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Posts Tagged ‘debt’

Think You Can’t Get a Business Loan With Bad Credit? Think Again!

Thursday, March 20th, 2008

Just because your personal finances are a mess and your credit score has hit rock bottom doesn’t mean that your business it out of luck when it comes to getting approved for a loan. Yes, really! Many small business owners rely on a home equity loan to get their businesses off the ground; but for others that’s not even an option. So, without a personal loan to fall back on, what can you do to give your business a much-needed cash boost? Actually, you have more options than you might think.

First things first

If your personal credit score is less than 640, then you will most definitely want to separate your personal credit from your business credit. All you need to do is obtain a tax ID number or Employee Identification Number (EIN), rather than using your social security number.

Building your credit history

One you have a clean starting point for your business, it’s time to start building a loan-worthy credit score. You may want to start by getting a business credit card; however, you must be certain that you can pay off the balance in full, each and every month. Also, begin to build credit lines with your vendors and suppliers. The more you can show banks and lending institutions that you have a history of making payments on time, the better.

Obtaining a business loan

Once you’ve successfully implemented the above techniques, you’ll be well on your way to getting the larger loan you desire. However, building a stellar credit score takes time and, as with many small businesses, you may not want to wait years before the bank is ready to trust your business as a borrower. However, there are several ways you can get your business a loan, based just on the small credit history your business has. First, you can work your way up to that large loan with the "loan ladder" approach. That means you get a smaller loan, pay it off quickly and then get approved for a larger loan, etc. It may take several steps, but eventually you’ll prove to the bank or lending company that you are ready for that mega-size loan.

There are also two options that help to share the risk between lender and borrower. The first option is to get a collateral loan. This means that you are putting your assets as security against the loan. This can be expensive office equipment, land, office building, home, etc. This makes getting a business loan easier but, of course, it also increases the risk to you. The second option is to get someone with good credit to co-sign your business loan. This could be a family member, friend or business associate. Doing this will increase both your chances of getting a loan and the loan amount itself. Something to think about with this option, however, is the personal repercussions you may face if you end up defaulting on the loan.

Another option is a bad credit business loan. While this is a high interest loan with hefty penalties for late payments, it is at least an option for you when nothing else is available. Plus, if you can pay the loan off in good standing, you’ll be one step closer to getting that "perfect" business loan.

So you see, even though you may have made some mistakes in the past with your personal finances, you can start fresh with your business credit. However, it’s important that you learned a few things along the way and don’t fall into the same pattern once again.

Tags: advice, bad credit, business loans, Carrie Hinkel, debt, Finance, Finance and Accounting
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When Good Debt Goes Bad

Wednesday, February 13th, 2008

Although you might be surprised at the thought, there is such a thing as good debt. Despite the fact that all debt is normally associated with poor credit ratings and possible blacklisting - not to mention the potential loss of your company - you can actually sometimes use debt to your advantage. It just needs to be handled properly, and the best way to do that is to understand what constitutes good debt.

Good Debt

The simplest way to look at good debt is through how positive your company assets are. If you have assets that are making money for you at a higher rate than what the debt actually costs to have these assets, then that’s what is known as good debt. So, for example, you may own a host of properties that you rent out. If it costs you $100,000 per month in maintenance fees, etc, but you’re making $120,000 per month in rent, this is a good debt.

Another example of good debt is anything essential that you need to continue trading, but don’t yet have the capital to pay for it completely without using up all of your existing cash flow. For example, an IT company may need to buy numerous servers to keep its business going and provide the work its clients require. However, they can’t afford to pay for the servers in full, so they have them on a business loan arrangement. Because it’s equipment that’s key to their trade, again it’s classed as good debt, since it’s a means of bringing in revenue.

Bad Debt

This is simpler to work out and understand. Whereas good debt generates positive income, bad debt is where income is still generated, but not at a level that will pay off the debt itself. In fact, it doesn’t even cover the interest on the debt. Bad debt also includes non-essential items that you’ve bought or paid for that your company neither needs nor can afford to have. A good example of this could be a flashy company car when the old one is less than a year old; or a personal assistant for the boss when the work rate doesn’t justify the expense.

The problem with debt is that it’s so easy for good debt to turn bad, which is why you need to fully understand how both sides work, or have a very good accountant who can look after it for you. One way to turn good debt into bad is to over-extend too fast too soon. For example, you have a successful delivery business - expanding into new territories too fast and taking on more staff without a solid foothold in a new area is a way to fall into bad debt.

