5 Keys to Qualifying for a Small Business Loan

Are you looking to secure a loan to grow your business? The numbers aren’t exactly encouraging when it comes to approval rates. Alternative lenders approve around 56 percent of small business loans, while traditional banks (who have less experience with non-collateralized loans) only approve around 27 percent.

Despite these somewhat disheartening statistics, there are several steps you can take to strengthen your application and make the best case for your business.

Keep in mind that lenders are essentially risk managers. When they review your application, they’re looking at the amount of risk involved when it comes to your ability to repay the loan. Follow these five steps to minimize the risk your business represents and improve your chances of approval.

Get Cash Flow Under Control

In the eyes of a lender, cash flow is king. The strength (or weakness) of your business’s cash flow is one of the main factors lenders consider when deciding whether or not to approve your loan.

Ideally, lenders are looking for a history of positive cash flow — when more money is coming in than going out. They want to see that you have enough money to cover all of your monthly expenses, with enough left over to comfortably make a hypothetical loan payment. Dips into the negative are a red flag that indicate risk.

Depending on the lender, anywhere from 90 days to 24 months of your cash flow history will end up under a microscope. It pays to get serious about cash flow management now so you can build up a history that lenders are comfortable with. Intuitive online tools can help you get a handle on your cash flow, and simplify analysis with visuals like charts and graphs.

Check Your Credit

Always check both your personal and business credit before you apply for a loan, and fix any errors that may be dragging down your score. Depending on the lender and the type of loan you’re requesting, one or both reports may be pulled as part of the loan approval process.

Your business credit will likely be taken into account if you’re applying for an SBA loan, or a loan from a traditional bank. If your business is new and has yet to build up business credit, your personal credit will often be taken into account, along with that of other majority stakeholders. In lieu of business credit, banks often judge your ability to repay the loan based on your personal score.

Not only will your credit scores affect your chances of getting approved for a loan, they can impact your interest rate should you get approved. If either your business or personal credit score is low (below 600 for personal credit), take steps to improve it before you apply for a loan.

If your credit is less than stellar and you don’t have the luxury of time to improve your score, you still have options. Alternative lenders are generally more lenient when it comes to credit scores, and often weigh cash flow more heavily when making their lending decision.

Know What to Ask For

Asking for either too much or too little can hurt your chances of getting approved for a loan, depending on the type of lender you’re working with.

Need a loan that’s less than $500,000? Traditional banks may not be your best bet. Historically, they tend to lend higher amounts — and have less experience dealing with loans that may not be backed by collateral.

Alternative lenders, on the other hand, are more likely to lend small amounts, and the application process can be much faster and easier. The key, of course, is to show these lenders that you can repay the loan (see number 5). To increase your chances of approval with these lenders, only ask for as much as you can comfortably pay back.

Know Why You’re Asking

Would you let a friend borrow $10,000 without knowing what it’s for? The same goes for lenders. A surprising number of applicants fail to tell lenders exactly how they plan to use the loan. Always define how you’ll put the capital you’re requesting to work to grow your business.

A convincing business plan is a great opportunity to remove any doubts a lender may have about your ability to repay the loan. Laying out a plan for the funds you’re asking for will go a long way to boost a lender’s confidence in your business.

Prove You Can Pay it Back

This common sense step goes right back to your all-important cash flow. When a lender scrutinizes your financials, what they’re really looking at is your ability to repay the loan you’re requesting. If you ask for an amount without showing exactly how you plan to pay it back, your application will likely land in the rejection pile.

Cash flow projections will go a long way to show a lender exactly how you’ll cover those loan payments. Fortunately, showing lenders where your business is headed doesn’t have to be difficult. Those same online tools that helped you analyze your past and current cash flow can help you create a future projection that you can hand over with your application to improve your chances of getting approved.

