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Business Credit Scores vs. Personal Credit Score

Starting a business takes money, and that money typically comes from financing. But in order to get approved for a business loan, entrepreneurs need to meet certain lending criteria, including having decent credit. Lenders will not only look at your personal credit score but also your business credit, both of which play a role in your ability to obtain financing for your business.

But how exactly does business credit and personal credit differ? Let’s dive into each to understand the difference.

Business Credit

Business credit – also referred to as commercial credit – helps lenders to determine your creditworthiness and candidacy for financing. A high business credit score can boost the odds of securing a business loan and obtaining better favorable terms. On the other hand, a low business credit score can make it more difficult to obtain financing and secure more favourable terms.

Not only do lenders look at our credit score, but so do vendors and suppliers before agreeing to deal with your company. Business credit is also required to obtain business insurance, and in many cases, it’s also needed for purchasing goods and services.

While your personal credit may be able to be used for some of these, in many cases it can’t. And even in cases where personal credit may be used, it really shouldn’t, as using personal accounts can make accounting a lot more confusing and difficult.

Who Creates Your Business Credit Score

There are three major credit bureaus in Canada that are responsible for determining business credit scores: TransUnion, Equifax, Dun & Bradstreet. Each of them uses a set of factors to determine a business credit score.

TransUnion

TransUnion offers both business credit reports and business credit scores. TransUnion uses business credit data and public record information to create their business risk score. This score takes into consideration a number of factors, including insolvencies or delinquencies, available credit limits, business bank accounts, credit cards, and collection.

Equifax

Equifax works a little differently than other credit bureaus in that it assigns a business three different scores. The first is a conventional credit risk score between 100 to 992, which assesses a company’s credit history. The second report from Equifax contains a “Payment Index” range from 0 to 100, which is a measure of payment history to past creditors. A score of at least 90 means that a business pay their bills on time, on average. Thirdly, Equifax’s “Business Failure Score” ranges from 1,000 to 1,880 and assesses the risk of businesses dissolving.

Dun & Bradstreet

The Dun & Bradstreet PAYDEX score is a rather straightforward business credit scoring model that’s based on how promptly payments are made and is scored up to 100. This credit score assesses the average number of days needed to pay off a debt. A score of 100 means that bills have been paid at least 30 days or more before they’re due, on average. Scores of 80 mean that bills are being paid the day they’re due, on average. Generally speaking, the longer it takes for you to pay your bills, the lower your score will be.

Personal Credit

Personal credit scores are used by lenders to assess a borrower’s creditworthiness and financial health. These scores represent numerical expressions that are based on an assessment of a person’s credit information.

Lenders use credit scores to assess whether or not consumers are able to qualify for a loan, the interest rate charged, and potentially even the loan amount. Missing bill payments and taking out too many loans can bring a credit score down, which can make it more difficult for a borrower to secure a loan.

A high credit score, on the other hand, means the individual has been much more responsible with his or her finances. Payments are typically made on time, credit limits are not maxed out, and debt loads are relatively healthy.

In Canada, personal credit scores range from 300 to 900. The closer the score is to the upper level, the better. Generally speaking, lenders like to see a score of at least 650 to 680 before they agree to extend a loan to an individual.

Who Creates Your Personal Credit Score?

In Canada, there are two major credit bureaus, Equifax and TransUnion. These bureaus compile the information found in your credit file to calculate your credit scores.

Certain factors are used to calculate a credit score, including:

  • Payment history – A history of timely payments will help increase your credit score, while a history of missing payments will do the opposite.
  • Debt load – The amount of debt you carry relative to your income will impact your credit score. Higher debt loads are often associated with lower credit scores, while lighter debt loads are typically associated with higher scores.
  • Credit utilization ratio – The amount of money that you spend relative to your credit limit will be a factor in your credit score calculation. It’s generally recommended to keep your spending to no more than 30% of your credit limit in order to keep your credit score healthy.
  • Age of your credit accounts – Older credit accounts are usually a good thing for credit scores, especially if they’re in good standing. Further, a longer credit history will help credit bureaus better assess your credit health.
  • Credit mix – Having a few different credit accounts – such as a mortgage, personal loan, car loan, and credit card – can be a good thing for your credit score, as long as you are responsible with all bill payments associated with each.

