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How To Tweak Your Small Business for Success

Small-business owners usually don’t have the time or money to routinely make big changes to their businesses. However, you can consider easy changes that have the potential to make a big difference to your company’s bottom line. Here are four tweaks you can make to help ensure you spend your money wisely and increase your success:

Use financial tools:

It’s hard to optimize your business if you don’t perform proper financial management for critical areas such as revenue, taxes and payroll. You can cut this seemingly daunting task down to size by using relatively inexpensive financial tools like these:

  1. QuickBooks: A mobile, cloud-based accounting system that provides real-time insights into your business and accomplish tasks, such as banking and invoicing, via your computer, tablet or smartphone.
  2. Cyfe: A dashboard program that consolidates information from multiple websites you use, such as PayPal, Shopify, QuickBooks and social networks, to save you time and help give you the big picture.
  3. Mint MyBusiness: A business version of the popular financial tracking software that keeps tabs on your spending habits and even suggests budgets.
  4. Couponbox: A coupon calculator that shows the cost-effectiveness of your coupon-based marketing programs, so that you don’t hurt the bottom line with overly generous discounts.
  5. Trigger: Track part-time employees, freelancers, and contractors as they work on projects and tasks, a great way to measure productivity.
  6. TurboTax: The business version helps you prepare your taxes, maximize your deductions, and handle all the forms you need to file.

Streamline operations:

Businesses require more time to manage as they grow. Here are some ways to streamline your business and save yourself precious time and money:

  1. Cut back on email: Set a time limit on the amount of time you spend each day responding to email. Only spend time on urgent messages, and consider programs like Slack to handle internal communications.
  2. Outsource: Use accounting and HR services instead of tying up your own time doing tax prep, payroll, benefits administration, etc. It’s less expensive than you think and frees you up for more important tasks.
  3. Throttle meetings: Some meetings just suck the soul out of your business by being non-productive and boring. Don’t schedule meetings unless they directly contribute to your monthly or quarterly goals.
  4. Hire expertise: It’s easy to begin a company by hiring friends and family rather than expert talent. Fight this urge and hire great people from the outset. It might cost a little more, but it will help you avoid mistakes, wasted time and bruised feelings down the line.

Build company morale:

Happy employees are productive employees. There are many inexpensive ways to build morale, including company picnics, birthday parties, relaxation breaks, good medical benefits, employee discount programs, and allowing pets in the workplace. You might even organize a nearby child care center if you have several employees with young children.

Revamp your image:

Does your marketing image provide the best return on investment. Perhaps you can tweak it to give your brand(s) more oomph. First, conduct an image audit to find out what customers (and demographics) think of your branding. Pick a new logo, font, colors and designs that are more relevant to your target audience. Update your website and employ the latest SEO techniques. Get involved in the community and listen to customer suggestions.

There are many other ways to tweak your business, but these are a good start. If you need extra help organizing your business budget, be sure to check out our smart sheet. 

 

Is Keeping a Debt Tracker Beneficial to Your Business?

If you run a small business, especially one in which you’ve empowered others to spend company money, you know how important it is to manage your cash flow. It comes down to a question of solvency: Does your business have enough short term cash to meet its obligations, including debt payments due throughout the next several months. One of the unfortunate things about most debts is the big monthly repayment that always seems to threaten your cash balance. We say most debts, because as we’ll explain below, some loans, like the ones offered by IOU Financial, avoid mammoth monthly payments altogether.

A debt tracking tool, which centralizes information about debts and debt payments, is therefore an excellent idea for the busy owner on the go. The tool can take the form of a downloaded computer program, online software, or a mobile app:

  1. Computer program: You can purchase or rent financial management software, such as QuickBooks, that provides debt tracking functionality, along with a host of other features. If you use a computer-based accounting system, you should be able to generate reports about cash and debt, but they might be less timely.
  2. Online software: A program like Mint provides information about your upcoming bills and warns you if your cash is running low.
  3. Mobile apps: Several apps exist for tracking debt, including Debt Tracker, LearnVest, Unbury.me and others. These have the advantage of always being available, even if you aren’t at your computer. Mobile wallets not only include debt information, but also provide mechanisms to make payments.

Functionality

So, what should a debt tracker do for you?