As long as you can differentiate the two and know how to work good debt to your benefit, it’s a very useful tool to have for your business.

Tags: Accounting, advice, danny brown, debt, Finance, Finance and Accounting, small business debt
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Managing Your Small Business Debt

Monday, January 14th, 2008

Debt. It’s the word many small business owners hate to hear. It’s a reality for most businesses to incur debt to finance operations, at least in the start up years. Although many small businesses are denied credit in the first few years, others have bankers and credit card companies begging for their business, especially those companies whose owners have substantial personal assets to attach.

I hear the following from small business owners every day:
"It doesn’t matter. I get to write it off."
"You can’t operate in this industry without a big line of credit."
"I need a corporate credit card to take my customers out to lunch."
"You have to spend money to make money."

All of these arguments are quite superficial and speak more to our penchant for overspending than anything else.

The first statement, "It’s a write off…" is the most tenacious argument of the lot. Many small business owners think that because something is tax-deductible, it’s free. If you look at it on paper, however, you will see the foolishness of the premise. Let’s say, for example, that you spent $1,000 in interest on a loan. The $1,000 is certainly deductible from your income. At a 25% corporate tax rate, this would give you $250 in tax savings. But you still had to fork over $1,000! You are still out of pocket by the difference, or $750.

It’s critical to get a grip on your debt picture and how much interest you are paying. This will help you plan and grow more effectively in the future.

Understanding Debt Service

Debt service represents the amount of money it costs a business to maintain or "service" its debt. It includes both interest and principal payments required for a company to remain on-side with its lenders’ covenants or agreements.

Some of your debt may require interest-only payments while some might be a blend of interest and principal repayments.

The purpose of incurring debt in any business (both the corner store and General Motors) is to generate more revenue. This is called leverage. The theory is that with more capital available to a business, it can buy more equipment or invest in more promotional activities in order to bring more customers in the door. In many cases however, a lack of understanding of these principles hides the fact that debt is simply being used to prolong the agony of an unprofitable business. Understanding your total debt service will help you to determine whether your indebtedness is helping you earn revenues.

Tags: Accounting, Angie Mohr, budget, debt, Finance and Accounting, finances, Numbers 101 for Small Business, small business debt
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Calculating Your Cost of Borrowing

Monday, January 14th, 2008

In part one of this article, "Managing Your Small Business Debt", we looked at debt service and the role it plays in your business’s finances. In this article, we’ll look at how you can calculate your cost of borrowing in order to save your business money.

Another useful measure of your company’s debt is to look at the overall cost of borrowing. Comparing the blended cost of borrowing over time tells you whether it is becoming more or less expensive for the company to acquire capital.

You may have financing from several different sources:

* Bank loans
* Lines of credit
* Credit cards
* Capital leases
* Suppliers
* The government

It’s important to understand the total cost of your debt from all sources. You can do this by calculating a blended interest rate from all of your current debt.

Let’s look at an example:

A company has several different sources of financing:

* A bank loan with a current balance of $14,912 and an interest rate of 8.5%
* A capital lease for computer equipment. Balance $5,387. Interest rate 11.4%
* Payroll arrears owed to the government in the amount of $6,754. Interest rate per the statements is 10%
* A corporate credit card with a balance of $12,769. Interest rate 18.5%

In order to calculate the blended cost of debt, we simply divide each interest rate by the proportion of its related debt to the total debt. In the above example, it would look like this:

Type | Amount | % of Total | Interest Rate | Blended
Bank loan | 14,912 | 37.5 | 8.5 | 3.2
Capital lease | 5,387 | 13.5 | 11.4 | 1.5
Payroll arrears | 6,754 | 17.0 | 10.0 | 1.7
Credit card | 12,769 | 32.0 | 18.5 | 5.9
Total | 39,822 | 100.0 | 12.3

The weighted average cost of debt is 12.3% in this example. So, what does this tell us? Not much, by itself. It’s only when we look at the weighted average cost of debt over time that we are able to see if our interest rates are going up or down. If our blended rate is going up, for example, it could mean that we are beginning to have solvency issues. It means that our newer debt is at a higher rate than our existing debt. Lenders may be more hesitant to lend to us and we may be seeking financing from more unconventional (and more expensive) sources.