Guest Post: About the Author

Eddie Davis – As VP of Business Development at FINSYNC, Eddie has the great pleasure of introducing a world-class financial platform to partners ranging from financial institutions to accounting, advisory, payment and others parties interested in facilitating better business through automation and analytics innovation.

 

Lending Terms Business Owners Need to Know

Many business owners haven’t had the opportunity to attend fancy college programs in business and finance. Nonetheless, there are many terms related to loans and credit that you need to understand, especially if you are about to apply for your first business loan. Here is IOU Financial’s rundown of important lending terms.

ACH Transfer:

An electronic, bank-to-bank transfer from one account to another, processed by the Automated Clearing House network. Lenders typically deposit loan proceeds and collect payments via an ACH transfer.

Annual Percentage Rate (APR):

An annual interest rate that reflects the cost of a loan, including fees. Because APRs are standardized, they allow you directly compare loans from different sources.

Application Pre-approval Rate:

The percentage of loan applications that a lender pre-approves. A good lender should have an application pre-approval rate of at least 85 percent and should provide the pre-approval within minutes.

Better Business Bureau Rating:

A rating from the BBB that assesses your business’ overall practices. The top rating is A+ .

Business Credit Report:

If you run a corporation, limited partnership or limited liability company, a business credit report functions for your business the same way as consumer credit report does for individuals. Providers include Dun & Bradstreet and FICO.

Fixed Loan Payments:

A fixed amount, paid daily, weekly, or monthly, to cover the interest charges and principle repayment of a loan. IOU Financial offers automated daily or weekly loan payments to avoid large monthly payments.

Funding Time:

The time it takes receive your loan proceeds after you submit your loan application. The funding time can vary from 24 hours (for online lenders) to weeks or months (for banks).

Interest Type:

Interest types are fixed and variable. A fixed interest loan maintains the same payments throughout the loan term. A variable interest loan uses an interest rate that can change over time, thereby changing how much you repay each month.

Loan Application:

A questionnaire you fill out to apply for a loan. Some lenders, such as banks, use very detailed and complicated applications that require large amounts of financial data. On the other hand, online commercial lenders often have short applications that you complete online.

Loan Renewal:

An optional feature offered by some lenders like IOU Financial that allows you to apply for a replacement loan when you repay a set percentage (e.g., 40 percent) of the original loan.

Loan Term:

The amount of time you have to fully repay your loan. If the loan term is for less that one year, it is a short-term loan. Loans with terms of one year or longer are long-term loans.

Maximum Loan Amount:

The maximum amount a lender will lend to you.

Prepayment Penalty:

This is a fee some lenders charge when you pay off your loan ahead of time. Always use a lender that does not charge a prepayment penalty.

Pre-qualification Requirements:

A set of standards that allow you to immediately prequalify for a loan from some lenders. The standards might include business ownership, frequency of daily deposits, time in business, average daily ending balance in your business bank account, and annual revenue.

Simple Interest Loan:

A loan that charges interest on a daily basis, meaning you only pay interest on the unpaid principle amount. Contrast this to a compound interest loan, in which you pay interest on your interest. IOU Financial is a simple interest lender.

Small Business:

Typically, a business with fewer than 250 employees. Many of the best lenders specialize in loans to small businesses.

Upfront Costs:

These are fees, such as origination and processing fees, that some lenders charge. Always choose a lender who charges no upfront costs.

Looking for more information about small business lending? Our small business loan consultants have the know how to answer any question you throw at them.  As industry experts, our staff is ready to find the answers even your toughest business questions!

How to Make Business Financing Part of Your 2019 Growth Plan

You might occasionally encounter a business owner who has a dim view of debt. That’s unfortunate, because debt, if you manage it properly, can help you grow your business. Here are several ways your business will benefit from the prudent use of debt:

Accelerate growth:

You can use loan proceeds to buy new equipment/facilities, hire more skilled labor and/or purchase additional inventory. This gives you growing room without drawing down your retained earnings. Naturally, you should have a detailed plan that lays out how you’ll deploy the loan proceeds to achieve the desired results. Failing to plan your finances can leave you in a hole when it comes time to service your debt.