How to Establish Business Credit

In addition to keeping all of your business finances separate from your personal finances, there are other ways to establish business credit:

Open a separate business account – As already mentioned, mixing your personal and business finances can make things more cumbersome. Not only will a separate business checking account make things easier for bookkeeping purposes, but it can also help you build business credit when you use it strictly for business expenses.

Apply for a business credit card – Using a business credit card responsibly can help you build good credit, much like using a personal credit card responsibly can have the same effect. With each timely payment you make, your business credit can be improved.

Apply for a small loan – Every payment you make will be reported to the credit bureaus, which can help you build good credit.

Establish credit lines with suppliers and vendors – Since Dun & Bradstreet needs a minimum of four vendors to generate its credit report, it would help to establish credit lines with suppliers and vendors and build up relationships so they can eventually turn into future trade references for your business when you apply for a business loan.

Regularly keep tabs on your business credit – It doesn’t take long for your business credit to change, so it’s important to keep an eye on it on a regular basis. By identifying any changes in your business credit report, you’ll be able to spot any strange issues that you can deal with right away before they negatively impact your credit rating.

Should You Ever Mix Business and Personal Credit?

While we don’t recommend using your business credit card to pay for personal expenditures, your personal credit score plays a key role in your business. Having said that, lenders are still going to look at your personal credit score if your business is relatively new and will require a personal guarantee when applying for financing, which means you’re still responsible for the loan. If you ever default on your business loan, the lender has some more recourse aside from going after your business.

It’s important to still maintain your personal credit score while you’re building your business credit since they can both be important when applying for a business loan.

Guest Post: About the Author

Loans Canada is a financial technology and media company that connects Canadian consumers to financial service providers and educational resources. Loans Canada is one of the nation’s leading online destinations for information on loans, debt relief, credit building, and commercial financing. Their technology platform allows consumers to search for the best lenders and credit providers in Canada.

7 Tips for Boosting Your Tax Refund

The tax season is slowly kicking into gear. It’s a constant struggle to keep up with the legal changes, leaving many of us with missed opportunities, pondering just how much we could have gotten in tax refunds.

In this article, we aim to help you with a few simple tips. Each of them offers a glimpse into the current law, more like a lead you can use to further find out how you can benefit most from tax refunds this year. Interested? Keep reading. 

The Power of Tax Credits

Tax credits are often mentioned to be better than deductions themselves. This is because they subtract from your tax bill in a 1:1 ratio, and not in proportion to your rate. It’s a pure “dollar-for-dollar” deal.

There are several tax credits for which you can qualify as a business owner:

  1. Work Opportunity – a credit for employers who hire candidates facing significant employment obstacles, such as food stamp recipients or ex-felons;
  2. Disabled Access – similarly to the first one, a credit for employing candidates with disabilities;
  3. Qualified Research Activities – credit for resources spent on research and development – whether for a product, software, or a patent.

Look into the tax credit regulations to know which ones you are eligible for.

Prepay

If there are any fees that should be paid in January of the following year, try to pay them off by the end of December.

However, don’t get carried away in the race to pre-pay everything and run your account balance low. Look for smaller expenditures in membership fees, software subscription renewals, office space rental, warranties, etc.

Track Mileage

Whether you are an employer or an employee, track your commute to work. Over time, the mileage can add up to a significant tax deduction. There are two ways to go about it:

  • The Standard Deduction Rate – which covers the actual mileage (the IRS adjusts the rate each year, so make sure to stay informed), and
  • The Actual Expense – which covers everything else: gas, parking fees, insurance, etc.

According to a lot of firsthand online testimonials, many have found that the standard deduction rate works best for them. If you’re having trouble tracking mileage, there are smartphone apps that can help you get accurate tracking. Plus, it’s easier to turn it into a habit.

Stay in the Loop

When it comes to taxes, changes are being implemented every year. More so for businesses than for private households. It’s expected that most of it will be difficult to follow, especially when we’re busy.