  • Accounts: The program should have full information about each debt account, including account number, method of payment, payment calendar, interest rate, outstanding balance and so forth. It should be able to sort the account display by various criteria, such as date, amount of next payment, interest rate and more.
  • Payments: Debt trackers should be prepared to give you full information about each payment you make, including penalty fees and interest. Comprehensive trackers also serve as a means to schedule and make payments, by generating online checks or performing real-time bill payment.
  • Cash management: Trackers should be able to report your available cash and near-cash reserves, and alert you whenever a payment will create a low-balance or overdraw situation. You would like a tracker to suggest the order in which to pay off debts, according to criteria that you set, such as remaining balance or interest rate. A nice feature is to have an earmarking function, in which you allocate a portion of cash inflows to specific objectives, such as building up a fund to act as equity for a property purchase. Naturally, part of cash management is to report who owes you money and when to expect it.
  • Usability: A debt tracker, whether standalone or a function of a larger system, should meet certain usability standards. It should be easy to operate, secure (using encryption, PINs, etc.), offer flexible reporting, and, if you choose, a method to make payments. Ideally, the tracker will be integrated with the rest of your company’s financial data, including all payables and receivables.

The Joy of Daily Repayments

We mentioned earlier how monthly debt payments require you to ensure you have sufficient cash when the payments come due. That’s a major benefit of debt trackers. IOU Financial takes a different, and better, tack. Instead of hitting you with a monthly lump-sum repayment, we evenly spread your payments over all the business days within the month, and we automatically debit your bank account so that you don’t have to take any special steps. Your debt tracker will show you how your balance goes down gently each day. IOU Financial can lend your business up to $150,000 in as little as 24 hours, so contact us today to experience the joy of daily repayments.

How to Get Your Finances Ready for Your Slow Season

Many small businesses experience one or more slow seasons each year. For a B2B business, the year-end holidays might be a slack time, while tourist-related businesses might have little to do during the coldest (or hottest) months. Although challenging, a slow season is at least predictable, which means you can make preparations to see your business through the lean months. Here are some suggestions:

Assess your cash needs:

Most businesses have a mixture of fixed and variable costs. You’ll need enough cash to cover your fixed costs and that portion of your variable costs that you can’t avoid. Your monthly and quarterly budgets should give you a good indication of an impending cash crunch and thus how much money you must have on hand.

Husband your cash:

In the months just prior to the slow season, accumulate excess cash, if any, in a bank account. If you have a lot of money tied up in unpaid invoices, consider factoring them for immediate cash. Cut your expenses and purchases during the slow season. If you hire contractors, it’s easy enough to reduce staffing. That’s a little harder to do with employees, but many places do furlough workers or give them unpaid extra vacation time. In the worst case, you can let go of some employees, but that may cause more problems in the long term. A better idea is to hire only the number of employees you need all year round, and then hire seasonal workers during the busy months.

Take a vacation:

If you run a mom and pop store, schedule your vacations for the slow season(s) and shut down the store during those times. For example, if you own a frozen yogurt store in Washington DC, the three coldest winter months might be an excellent time to take an extended holiday. This will cut your variable costs to the bone.

Make credit arrangements:

A short-term loan or line of credit can be just the ticket for smoothing out a choppy selling year. IOU Financial can lend you up to $150,000 on short notice and favorable terms, without all the hassles associated with a bank loan. Since the loan is short term – the length of the slow season – the total interest paid will be relatively modest.

Negotiate better terms with suppliers:

If your slow season is well defined, you should be able to work with your suppliers to loosen their terms during the slack period. It’s reasonable to ask for due dates to be extended from 10 to 90 days, especially if your payment record with the vendor is good. A good supplier will understand your business cycles and offer you flexible terms when you need them. It’s important to reach these agreements well in advance of the start of the slow season, so that you can adjust your budget accordingly.

Increase your social presence:

Use your extra time during the slow season to increase your social media footprint. It’s an excellent time to publish articles and send out newsletters or emails containing useful information. Update your entries in LinkedIn, Facebook and other outlets. You can even advertise over the web by buying ads from Google, LinkedIn and other social sites.

Plan sales events:

If you can’t close up shop during the slow season, why not schedule major markdown events for the period? Lower prices, suitably advertised, should draw in customers. You can also plan fun events, like raffles and free donut days, as well as instituting a buyer loyalty program.