The Danger of Leverage

Many "Make Millions with Your Small Business" books will talk about leverage and "good" debt versus "bad" debt. They argue that it takes money to make money and that virtually all companies borrow. "Good" debt (they say) allows you to leverage your funds to earn more income. For example, if you can attract $50,000 worth of new business by buying a $30,000 machine on credit, you would be farther ahead to do so.

What these "gurus" don’t tell you is this simple fact:

DEBT = RISK

Not exactly rocket science, I grant you, but critical information to keep in mind, nonetheless. In our above example, what happens if you don’t get the increase in business you were expecting? The debt is still there. You can’t tell the bank "Sorry, I can’t pay you back until I get this new business in the door." When your business is indebted to a bank, mortgage company or other lender, there is the risk of default and of the debt being called and company assets seized. Think of it this way: it’s only companies that have debt that declare bankruptcy. If you didn’t have any debt and you wanted to wind up your company, you would simply close the doors.

Another danger that many small business owners don’t think about is that many lenders require the personal guarantees of company owners and may even require you to put up your home as security. Now, not only are your business assets at risk but everything you own personally as well. Clearly, this increases the risk of entering into credit agreements.

I’m certainly not recommending that you never borrow money. However, you need to understand the following every time you engage in credit:

* What is the purpose of this borrowing?
* Am I getting the best interest rate possible?
* What does the revised stream of cash flows look like with the new debt?
* Do I have a plan to retire this debt?
* Do I have to pledge any personal assets to get this credit?

Once you have satisfied yourself that you have done the required background work to understand your business strategy, then you can enter into the agreement with confidence.

Tags: Accounting, Angie Mohr, budget, cost of borrowing, debt, Finance, Finance and Accounting, interest rates, loans, Numbers 101 for Small Business, small business loans
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Small Business Debt Issues and How to Effectively Control Them

Wednesday, December 5th, 2007

It takes more money to start a business than most entrepreneurs initially realize. This leads to increased debt and, for many, bankruptcy. In 2006, approximately 1.9 million American businesses filed for bankruptcy. For most companies, this is never a good option. It ruins your credit, makes it next to impossible to ever get another loan, and it may be difficult to gain back the trust of customers, clients and employees. But, don’t worry; there are plenty of good options for any debt-ridden business to keep afloat and start to manage their finances properly.

Common debt issues small businesses face:

Too many monthly payments - With several credit card bills, loans, mortgage or rent, utilities, phones, fax, internet and a variety of services billing you each month, it’s easy to feel overwhelmed!

High interest rates - Many small businesses are solely financed on credit cards. Of course, they plan on paying them off quickly; but it doesn’t always happen that way and those double-digit interest rates can quickly eat up any profits.

Unnecessary expenses - When a small business is drowning in debt, expenses that were once a "good idea" can quickly turn into a serious drain on finances. Here are some examples: paying a monthly fee to a marketing company, having too many phone lines or cell phones, expensive mailing campaigns, 24-hour-a-day tech support. In a financial crisis, all your business expenses should be carefully examined. Trim everything that isn’t absolutely necessary. Once your business is back on track you can re-examine these, but for now the future of your business may very well be at stake.

Too much advertising - Advertising is a good thing - when it works. If your business is suffering from debt, your advertising methods may not be working. It’s easy for a small business’ Google Adwords campaign to be in the $500-$1000 monthly cost range. If you are in too much debt, consider seriously cutting down your campaign and making sure what you keep is actually working. The same goes for print or email campaigns. Evaluate everything, and trim most of your campaigns down, at least until your company’s finances are under control. Think of it this way - if your current advertising campaign was really working then you wouldn’t be in so much debt!

How to manage your business’ debt and slowly get out from under it:

On your own - If you were able to gain some cash flow by trimming your expenses, great! Now, don’t go out and buy a fancy new laptop - pay off your debt! Start with the highest interest loans first - which are usually the credit cards. If you feel that you were able to gain enough cash flow to considerably put a dent in your debt every month, then you should begin to pay off each loan, one at a time. If you think having that extra cash in your account will be too tempting to spend, then set up an automatic transfer from your bank account to the loan.