Luckily, you can hire a tax expert to help you. Together with them, you can look over your current state, where the missed opportunities are, and how to fix any possible mistakes you’ve been making so far. It’s a great way to get a leg up on your finances and to make the taxes work for you, not against you.

Your 401K

“Investing” in your 401K or IRA (Individual Retirement Account), is a great way to ensure your future money is safe from taxation. It stays that way until you make your first withdrawals, which can be a few decades from now. Look into maxing out your contributions each year, and if the company you work for has a specific percentage for matching your investment, be sure to take advantage. 

If you are a business owner, your follow-ups to the employees’ contributions can also be written off as tax-deductibles. Just make sure to consult your tax expert beforehand, because the return value depends on the payment method.  

Employee incentives

We all know about the health and retirement plans, but there are also company picnics, gifts, bonuses, and even educational assistance. These can all be tax-deductible. Again, the best way to go about it is to visit the IRS webpage and check which ones are eligible for your business.

Write off Bad Debts

While many are already familiar with bad debts, it doesn’t hurt to remind: you can write off bad debts from clients that didn’t manage to pay you out. However, this comes with numerous caveats. It depends on how much time has passed for your request to be valid, and also on how well the business is doing financially. You’re more likely to get the debt written off if the company is near foreclosure and bankruptcy.

In the End

The secret to boosting your tax deductibles lies in your knowledge. Get informed as thoroughly as you can. A lot of the abovementioned tricks are known among experienced business owners and employees as well. If possible, hire an accountant or a tax expert for help. Look for advice among your peers, as firsthand accounts give great insight into what is possible and what isn’t.

Guest Post: About the Author

Michael Deane is one of the editors of Qeedle, a small business magazine. When not blogging (or working), he can usually be spotted on the track, doing his laps, or with his nose deep in the latest John Grisham.

Learn Valuable Skills Online to Better Serve Your Business

If you run a small business, you’re probably always looking for ways to improve quality and boost the bottom line. The good news is that you can learn many valuable skills online, often for free, that will help you achieve your business goals. These skills can help you improve your marketing and cut expenses for tasks that you now farm out to part-timers or consultants. The following is our list of skills for you to consider learning.

Marketing-Related Skills

  1. Copywriting:
    Does your website content show you off at your best? Do you feel your marketing emails are effective? If eigther answer is no, part of the problem might be weak copywriting. Poor grammar, inappropriate word choices, and boring copy self-sabotage your marketing efforts. While you can hire a good freelance writer at a reasonable rate, you might also want to improve your writing skills and take on some of the work yourself. You can improve your copywriting skills for free at websites like Copyblogger.
  2. Search Engine Optimization:
    SEO is a way to improve the results of online keyword searches. It involves several technical tasks as well as analyzing data from search engines like Google. Your goal is to get your company listed on Page 1 of search results for your chosen keywords (i.e., the terms a searcher might enter). While excellent, authoritative copy is a must, you can also boost your results by making it easier for the search engines to understand your website content. SEO does this, while data analytics shows how the public is responding. Check out the free online courses available from Google.
  3. Social Media:
    Nowadays, it’s almost mandatory to maintain a social media presence in order to compete effectively. Being a social media guru requires time, effort and skill. The payoff is improved buzz about your product or service, which can lead to higher sales. You can learn the ins and outs of social media at sites like Lynda.com. While some charge money, they often have a free trial period to test them out.
  4. Photography/Graphic Design:
    Beyond great content, your website and other marketing collateral should be visually compelling. Instead of buying the same old stock photos that everyone else uses, you can decorate your website with your own photographs and graphic designs. It could very well be worth your while to learn Photoshop, which will allow you to use your graphic skills to improve the look of your websites and other materials. Many sources of Photoshop training are available for free or a modest membership fee, such as Kelby One.