IOU Financial is your source for affordable small business loans of up to $150,000, funded in as little as 24 hours. There are no upfront costs, and daily fixed repayments avoids large monthly payments. Let us see you get through your slow period and help you grow your business year-round.

5 Tips for Keeping Your Business Finances Secure in the Age of the Internet

The Internet has its tenterhooks into everything. Large businesses have IT Departments that use sophisticated techniques to keep their data safe, but if you run a small business, you probably have limited technical resources. Still, there is a lot you can do to secure your financial data, and it’s a really good idea to do just that. Hackers can steal your data or drop malware into your website. In some cases, you may have to pay ransom to get your website working again. Here are five tips to help keep your business data secure:

Secure your network:

You need to be able to discourage hackers while maintaining the functionality you need to do your business. Your WiFi must be encrypted and password protected. Hackers often do mischief by packaging malware within comments or email they send to your website.  You need a physical or site-level firewall to control access, and a continually executing malware identification and removal program to keep out Trojan horses, spam links and so forth. If you use a commercial webhost like GoDaddy, review your security status and upgrade it where necessary.

Control your online purchases:

If you purchase from an insecure site, there is a chance the data will be intercepted or otherwise misused. You might not have a fancy purchasing department, but you can set some rules regarding who you purchase from. Only purchase from trusted sites – ones you’ve dealt with in the past, or, if a new site, one that uses a reputable payment processor, like Google Checkout or PayPal. Always ensure you see the padlock icon on your browser to verify you are looking at a safe page.

Monitor your credit report:

Your business’ credit report will tip you off right away to fishy transactions. You should make arrangements to get fresh copies of your credit reports at least once a month. It’s worth the money. When you receive them, check them over for hinky items that may indicate identity theft. If you find these, contact your bank, the credit card issuer (if applicable) and the credit bureau right ways. You might also need to change account numbers and passwords.

Be careful with your email:

Phishing is big business and the crooks are getting better at it all the time. Your email provider is your first line of defense, alerting you to suspicious email and quarantining it in a spam inbox. Beware emails that ask you to click a link to fix some problem or claim a reward – it’s probably a ruse to load malware onto your computer or direct you to a malicious website. Never include private information, such as account numbers or tax ids, in your emails. If you get an email from a supposedly trusted source asking you to take some action, do not respond to the email. Instead, contact the company by phone or separate email to verify the situation.

Set banking alerts:

You should closely monitor your business checking account for suspicious activity. If you use a program like QuickBooks, download and review your transactions daily. Use a bank that offers account alerts, such as when a withdrawal or payment exceeds a certain amount, of if your balance falls below a given figure.

If you take suitable precautions, you can take advantage of all the efficiencies the Internet provides without undertaking undue risk. When you deal with IOU Financial, know that we follow the highest standards of data protection so that you can borrow money in confidence.

Tax Season is Here: How to Properly Get Your Finances in Order Before You File

The new year is also the start of tax season, so it’s time for your small business to get organized, file business expenses correctly, and ensure you are getting the correct refund. The details of how to accomplish this depend, in part, on how your business is organized: sole proprietorship, partnership, LLC or corporation. Yet the ways you go about calculating your taxable business income are pretty much the same however you’re organized. Here are the basic steps you’ll need to file your taxes properly.

Collect your business records: Hopefully, you have a computer and/or file drawer that is carefully organized to maintain all your raw paperwork, such as invoices, receipts, tax documents, bank statements, business diaries, etc. But we know that some folks are in the habit of piling all their papers into a heap on a desk. Well, now is the time to attack those records, get them sorted and entered onto a spreadsheet or accounting package. If you use software like Quicken or QuickBooks, you can go through your transactions, flag tax-related items and associate them with the appropriate IRS tax forms and lines. Once complete, you can then import the data into tax preparation software and it will automatically prefill many of your forms and schedules. 

Resurrect missing information: If you are somewhat disorganized, you may not have done a 100 percent perfect job of preserving your receipts. For example, you know you went on a business trip last year, but can’t seem to locate any of the receipts for travel, lodging, meals, taxis and so forth. Unless you paid for everything in cash, you can resurrect the missing information by combing through your credit card and bank statements. In fact, it’s a good idea to scour the entire 12 months of these statements to make sure you haven’t missed any deductible expenses. If you operate on a cash basis, remember that tax-related events occur when money is collected or disbursed. Accrual-based businesses must instead use the dates on which income is earned and expenses are incurred.