Retain full ownership:

You might want to expand your business and are deciding whether to use debt, equity or a mix of both. Remember that bringing on equity investors gives you new “partners” who’s ideas might be different from yours. By borrowing rather than issuing stock, you remain fully in charge and do not have to share profits.

Tax benefits:

You can deduct you loan interest from your business taxes. As you know, every dollar in business is important, so the tax benefits you receive from borrowing are a significant success factor.

Build your credit:

When you pay your loan back on time (or faster), you likely will increase your credit score and boost your credit limit. This comes in handy as you expand your business, because future loans will be easier to access, and you’ll probably get a lower interest rate and/or higher spending limit. Be sure to check your credit reports and scores so that you can correct mistakes.

Avoid asset sales:

If you find you don’t have sufficient funds to complete your growth plan, you might be tempted to sell off your receivables or inventory. However, asset sales have several problems that reduce their desirability. For instance, your customers might not like being billed by a new entity, and this may cause them to question your viability. Furthermore, the haircut you take on asset sales often exceeds the interest you’ll pay on a loan. Why risk doing permanent damage to your business through asset sales when you can take out a short-term loan instead?

Smooth out seasonality:

Seasonal sales variability shouldn’t stop you from expanding your business. Using debt allows you to smooth out the effects of seasonality and keep your growth plans on track. To that end, make sure you borrow from a lender that doesn’t charge prepayment penalties. This allows you to pay off your loan sooner than anticipated without incurring extra charges.

Financing your ideas:

It takes cash, and often lots of it, to pay for the R&D costs associated with a new product or service. You can obtain cash via debt and plow it into your latest research, both from the operational and marketing viewpoints. Using debt instead of equity helps you maintain your trade secrets when they are most vulnerable – in the development stage. Equity investors might require you to reveal valuable information that can fuel the work of competitors.

Cost of capital:

Debt often has a lower cost of capital than does equity. Equity investors not only require a chunk of the profits, but also might require managerial control, a required rate of return and dividends. Debt is simply priced and avoids some of the costs associated with equity financing.

In summary, financing your business’ growth through the prudent use of debt is a winning formula for long-term success. IOU Financial can arrange a business loan of up to $300,000 quickly and with minimum hassle. If you are interested in growing your business, contact us today.

4 Ways Business Loans Support Your Financial Status & Help You Achieve Your Goals

There are a plethora business opportunities in the world today, many of which did not exist decades ago. As technology advances, many digital trends influence the types of businesses that pop up. Even on social media platforms, there are businesses that cover how best to manage social walls and increase followers. One thing is important in all these, whether you are an online merchant or a manufacturer of kitchen wares, whether you render services or sell products, the core of business strength is capital.

The truth is every business needs a solid financial status to be able to thrive. Sometimes, there might be some hitches in the running of a business- like low inventory, the need to hire staff and grow sales, or the need to carry out a profitable marketing campaign. Considering a business loan might be recommended. Although some individuals try to be cautious, there are immense benefits that getting a loan offers.

4 Ways that Business Loans are Beneficial to You

Not every reason is valid enough to seek a loan. However, there are solid reasons that support this. Just like making a purchase comes with costs and benefits, getting a loan can have a positive impact on business when weighed against the cost. Here are 4 ways that this can benefit your business;

Expansion of Business Activities

More customers are coming into your store and you need more staff to cater for the increase in activities, or you need to add a new location to your business, or there are new products and services that your business can provide- if this is the case, you might need to expand your business to accommodate more hands on deck, or have new space for business activities.

It might be very demanding on the finances of your business when it comes to bearing the cost of adding another location or venturing into a new market, even though these moves can boost the profitability of your business.

Getting a loan can ease these processes by providing ready capital for new overhead and upfront costs. In considering this, it is important to have a proper plan and forecast to ensure that the new activity would be profitable enough to cover the repayment of the loan.