Other Skills

  1. Excel:
    Spreadsheets are almost mandatory for recording, tracking and presenting data. With them, you can do budgeting, track inventory, and a thousand other tasks. Excel is the most popular spreadsheet program, and you can get free training from Microsoft.
  2. Bookkeeping:
    You might be surprised how today’s powerful yet friendly bookkeeping software packages make bookkeeping an easy task that doesn’t require an accounting degree. Products like QuickBooks can handle your business bookkeeping as your business grows. You can get free training and certification from Intuit, the maker of QuickBooks, or from other free sources.
  3. Tax preparation:
    If your taxes aren’t too complicated, you can file them yourself using one of several tax preparation packages. For example, you can visit the Intuit website for free TurboTax training.
  4. Finance:
    If you have big ambitions in the business world, you just might want to become skilled at finance and financial decision-making. Many colleges and other institutions offer online courses that lead to certificates or degrees in finance. Also, check out the many finance-related articles offered at IOU Financial.

Conclusion

We’ve just scratched the surface about what you can do to beef up your business skills via free and paid online resources. Think about what would work best for your business and then get moving. You can bet your competitors are!

When a Loan Is the Right Move for Your Business

Every business needs adequate funding to survive and grow. Ideally, your operations provide enough cash flow to handle all your funding needs. But for many a small business, cash flow isn’t always enough to satisfy the need for working capital. That’s when it’s time to consider a business loan. Let’s look at a few scenarios in which a business loan is the prudent decision.

Purchasing Equipment

Your business may require expensive or specialized equipment. In addition, you may already own equipment that no longer provides the performance you require. If you feel you are losing sales or profit margin because you lack the right equipment, you owe your business the opportunity to compete using the most appropriate gear. Sometimes, equipment manufacturers or commercial suppliers will offer financing, sometimes not. A business loan used to finance much-needed equipment is a terrific idea.

Expansion

Your product or service is selling like hotcakes, and you know you could grow the business by expanding operations and/or enlarging your selling floor. If you need more or better space, it’s going to cost money. For example, you might benefit by making leasehold improvements to your brick-and-mortar store. Or you might want to open additional stores or move from your current location to something larger and more upscale. You are looking at a number of one-time costs, which is the type of challenge that a business loan can solve. The extra profits you earn through expansion will help you accelerate your loan repayment.

Unexpected Opportunities

It really hurts when a rare opportunity comes your way but you don’t have the capital to take advantage of it. For example, one of your suppliers might have cash flow problems that causes it to offer you inventory at a sharply marked-down price. You need money to purchase the inventory, and perhaps to pay for additional storage space. You know that this will pay off handsomely, so you arrange a business loan to grab the deal before someone else gets it. That’s a smart move.

Fresh Talent

Perhaps you run the type of business where the caliber of your top employees is critical to your success. If you’ve been the typical owner, you’ve had to wear many hats to launch your business and keep it running. You and your staff are overworked, and you can’t afford anyone to burn out, including yourself. In other words, you need to recruit some fresh talent because you know it will increase your revenues and/or reduce your expenses. A business loan can help pay for incentives to hire the right employees. Remember, if you don’t hire the person, your competitor might.

Acquisitions

If you’ve been successful running your business, it’s possible you’ve taken some market share away from the competition. Or perhaps you’ve been eyeing an operating business that complements your own. In many circumstances, a business merger/acquisition is the right way to go. It makes sense to fund an acquisition with debt if it will lead to increased market penetration, greater geographic scope, obtaining key assets, or expanding your business to related markets. You’ll need funding not only to buy the target company, but also to make changes to your own operations to accommodate your revised environment. You may need to increase your marketing budget or add management talent. A business loan is completely justified under these circumstances.

Seasonality

If your business suffers from uneven cash flows due to seasonality, a business loan can provide cash to help you withstand slow business periods. You should be able to repay your loan once the busy season returns. For example, you might need to furlough some employees, but want to continue to offer them health insurance. Or you want to buy inventory during the slow season because it’s cheapest then. Use a business loan to smooth out the seasonal revenue ebbs and flows that would otherwise threaten your company’s survival.

Conclusion

There are many circumstances that justify a loan for your small business. What is never justified is settling for a slow, overpriced loan. IOU Financial offers fast loans with convenient repayment options that won’t disrupt your operations. Our loan rates are extremely competitive, and we can say yes when banks say no. Contact us today to discuss how we can help you fund your business quickly and efficiently.