Find the correct forms: The IRS is pretty picky on which forms you use to file your taxes – they want you to use the right If you are a sole proprietor or run a one-person LLC, this means you’ll be getting intimate with Schedule C of Form 1040. A corporation must instead file Form 1120 separately from your personal return. Partnerships have separate forms as well. Your tax software can quickly ascertain which forms it will use to collect and report your information.

Make 401(k) payment: Your tax software will keep a running total of your refund or taxes due as you fill in the required data. If it turns out you owe the IRS money and you file on Schedule C, remember that you can fund your personal 401(k) up until the tax filing deadline and deduct the contribution from last year’s income. For 2016, that contribution can be as much as $59,000, depending on your age and income.

File on time: If you need an extension, remember that only buys you time for filing, not for paying. You still must pay what you think you owe by the April 15 deadline. Note that if you file Form 1120S as a Subchapter S corporation, the deadline is March 15. If your fiscal year doesn’t coincide with the calendar year, adjust your dates accordingly.

Should you find yourself short of cash at tax filing time, it’s good to know that IOU Financial can lend you up to $150,000 in as little as 24 hours.

Business Budget Basics: 5 Things you MUST be Doing to Ensure Success

Whether you are a startup or a seasoned company, small businesses rely on cash flow to stay in operation. Budgeting is the primary weapon a business owner has to control cash flow and predict possible shortfalls. If you want long-term success, you must maintain a budget and adjust your operations when budget tracking indicates the need to do so.

A budget that both estimates and matches expenses and revenues helps a small business forecast its cash position in the short and medium term. You need a cash forecast to ensure you can operate as planned, expand the business if the opportunity exists and verify that you can generate enough earnings to pay yourself a viable income.

What to Do

Don’t worry too much about how to do a budget. You can use an online spreadsheet, such as the IOU Financial Business Budget Smart Sheet, to make all the entries and generate reports. It’s more important to concentrate on what you must do to get the most from your budget. Here are five tips that you’ll find useful.

Check out industry standards: Every industry has its own characteristics regarding how much of your revenue you’ll have to allocate to various cost groupings. Retailing is quite different from refining, and you need to know the right numbers to use when constructing your budget. You can glean this kind of information from several sources, including the IRS website, the library, and other local business owners. You don’t have to be too precise, because small businesses tend to be volatile – what’s important here is to understand the industry averages.

Leave some slack: It’s great to budget, but it can be self-defeating if you aim for precision down to the nickel. Predictions are often unreliable and the future is uncertain. Bearing this in mind, it’s better to underestimate revenues and revenue growth relative to expenses when projecting the next three to 12 months. Better to have some extra cash on hand then to be caught short unexpectedly.

Sharpen your pencil: That’s old bookkeeper lingo for finding ways to cut costs. To do so, you’ll need to identify budgeted expenses that you can control. Fixed expenses like rent and insurance usually can’t be changed in the short run, but other items can, including non-critical maintenance, adjustments to labor usage, discretionary purchases and so forth. Remember to take advantage of your suppliers’ payment terms. In some cases, you might be able to reduce retirement plan contributions for the current year.

Review your budget frequently: Big businesses often work on an annual budget cycle. That makes sense, since their size requires a complex and time-consuming budget process. You, on the other hand, need to review your budget at least every month. A small business doesn’t have the kind of resources that the big ones use to smooth out surprises in the company’s cash flows. The more volatile your environment, the more frequently you will need to review and update your budget.

Comparison shop: It’s your responsibility to conserve your cash, and one of the best strategies is to shop around for new suppliers and service providers. There is never a bad time to do this, but the start of a new budget cycle is a natural point to comparison shop. It’s also important to do this when you are planning a change in operations.

In sum, budgeting is an essential part of running a business. A cash crunch can kill a small business, so stay ahead of the curve by tracking your budget closely and revising estimates as you gather new information. Finally, establish a relationship with a lender so that you can borrow money when you need it, whether budgeted or not.

DIY or Hire an Accountant?