Increased Liquidity

For many businesses, inventory is an important component of commercial activities. It is important to keep your inventory replenished and of high quality. With a sales projection, you can forecast the profitability of acquiring more inventory and improvement in cash flow can help you achieve this.

Apart from inventory, day-to-day activities are also crucial to businesses; you might need to train staff, pay salaries or effect repairs on machineries. Loans can improve your liquidity and help you cover these activities smoothly.

Invest in Marketing

Marketing can be the very approach your business needs to pull in more potential customers. However, due to the cost that marketing entails, some businesses tend to put it on hold. This is because successful marketing campaigns require a tangible budget.

Since marketing is needed to spur business growth, investing in a campaign can increase your customer base. Taking up a loan can help you execute a solid marketing strategy, thereby increasing customers and improving the financial status of your business.

You Keep the Profits

Compared to getting investors for your business, one benefit that loans offer is that the profit you make is retained for you and your business. On the other hand, investors require that they have a share in the profits of your business.

With loans, you can venture into new business opportunities, expand your business or get needed equipment, all of which are beneficial to you in the long run even after the loan payments are made.

Every business needs financing no matter the nature. Although some are of the opinion that adding debt counters the growth of your business, with the right approach, debt financing can come in handy and boost your profitability. Not every business needs to take up a loan. There are several things to consider such as the terms of repayment and interest rate. It also requires proper planning and knowledge of the market so as to ensure that the profitability of the business can cover loan repayments and keep you in an excellent financial standing.

Every business envisages steady growth. With the above put in place, loans can improve your financial status and help you achieve goals. Its benefits can still be visible even after the loan has been cleared.

Guest Post: About the Author

Ali Khan is a Search Engine Optimization (SEO) specialist and a content marketer. He works as a search director in a reputable organization. His main area of interest is digital marketing management and SEO outreach. He writes unique and research driven content about SEO analysis, Social media, Physical fitness and more.

Is Now the Best Time for a Business Loan?

We are often asked whether now is a good time to take out a business loan. Our answer is usually, “It depends.” Let’s explain. Two sets of factors figure into the timing of a business loan – macroeconomic and microeconomic. We take a closer look below.

Macroeconomic Factors

In general, it’s a good idea to borrow when interest rates are low, as they are now. As you know, the Federal Reserve has raised rates several times in the last two years, and more rate hikes are imminent. While rates are still low, you don’t want to wait for them to get any higher, so quick action right now is a smart idea. If interest rates were falling from a high level, you’d want to wait till they fell to an affordable level. Other macroeconomic factors that might influence timing is the occurrence of financial or political shocks, or the general tightening of credit, both of which might discourage you from short-term borrowing.

Microeconomic Factors

Loan timing is also a function of why you need the money and how you plan to use it. Some uses are good, some not so much.

Green Light

These are some reasons why now would be a good time to get a business loan:

  • Expansion: You are at a point where you are turning down business because you don’t have the capacity. If expansion is called for, you will need to finance extra space, or new equipment, or new hires, etc. The fact that you will be bringing in more business bodes well for your ability to repay the loan.
  • Cushion: If you have a seasonal business, a short-term loan can create a cash cushion to get you through the lean months. By evening out your cash flows, you can avoid emergency layoffs or panicked price cuts. This helps your business’ long-term prospects. You can repay the loan when the busy season returns.
  • Sunshine: The adage, “make hay when the sun shines,” has application here. When your business is in a good spot and has a high credit rating, getting a loan will be relatively easy. When you wait until you are in desperate shape, you might not qualify for a loan. If you can get an affordable loan during good times, it can add an extra layer of safety against liquidity problems later on.
  • Credit builder: A startup business has no credit history, but a business loan can be the remedy. Taking out a business loan and then repaying it on time will build your credit score and potentially give you access to larger loans in the future.
  • Opportunity knocks: Once in a while, a golden opportunity falls into your lap. A loan can enable you to jump on the opportunity, thereby strengthening your company and making repayment easier.