7 Ways to Avoid Financial Stress When Running a Business

Running your own business requires careful thought and planning. But even with all that, it’s hard to avoid feeling financially stressed from time to time. Handling the stress productively can help your business succeed. But avoiding it in the first place can also make your job far more enjoyable. Here are seven ways to sidestep financial stress before it appears:

  1. Establish good accounting habits:

    You can avoid much financial stress by knowing your exact financial condition every day and tracking your cash flows against your budget. You should purchase either a good accounting system in-house, subscribe to an online accounting package, or hire an accounting service to do your books. You should stay on top of your accounting entries and generate reports frequently to see where you stand. Using this information, you can respond to upcoming cash crunches early and take actions, such as delayed spending, to reduce the problem.

  2. Invoice promptly:

    Always invoice immediately when providing a service or sending goods. Encourage prompt payment with terms like 2/10 net 30. That is, you’ll grant them a 2% discount if they pay in 10 days, but in any event, the full amount is due in 30 days. After sending out invoices, remember to follow up promptly. You can automate your email and SMS service to help you maintain contact with the people who owe you money.

  3. Adopt money-saving ideas:

    For example, consider renting equipment rather than buying it. This can avoid an enormous outlay of cash that you can instead deploy elsewhere. Also, renting equipment relieves you of repair costs should it break down. You can rent office space, or better yet, work from home if possible. If you have staff, see if they are interested in working remotely, as this too can save you (and them) money. Put on your thinking cap and we’re sure you’ll discover dozens of smart ways to spend less money.

  4. Keep it legal:

    One temptation some business owners succumb to when finances get tough is to cut corners and adopt shady practices. Besides being unethical, it will surely elevate your stress level rather than reduce it, and in the long run can lend you in hot water. Keep it honest, and whether you succeed or fail, you’ll know you did so legitimately.

  5. Use an LLC:

    A limited liability company can reduce stress by protecting your personal assets from your business creditors. If you run a sole proprietorship, a creditor or legal opponent can sue you in court and if they win, seize your home, car and other assets to collect the money due them. An LLC shields you from personal liability for your business debts without having to set up a corporation.

  6. Do your own marketing:

    It’s become much easier to manage our own public relations, thanks to the internet and social media. You have the opportunity to effectively engage with people on a personal basis. Social media accounts are free, and you can do online advertising in any amount that is comfortable. Build up your website with good content to improve your position in web searches. Learn the ways of the SEO masters to help build website traffic, increase prospects and convert them to customers.

  7. Use debt wisely:

    Cash flows in a small business are often uneven. This is compounded by any seasonal aspects to your business. The wise use of debt can mitigate these problems by providing injections of cash when you need it. Moreover, a short-term loan can let you take advantage of opportunities that pop up from time to time. For example, you might have a supplier who offers you a great deal on inventory. A loan could allow you to buy up the extra inventory and then use the increased profits to easily repay the loan.

Conclusion

The key to reducing financial stress is to spend less, earn more, husband your cash and rely on credit when you need it. If you are interested in a low cost, convenient business loan, contact us at IOU Financial — we’d love to hear from you.

6 Practical Tips to Manage Your Small Business Finances

Even experienced business owners can benefit from improving the way they manage their finances. This is especially true if your expertise in your product or service doesn’t extend to managing business finance. It would be a shame not to realize the full potential of your company, so we’ve assembled six practical tips to help you stay on top of your business finances.

1.   Remember to Pay Yourself

Especially in the early days, your desire to make your company a success can cause you to plow every dollar back into the business. While the impulse is admirable, it is also unsustainable. The fact is, you need to ensure that your personal finances are adequately handled so that you aren’t distracted from your business. You are central to your startup and deserve compensation for your efforts. Remember, if for some reason the business fails, you don’t want to be in a position where you never received any pay for all your hard work.