Many owners of small business do their own accounting, usually with the help of a software package such as QuickBooks. This can make sense if you run a one- or few-person operation, are familiar with basic accounting, and have the time and inclination to take on the work yourself. For you DIYers out there, we recommend our IOU Financial Business Budget Smart Sheet to establish and track your budget.

For some, the question of hiring an accountant is confusing. Here are nine signs that indicate you should go ahead and hire one: 

  1. Knowledge: If you aren’t familiar with accounting terms, financial statements or report creation, you might need an accountant, at least in the beginning, to teach you what you need to know. If you don’t think you have the time to study the subject, you can keep the accountant on as long as needed.
  2. Taxes: Tax law is complicated, and one of the worst mistakes a business can make is to overpay its taxes. But even worse is to underpay and get caught, because then you’ll be hit by penalties and interest. Use an accountant if you don’t understand which deductions and tax credits to take, and/or if you don’t want to file your tax return on your own.
  3. Time: Let’s face it, bookkeeping can eat up your time and divert you from more important tasks. You need to operate the business, make staff decisions, market your offerings and troubleshoot problems. It shouldn’t be surprising that bookkeeping would be low on your priority list. You can hire a bookkeeper who knows how to do other accounting tasks – they usually charge less than full-blown accountants.
  4. Growth: Congratulations, your business is experiencing rapid growth. However, that also means you have more customers to attend to, more staff to hire, more vendors to negotiate with, and so forth. These activities require more paper pushing, number crunching and meeting time. With these management challenges, why not let an accountant lift some work off your shoulders?
  5. Profit margin: It’s nice when revenues grow, but less nice if profits don’t follow. The reason is invariably that your costs are too high. You could use an accountant with a sharp pencil to evaluate your overhead costs and suggest ways to save money. The savings could easily pay the accountant’s salary and hopefully a lot more.
  6. Investors: Have you grown to the point that you have investors? Well, they’re going to want to see professional reports that lay out the current financial condition of the business. Professional financial reports are also useful in recruiting new investors. An accountant can produce the reports you need and make them look professional – that will help keep investors happy.
  7. Expansion: If you are thinking about expanding into a new state, an accountant will help you meet the regional reporting requirements for payroll tax, income and sales. Expansion to a new state may include opening new locations, creating new distribution logistics and hiring new staff. An accountant can help you track the costs of these moves.
  8. Merger/acquisition: If you are looking to buy or sell your business, you’ll need an accountant to evaluate the entities involved and how to structure the transaction in order to minimize taxes.
  9. Audit: If the IRS has signaled that it wants to audit you, a CPA or other qualified accountant will be able to represent you to the IRS. This can help prevent you from making mistakes as well as lower your stress level. Generally, you don’t want to face the IRS on your own.

Get Your Finances Straight for 2017

With 2017 upon us, it’s an important time for taking stock of your business’ finances and setting right whatever issues are unresolved. Here are 9 tips you can execute right now to get your finances straight:

  1. Update your business plan: Several sections may need updating. What was the last time you analyzed your competitors or reevaluated your marketing plan? It’s easy to let these things slip, but important to bring them up to date. You will, of course, want to also recast your financial projections and budgets for 2017 in light of current conditions. Check out our Business Budget Smart Sheet to help you whip your budget into shape.
  2. Stay informed about health care: Donald Trump has promised to repeal Obamacare. This will have unpredictable repercussions for companies with employee health plans. It would be wise to anticipate the worst, which is health insurance costs rising substantially. On the other hand, you may no longer need to provide health insurance, which might save you a ton of money. The best advice is to stay informed.
  3. Reassess your capital structure: Do you have enough capital to fund your operation and expansion in 2017. If you plan to grow your business at the start of the year, now would be an excellent time to line up a commercial loan from IOU Financial. Our streamlined process can provide loans of up to $150,000 in as little as one business day. Whether you plan to move to bigger quarters, increase your inventory or add another shift, an IOU Financial business loan can get you ready for 2017 with the capital you need, quickly and hassle-free.
  4. Set aside contingency funds: An excellent 2017 resolution would be to earmark some of your profits for a contingency fund to handle unexpected cash crunches. A proper emergency fund should be able to keep your business afloat for three to six months. You can, of course, supplement your contingency fund with a quick loan from IOU Financial. Unlike a bank, we respond to emergencies immediately with fast funding.
  5. Review your insurance policies: You should review at least once a year your liability insurance, key-person life insurance, health insurance and so forth. The insurance market is quite dynamic, and it’s always a good idea to find out whether money-saving policies are available.
  6. Stay informed about 2017 tax changes: We already mentioned the Obamacare changes that are brewing. Mr. Trump has also promised a giant tax cut for businesses and a relaxation of regulations, all of which could have a major impact on your business finances. If necessary, confer with a tax specialist to ensure you understand the latest rules.
  7. Check the latest salary guide: Every year, several publishers put out the latest industry salary guides. See how your pay structure compares to your industry statistics – you may need to modify you pay structure if you are looking to recruit good people.
  8. Use cash accounting to advantage: Many small businesses use cash accounting, in which income is recognized at collection and expenses realized at disbursement. To lower your 2016 tax bill, prepay expenses and delay collections. This will shift some profits into tax year 2017, giving you an extra year to hold onto them, when tax rates might be lower.
  9. Evaluate your offerings: Depending on what type of business you run, it might be a good idea to look at the products and services you offer and see whether some changes are in order. If you are a merchandiser, you can look at your mix of products and eliminate the weakest performers, and/or extend your range of merchandise to new areas.