Red Light

Here are some times when you should avoid taking out a business loan:

  • Maxed-out: If you already have large loans and maxed-out lines of credit, taking on additional debt might drive you into default. Even if you can arrange another loan, the lender will probably demand exorbitant interest rates that will only increase your cash flow problems.
  • Uncertain purchase: If you are considering the purchase of a new business asset but aren’t sure whether you can afford it, reconsider the purchase. A business plan should lay out exactly how you expect a new asset to affect your business and how much it will cost. If you are unsure about how the loan terms will align with the new asset’s cash flows, go back to the drawing board until you are certain you know what you’re doing.
  • Band-aid: If your business mismanaged its financing, taking a loan might just be a band-aid that masks the underlying problem. A better strategy is to bring in a CPA or operations manager to help fix the problem first.

Want to see what alternative lending can do for you? Talk to an IOU Financial Small Business Loan Consultant and learn about the ways IOU Financial can help you get the capital you need.

Nine Things That Separate Good Business Lenders from Bad Ones

If you’ve ever had a bad experience applying for a bank loan, you understand how demeaning it can feel to be turned down. Regulation and low interest rates have made it tougher for banks to lend to small business. The tight-fistedness of the banks after the 2008 mortgage debacle created a vacuum which was filled by online business lending companies of varying quality. The best are a pleasure to work with, the worst are disappointing. Here are nine things to look for to distinguish the good from the bad:

Direct lender:

A direct online lender is a company that actually supplies the money it lends to borrowers. Many business-lending websites are mere matching services that send out your application to a network of lenders. That might sound good, but it’s not, because you end up paying much more for you capital. You see, the matching broker collects a fee from network lenders, who pass that fee onto you in the form of higher loan cost.

Ease of application:

Some lenders want extensive paperwork and documentation. A few operate over the phone, which is tedious. Look for a lender with a streamlined, paperless online application process that can be completed in minutes. And, perhaps it should go without saying, but we’ll say it anyway: Never pay an upfront fee to apply or qualify for a small business loan!

Quick approval:

There are two aspects to this. The first is that you’d like to be approved, so you will want to borrow from a direct lender with a high rate of loan approvals, say 85 percent. Secondly, you want the decision, and the money, quickly. A good lender looks beyond your credit score, makes a decision in minutes and gets you your money the next business day. A good lender will not do a hard pull on your credit. A bad lender may require extensive underwriting, which can waste days and still end up in a denial.

Sufficient amounts:

A business lender with a maximum loan limit of $25K or $50K won’t satisfy many small business borrowers who need more. Look for a direct lender who is willing to lend up to $150K.

Affordable rates:

A lean, efficient online business lender isn’t saddled with large overhead expenses that can drive up the cost of loans. Look for an interest rate well below the cost of a merchant cash advance. Merchant cash advance are not loans and can be very expensive.

Convenient repayment terms:

Hate that big monthly repayment that always seems to leave a gaping hole in your working capital? The best lenders take fixed daily loan payments directly from your bank account. It’s amazing how much more comfortable it is to spread the repayment over 20 daily installments rather than to pay it once a month. Only use lenders who offer fixed pay-back loans, so that you aren’t surprised by suddenly higher repayments.

Renewals:

Cash management is dynamic, and sometimes you need to renew a loan before the old one is paid off. Bad lenders won’t do this, but good ones will approve renewals after a certain portion, say 40 percent, of the original loan is repaid. This gives you the flexibility to take advantage of opportunities as they occur.

No prepayment fees:

Avoid a lender who soaks you with a prepayment fee or who charges you compound interest on your loan. Compound interest means you pay interest on your interest. Ouch! Go with a direct online lender who charges simple interest on your unpaid principal balance, and who never penalizes you for paying off your loan early.