2.   Budget for Growth

After paying yourself, it’s crucial to plan for the growth of your company. For many businesses, if you are not growing, you are dying. So put aside some money to fund growth opportunities and to take advantage of favorable circumstances. Besides increasing the scale of your business, your commitment to growth will have beneficial side effects. For example, it might be easier to recruit quality employees if they see your willingness to invest in the future. Your customers will welcome improved service, and your business will realize additional value.

3.   Optimize Your Billing Strategy

Billing is part of your central accounting package, but unlike some other areas, billing can involve extra operations beyond bookkeeping. We’re talking about dealing with those occasional clients who are slow to pay. These semi-deadbeats put a dent in your cash flow, and if the problem gets out of hand, your business could be jeopardized. You can improve your billing strategy by adopting discounts, such 2/10 net 30. This gives your customers a 2% discount if they pay within 10 days. Another strategy is to sell off your problem accounts to a collection agency. You’ll take a small loss, but you’ll free up your time to concentrate on more important tasks.

4.   Be Ready to Pounce

Ideally, you will have sufficient funds put aside to take advantage of unusually favorable opportunities. For example, one of your wholesalers might offer you a special discount on inventory. Or perhaps a desirable piece of equipment suddenly becomes available at a good price. It would be a shame to lose out on these opportunities simply because your money is tied up elsewhere. Therefore, be ready to borrow money on short-notice from a convenient and fast source, such as IOU Financial. Typically, the profit opportunities from a good deal far outweigh the interest costs of a short-term loan.

5.   Stay on Top of Your Tax Payments

Taxes might be the bane of your existence, but you had better keep current with your tax obligations to avoid disastrous consequences. You will owe income tax, sales tax, maybe even property tax, that must be remitted on time. If you have trouble making quarterly payments, then switch to monthly payments. In this way, taxes become a routine monthly expense, just like all your others.

6.   Monitor Your Books

You should review your books and records at least weekly. This is your best bet for quickly becoming aware of potential problems. Part of monitoring your books is being able to diagnose any weaknesses in several important areas, including liquidity, efficiency and return on investment so you can respond quickly as problems arise.

Conclusion

There are many ways to improve your business finances, but they require vigilance and prompt action. Ensure you have enough resources available, including access to working capital, to help you fund your efforts to grow your business and remove impediments to growth. If you’d like to discuss a strategic loan from IOU Financial, we’d love to hear from you.

4 Things Small Businesses Must Include in Their Budgets

Budgeting is to business as oxygen is to life: Without it, you die. The reason budgeting is vital to the health of a small business is that it is your GPS device for telling you where you are supposed to go and where you are actually heading. You use the budget to track business expenses, cash on hand, revenue needed and received, and other items to know whether your business is succeeding. The differences between your projected and actual budget numbers are your early warning system when things start to go wrong — or your confirmation that you are on the right track. Those differences are also a call to address problems by changing what you are doing.

Bottom line, your budget tells you how much money you have, how much you must earn and how much money you will have to spend. Importantly, it also tells you how much you might need to borrow to plug any cash shortfalls and to finance your growth. To know these things, you should include in your budget the items listed below.

Required Budget Items

Your budget might have dozens of line items, but they can all be organized into four groups of items that every budget must track: Sales, costs, profits and cash flows.

Sales and Other Revenues

These figures are the foundation of your budget. You can’t spend money unless you make it, and you don’t want to overestimate how much you’ll make by donning rose-colored glasses. Your estimates should be conservative but realistic — if they turn out to be too conservative, well, that’s a good thing. On the other hand, bloated estimates could leave your business floating belly up.

Estimating your revenues is hardest if you are just starting up your business, because you don’t have any prior-year data. That’s why you did extensive research by talking to other owners in your same field, undertaking market research, and relying on your knowledge from previous jobs.

Be sure to include, if appropriate, estimates for sales allowances and returns, which you subtract from gross sales to calculate net sales.