One last thing: Happy New Year from your friends at IOU Financial!

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!

How Your Assets May Not Be Working As Hard As You Are

Why A Cash Flow Loan is Better Than Collateral for Business

Assets are the things your business owns. They include short-term ones, such as accounts receivable, cash, and inventory, and long-term ones, such as plant and equipment, intellectual property and goodwill. A business’s job is to convert assets into revenues and profits. If you are not fully leveraging your assets to help your small business grow and thrive, you could be missing out on profits.

There are two major ways that assets can be put to work by your business.

  1. Cash Flow Generation: Whether you are a merchandising company selling inventory, a manufacturer turning raw materials into finished products, or a service-oriented company relying on office space or equipment, you are using assets to generate revenue. The cash flow generated from your business assets can be put to work as the basis for obtaining a loan from an alternative lender. While banks look only at credit ratings, alternative lenders are usually much more interested in daily cash flows and lend based on healthy flows. A loan means working capital to pay down more expensive debts, purchase equipment, increase inventory purchases, expand operations, acquire a competitor or otherwise leverage your revenues so that the additional profits exceed the modest interest costs.
  2. Collateral: Another way to make your business assets work is to use them as collateral. Some lenders, often called factors, will make a loan collateralized by your fixed assets, such as plant and equipment, or backed by your accounts receivable or inventory. In an A/R loan, the factor advances you about 70 to 80 percent of the invoices it accepts, and then pays you the remainder, minus a financial fee, when the invoices are paid. This speeds up your business cycle by allowing you to purchase more inventory faster. It also relieves you of the headache of trying to collect from people or companies who are overdue. You can also sell your A/R for a fixed price to a collection agency.

Comparing the Two Methods

Both of these methods deliver capital to grow your small business, but there are advantages to cash flow generation instead of leveraging assets as collateral.

When you use assets as collateral in factoring, it puts pressure on your sales margins due to the fees you are charged when you pledge assets or the loss you take by selling assets. Also, if you sell your A/R, you could alienate your customers if they start being contacted repeatedly by a collections agency that is unknown to them.

In general, taking out a loan for cash flow generation is the better deal. Rather than tying up your main assets or, in the case of collections agencies, even selling them, you keep your business assets and maintain control. You also get a full sum of money rather than a percentage advance to use as you see fit, and you avoid the financial fees of factors. As long as you have daily cash flow and a solid plan, the profits generated from the additional inventory, expansion, or other project made possible by your loan will be a permanent gain that will let you pay down the loan comfortably. Now that’s putting your money to work!

If you’re ready to try cash flow generation, IOU Financial is a great starting point to find out what a loan can do for your business. You can work with a Small Business Loan Consultant to take you through every step of the process, and we approve 85 percent of applications we receive, including many people turned down by banks. Our base requirements are that you own at least 80 percent of the business, have been in business a year or longer, make 10 or more deposits per month, and have annual revenue of at least $100,000. To get started, give us a call at 866-217-8564.

 

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