Ratings:

Check a potential lender’s score from the Better Business Bureau and TrustPilot. If the score isn’t great, keep looking.

Not sure which online business lender to call? Try IOU Financial, a leading, publicly-traded small business lender. Contact us today for a no-strings-attached consultation.

Business Credit Basics: 3 Things You Need to Know Before Applying for a Loan

Applying for a business loan is a significant undertaking, and it’s a good idea to get your business operating as efficiently as possible before asking for a loan. The amount of preparation you’ll have to do really depends on whether you borrow from a bank or a commercial lender. A bank is going to grill you and demand a lot of information that a commercial lender will not need. Here are three things you need to get know when you apply for a bank loan, and how each one differs if you choose a commercial lender:

1. Know why you want the loan:

For some reason, banks feel the need to know exactly how you plan to spend every dime of your loan proceeds. We are not quite sure why this is so crucial for the bank to know, but the usual reasons include expansion opportunities, smoothing out working capital, investing in inventory or capital goods, and acquiring another company. Be prepared to show the banks how you will turn the loan money into profits (or how it will cut losses). On the other hand, a commercial lender like IOU Financial doesn’t really care how you plan to spend the loan proceeds. We assume that you know your business best, and we don’t like substituting our judgement for yours.

2. Know your books:

A bank is going to review all your books and records before approving a business loan. This includes all your past income statements, balance sheets, tax filings and all other public information. Be prepared for questions on why certain expenditures were made or why a particular strategy was worth the investment. You really don’t know what the bank loan officer or underwriting committee is going to ask. Sometimes, a line of questioning can lead to new questions in different areas, a process that can drag out for weeks or months. You can be sure the bank will calculate all your financial ratios, and will interrogate you on any that are below industry averages. We are really only looking for two things:

a. Does your business generate at least $100,000 a year in revenue?
b. Have you been in operation for at least one year?
If both are true, you are well on your way to obtaining a loan from us.

3. Know whether your cash flow allows you to repay the loan:

This is a very important question that every lender, including us, is going to ask. Now, a bank is going to want to analyze your sources and uses of funds, your cash management policies, and your projected and actual budgets. The bank may want to know about your collection policies and examine your bank statements. If it sounds like an extensive process, well, it is. We have a different view – we only ask two questions regarding cash flow:

a. Do you generate 10 or more deposits each month into your business bank account?
b. Do you maintain an average daily balance in your business bank account of at least $3,000?
Assuming you own at least 80 percent of your business (or 50 percent if owned with a spouse), you can qualify for a commercial loan from IOU Financial with just a few facts. With a bank, you are more likely to feel like a trial defendant under cross examination. Perhaps that’s why it takes days or months to get a bank loan, while we can lend you up to $150,000 in as little as one day.

Contact IOU Financial today for a free consultation about your small business’ loan needs.

5 Common Misconceptions About Alternative Lending

Alternative, or non-bank, lending got a big boost in 2008 when the mortgage meltdown caused banks to roll up their welcome mats. In that era of recriminations, no bank wanted to go out on a limb and lend to anyone other than the most creditworthy customers. Today, businesses have learned that alternative lending, which includes commercial business loans, factoring, peer-to-peer lending and crowdfunding, can solve many problems quickly and efficiently without a lot of the delay and paperwork associated with bank loans.

Still, some business owners have negative misconceptions about alternative lending, so we’d like to clear them up:

Only bank-rejects apply to alternative lenders:

While it’s true that many businesses find it easier to qualify for a loan from an alternative source than from a bank, many owners prefer dealing with alternative lenders, as they tend to be more flexible, less judgmental and faster to respond. Many alternative lenders do not require collateral, can process an application in a few hours, and fund a loan within a day or two. One feature that IOU Financial borrowers truly appreciate is daily automatic repayment, which means a business doesn’t have to face a large monthly payment that can disrupt the business’ cash position.