Total Costs and Expenses

To make money, you must spend money– those are your costs and expenses. You should categorize your costs by type:

  1. Fixed costs: These are costs that remain the same independent of your sales numbers. They include rent, insurance, property taxes, leased furniture and so forth. While these costs are called fixed, they are not carved in granite. “Fixed” just means that it will take a while (up to a year and maybe longer) to change these costs.
  2. Variable costs: These are costs that vary directly with sales volume. They include the costs of merchandise, raw materials, labor, utilities, freight, inventory and alike.
  3. Semi-variable costs: These are costs that can slowly vary with the volume of business. For instance, they include the costs of salaries, marketing, communications and various elements of overhead.

Profits

Profits, or net income, are revenues minus all expenses. Ultimately, your business won’t succeed unless it can generate profits. Your budget should include estimated  interest and income tax expenses when projecting profits. If your budget tells you that it will take years before you might begin making profits, you should re-evaluate your business model and see if you can operate until the profits begin rolling in.

Projected Cash Flows

Lack of profits can slowly poison your business. Lack of cash can stab it in the heart. Your cash flows revolve around collections and disbursements. The timing of both will reveal whether your cash inflows and outflows align. To some extent, you can try to accelerate collections and delay disbursements when revenues fall short or unexpected expenses arise. Your budget will indicate when you might have to inject more cash into your business, either by contributing additional capital or taking out a loan. If the latter is required, contact us at IOU Financial for a quick working capital loan on easy terms and convenient daily repayments.

Budget Templates

You don’t have to build your budget from scratch. We recommend our Business Budget Smart Sheet, which will help you analyze your spending patterns, streamline areas of overspending, gauge the cash flow impact of fixed and variable costs, and much more.

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.

 

Streamlining Your Bookkeeping Process: Tools for Small Business

Whether you’ve been running your small business for years or are just opening up shop, efficient operations are the key to business success. When it comes to bookkeeping, it’s vital you run a smooth operation that gives you timely, reliable results. Bookkeeping tasks includes setting up accounts, entering transaction data, generating reports and preparing tax returns. It is the key part of your accounting system, including invoicing, bill payment, banking, inventory management and payroll. We’ve assembled here a short prescription for streamlining your bookkeeping process and have included a list of bookkeeping tools to boost your efficiency.

Five Keys to Efficient Bookkeeping

Even minor improvements can have a major impact on your business’ efficiency. Here are five:

  1. Establish or review your system:

    If you are just now organizing your business, you will need to have a detailed bookkeeping system in place from the very start. It starts with basic tasks, such as entering your receivables and payables as soon as you can — don’t let invoices or checks pile up on a desk, as it’s all too easy for something to fall through the cracks. Review your chart of accounts to ensure its properly set up and capturing all the information you need. Establish training materials in case you change bookkeepers, as this will save much time should the need arise.

  2. Maintain your pace:

    As we just touched upon, you should never fall behind on your bookkeeping. Even a delay of a few days can snowball into bigger problems. Errors often occur when you have to play catch-up. For example, your inventory system might fail to reflect orders placed if you haven’t yet entered the data into the system. It’s wise to have at least one “backup” bookkeeper who can step in when the primary one is away.

  3. Contract with a CPA:

    You probably don’t need a full-time CPA on staff, but that shouldn’t stop you from hiring one as a part-time consultant. CPAs can ensure your books are being kept correctly. You’ll probably have the CPA prepare your tax returns and answer any questions that come up. And in a pinch, your CPA can temporarily maintain your books if you need to find a new bookkeeper.

  4. Keep receipts:

    It’s such a cliché, but nonetheless true. If you don’t keep, organize, and record your receipts, your business will likely slow down as you search for purchase information from weeks or months before. Consider digitizing each receipt, and in any event, set up a filing system that ensures you can find a receipt when you need it.

  5. Use the best tools:

    It goes without saying that, in 2019, very few businesses are run using a paper-based accounting system. Since everyone automates, it makes sense to choose the systems and tools that have impressed the experts and other users. Don’t worry, you don’t have to pay thousands to get a basic accounting package. In fact, some good ones are free! Keep reading to see some expert recommendations.

Tools for Efficient Bookkeeping

The most valuable business tool is your accounting system. If you are a small company, consider getting a modular system with separate packages for basic bookkeeping, invoicing, inventory, payroll and so forth. Here are some noteworthy systems to consider:

  1. Wave:

    This is a top-rated free accounting system with more than 1.5 million users around the world. It’s a cloud-based system accessible anywhere you can establish an internet connection. It has impressive functionality, including invoicing, receipt management and banking. The only cost is a processing fee for online payments.

  2. Sage Accounting:

    Perfect for self-employed business owners who need a simple system that can be upgraded as your business grows. Prices start as low as $10/month.

  3. FreshBooks:

    A powerful accounting system that integrates most accounting features and interfaces with popular CRM and customer service apps. Prices start at $19.95 per month.

  4. Others:

    Many other accounting systems also perform well, including QuickBooks Online, Xero, Sage 300 Cloud and Sighted. If you need a payroll package, consider WagePoint, Gusto and SurePayroll. For tracking time and expenses, look at TSheets, Expensify and Neat.

Take the time to get your bookkeeping right from the start and you’ll save countless hours on error correction and rework. Your business will save money and you’ll have one less thing to worry about.

Are You Overpaying Your Business Expenses?

Running a small business is a costly undertaking in terms of time, effort and money. Unfortunately, too many businesses spend too much on their expenses. This eats into your working capital unnecessarily, possibly crimping your flexibility and your ability to take advantage of opportunities as they appear. Let’s look at some expenses for which many owners overpay.

Credit card processing:

As your business grows, so does your credit card volume. Have you asked for a quantity discount on your credit card processing fees? This is an extremely competitive market — shop around and you might find much better deals.

Design instead of content:

Your website is a tremendous lead generator. A problem surfaces when owners lavish too much money on design without paying enough attention to content. Your search results will improve if you populate your website with timely, authoritative content. While fancy design is fine, it won’t improve your Page Rank, and it can be expensive to create and maintain. Spend that money instead on quality writing and search engine optimization.

Oversized office:

Rent is expensive. Are you paying for space you don’t really need? Have you filled your office with expensive furniture and equipment? Many businesses can function in smaller spaces or even in a home office. The latter is a great option because it gives you a tax deduction without additional expense, eliminates your commute time (saving money on gasoline), and perhaps reduces your wardrobe costs.

Inefficient employees:

You might spend more on labor than any other expense. Inefficient employees are costly because you are not getting your money’s worth and you might even overstaff to compensate for some bad apples. There are ways to quantify how much an employee is returning to the business. Good employees should return 5 to 10 times what you pay them. If your employees are underperforming, replace them with better ones (even if they cost more) or use contractors instead.

Unproductive advertising:

Do you know your marketing return on investment (ROI)? If not, you don’t have a handle on how your marketing efforts are performing. Many businesses spend a lot of advertising dollars on Google and Facebook. These media sites can provide extensive information about your marketing ROI, but it goes to waste if you don’t use it.

Using paper:

OK, its 2019. Aren’t you ashamed you still haven’t gone paperless? If you had invested in a paperless office, you’d be saving a small fortune on printing and photocopying costs. Plus, don’t you want to save the trees?

Unnecessary travel:

Some transactions require in-person interaction. But does that really pertain to your business? Consider the costs of travel, hotel, meals and entertainment. Chances are you aren’t getting a good return on these expenses. Your time might be better spent conducting your business on Skype, and you’ll save a fortune.

Living the louche life:

You are a business owner, not a superhero. If you burn the candle at both ends, you’ll get burnt. Guard your health by avoiding too many nights entertaining customers, vendors and employees. Your tab will be substantial, and your health might suffer. Sure, you can probably charge off your entertainment expenses, but you may pay in other ways.

Failure to grab opportunities:

In the penny-wise and pound-foolish department, false economies can cost you in the long run. For instance, you might be offered inventory or raw materials at a discount, but you don’t make the purchase because you don’t want to borrow the funds you need. This behavior can stymie growth. The lesson is to use borrowing intelligently. If you don’t, you can be certain your competitors will.

These are just a few of the many ways you can cut waste and increase efficiency. Should you need to beef up your working capital, contact us at IOU Financial for business loans that are easy to get and easy to repay.