You have to be desperate to seek an alternative loan:

That’s just silly. Alternative lenders would soon go out of business if they lent only to companies on their last legs. The real story is that banks turn down loans for all sorts of reasons, many having nothing to do with creditworthiness. Alternative lenders assess the risk of each loan and assign an interest rate that makes sense. Companies with less than stellar credit scores can borrow from alternative lenders when needed, such as when they have to smooth out their working capital cash flows. Any good alternative lender wants to see its borrowers succeed, not fail, and will usually work with business owners to come up with solutions with the right fit.

You can hurt your credit score by borrowing from an alternative lender:

Poppycock! There is no truth to that myth, and in fact the opposite usually applies: If you pay back your loan responsibly, your business’ credit score should increase. Remember, business loans do not affect the individual credit scores of owners, they are strictly for business. The nice thing about getting an alternative loan is that by doing so, owners don’t have to pony up their own personal funds, which could indeed affect their credit scores.

You need high margins to make alternative loans work:

Loans from alternative lenders help all types of businesses, not just ones with high margins. IOU Financial has only four funding requirements, and none have anything to do with margins. We require that you own and operate your own business, have been in business for at least a year, make 10 or more deposits per month and have average daily balance of $3,000 per month. Margins schmargins!

Alternative lending is unregulated:

This is a common misconception stemming from the fact that alternative lenders do not have the same capital requirements as banks. But alternative lenders are not banks, they do not offer time deposit accounts and all the other services available from banks. The business model and cost structure of alternative lenders are much different from those of banks. Nonetheless, alternative lenders must adhere to federal and state lending regulations that require truthfulness and disclosure. There is also the whole area of contract law that governs alternative loans.

The alternative lending industry is strong and vibrant, because it serves the needs of many small businesses that otherwise wouldn’t be met. If you would like to discuss your own borrowing needs, call IOU Financial today for a free consultation.

Small Business Finances 101: How to Profit

We finish this introduction to business finances by discussing the payoff for all your hard work – profit! In particular, we dive into how to use your business’ profits to get paid. Unless you’re independently wealthy, you probably need to extract profit from your company to pay your bills and live your life. Like many of the important things in life, you have options. In this case, you have to decide how to structure your business and how to tap into profit while creating the smallest tax obligation. Your particular circumstances will help determine the best type of business entity to use, and you should, of course, seek formal advice from a trusted accountant or lawyer.

Structuring Your Business

Your choice of the type of business entity to adopt will greatly influence the amount of time and work you’ll have to expend administering the business. A small business set up as a sole proprietorship is certainly easier to run than a limited liability company (LLC) or C-Corporation, but the latter give you all sorts of protections or tax breaks not otherwise available.

The five most popular business structures are:

  1. Sole proprietorship: A simple structure in which you are the sole owner of your small business. You file your taxes on your personal return, as there is no separation between you and your business. That means you have unlimited personal liability for your business’ debts, putting your personal assets are at risk. It’s also harder to get a business loan for a sole proprietorship.
  2. Partnership: This is much like a sole proprietorship, except it involves at least two owners. Once again, you file your taxes on a personal return and you have unlimited personal liability. You share the business’ profits proportionally with your partners, so it’s a good idea to ensure they are trustworthy.
  3. LLC: A separate entity that provides liability protection but not separate tax filings unless you chose to file as a corporation. It is easier to set up and run than is a C-Corp. However, it’s harder to get investors, since you can’t sell shares. Also, you can’t pay yourself a salary, although there are other ways to get money out of the LLC.
  4. S-Corp: Recognized in most states, its similar to an LLC except it can issue shares and can pay wages to shareholders while avoiding corporate taxation. The S-Corp requires more paperwork than does the LLC, and you are limited to 100 shareholders.
  5. C-Corp: A corporation is the most difficult to set up, as it requires its own set of books and separate tax filings. It’s the most professional approach to business, with limited liability and no limits on the number of shareholders. C-Corps provide many tax deductions and benefits not available elsewhere.

Extracting Money

Assuming you are running your business in order to make a profit, the question remains how to extract money from the business to pay yourself for your time and effort. Here are several options:

  1. Salary: You fill out a W-2 and pay yourself a salary, minus any withholding taxes. It’s simple, but not tax-efficient for a corporate entity.
  2. Dividend: A corporation can pay a dividend to shareholders. Any part of the dividend that is a return of capital, rather than profit, is not taxable. The IRS looks dimly on huge dividends.
  3. Shareholder loan: You can borrow money from your company, but if it’s at a below-market interest rate, you might be liable for gift or dividend taxes.
  4. Owner’s draw: Cash available only to sole proprietors or partners, this money is not taxed at the company level. The money must eventually be repaid to the company.

Clearly, the way you structure your business has profound implications for your after-tax wealth. Consult with a professional before deciding the best ways to take advantage of your business profits. If you need tools to grow profits through a maintained budget, check out our Business Budget Smart Sheet. This tool helps you stay on track so you can reach profitability sooner!

Small Business Finances 101: Understanding Income

Income is the life source of your business. All your planning and strategies aren’t going to mean much unless you generate enough income to eventually make a profit. There are two types of income your business needs to track. Gross income is the money you receive from selling your products or services minus the costs of goods or services sold. Net income is your profit after you subtract all your expenses and losses.

As a small business owner, you need to know the most reliable ways to collect the income you owed, and how to properly report the income you receive.

Collecting Payments

  • Extending credit: While it’s nice to extend credit to customers, it can also be a money-losing proposition. People who pay with cash or payment card (debit, credit or gift) are your best customers. The only risk they pose is counterfeited bills or cards, which is a pretty small risk. When you get into checks and merchant accounts, you have to be more careful.
  • Credit cards: Many small businesses (55 percent in 2013) do not accept credit cards because of the steep fees and the possibility of disputes. If you sell online, you have no choice but to accept credit cards and pay the fees. Remember that if you don’t accept chip-embedded (EMV) credit cards, you are liable for the costs of fraud, a source of friction between merchants and card issuers.
  • Merchant accounts are business-to-business (B2B) credit arrangements with clients and suppliers. A 2014 U.S. study of B2B invoices found that a troubling 42.5 percent were paid late and that 5.6 percent were still uncollected after 90 days, which is the usual definition of a default.
  • Checks are not desirable, as too many things can go wrong. This is especially true if you have customers living abroad. It can take forever for a mailed check to reach you. Then there are the problems of stolen or overdrawn checks. Unless you have a long relationship with a customer, it’s best to avoid being paid by check.
  • Direct deposits via automated clearing house, transfers and electronic transfers are quick and safe for domestic payments. International transfers take longer. The only problem is getting your client to agree to make direct deposits.
  • Collections: If you are owed money, you can try to collect it yourself, hand debt collection off to an agency, or write-off the debt. In any event, late payments have a negative effect on your income.

Accounting for Income

Accounting is essential knowledge for your business. Keep your books up to date because delays can cause mistakes that might end up hurting your business and getting you audited by the IRS. You can hire a bookkeeper if you have enough activity to make it worthwhile. Many small businesses use software such as QuickBooks to perform bookkeeping. It’s up to you to evaluate the time you need to spend on using software versus paying a professional to do the work for you.

If you operate on a cash basis, you acknowledge income when it is collected. However, if you use accrual accounting, you report income when it is earned, which is usually before it is collected. Whether you use cash or accrual accounting, you need to keep accurate and timely records. This is especially important for figuring net income, which is the amount you are taxed on. To calculate net income, you must account for all expenses, costs and losses. If you miss some deductions, you’ll pay more tax than necessary.

If you need to stabilize your cash flow, hire a bookkeeper, or expand your inventory to bring in more income, IOU Financial offers convenient, low-interest rate commercial loans to help your business grow. Visit our loan calculator to get started!