Get a small business loan - You may be wondering, why another loan? Well, if your current loans are high interest, then getting a single low-interest loan could pay off all your high-interest loans and save you a considerable amount of money each month. However, this only makes sense if you are able to get a small business loan and if your current loans have a higher interest than the ones you would qualify for. Do the research first and see if this option makes sense for your company’s situation.

Work with a debt consolidation program - For those with several high interest loans, this program combines all your debts into one monthly payment and stretches the term of the loan out, so that payments are smaller. This option can really help to get a business back on its feet, and may even provide you with some leftover money at the end of the month to start growing your business again.

So, if your business is barely scraping by, there are plenty of ways to get it back on track. Just be sure you learned from your debt-happy mistakes and keep future expenses to a minimum.

Tags: Accounting, advice, Carrie Hinkel, debt, debt consolidation, Finance and Accounting, money, small business debt, tips
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What Your Business Can Learn From The Boy And Girl Scouts - Always Be Prepared!

Thursday, November 29th, 2007

Even if you have never been involved in the Scouts of America group, there is little doubt that you have heard their famous motto: Always be Prepared! No doubt you have also realized that this catchy little slogan does not just apply to outdoor excursions, but to most other areas of life as well, and that includes business.

Let’s get one thing clear before we get into the “meat” of this article: just like the little boy who brings a Swiss Army Knife to every single campout, the prepared business is likely to suffer some forms of derision from the fly-by-nighters out there.

One unfortunate facet of business seems to be bragging rights, and some of the precautions you take to guard against a downturn in the economy may mean that you don’t get to live quite the lifestyle of some of your peers.

Like the kid who brings his winter boots, though, you’ll be the one protected when the weather starts to get a little bit colder. Here are some basic rules you can implement in your business in order to be prepared for an economic downturn.

* Keep most employee contracts reasonably short term. You do want to take care of your good employees, but most businesses will employ people who really only fill positions when business is good.

Make sure that you don’t commit to long term contracts with your employees; and keep unions out!

* Keep your other contracts short as well. A good sign of a possible economic downturn is a scramble by companies which provide services to get you to sign a contract for long term service. Stay away from these, because from Internet providers to repairmen, these companies will try to squeeze any shortfall in their budgets out of you by pointing to that contract.

Never sign up with a company for services beyond a year!

* Don’t tie your personal and business debts together. Never accumulate business debt on a personal account. A business that goes bankrupt means a failed business, while a person who goes bankrupt stands to lose everything and will find it hard to get back on his or her feet!

Keep your business and personal lives totally separate.

* Don’t overspend when times are tight. If you specialize in seasonal goods, you already know of the importance of making a killing in good times to offset the bad. The same holds true for any business; if you are making a lot more than what you projected, that’s great.

You will want to, and should, invest some of that money back into the business, but try to act as though you had hit your mark and nothing more. Put the extra money away somewhere it can accrue some interest you can draw on if times get tight.

Just as it can be hard to be the responsible child who truly takes the old Scout motto to heart, so it can be difficult for a diligent business owner to guard against tough economic times. Still, economic downturns are as inevitable as rain, and it will never hurt to always be prepared.

Tags: Accounting, contracts, debt, Finance, Finance and Accounting, Leeia Ladipoh, preparation, strategy
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Avoiding the High Cost of Collecting Bad Debt

Tuesday, November 6th, 2007

Running a business can be expensive at times. There are ups and downs in your business just like in anything else. One thing that can really damage your business is collecting bad customer debt. This would be where the customer is behind on payments, or hasn’t paid for services acquired or products received. This sort of thing happens sometimes, but allowing this to happen can cost you much more money than the original price of the service or product, not to mention a killer headache.

You may have to pay court costs in order to try and get the money that you are owed, not to mention the cost to retain a lawyer. There is still the possibility that if you get a judgment for the monies that you’re due, the customer will simply ignore the judgment. While the judgment will go on their credit report, they can still ignore the fact that they owe you money.

When a customer is behind in payments or hasn’t made a payment, you’ll probably find that they are very difficult to contact, and that they make a lot of excuses. They may tell you that the payment is one the way, or provide you with a slew of other excuses that they think will get you off their back for the time being. This can be very frustrating and time consuming, resulting in even more cost to your business.

Here are some ways you can avoid these costs (and hassles) up front:

Require a credit check for your customers or clients. This way, you can tell whether or not your customers have had a judgment placed on their credit records in the past. If they have, they are probably more likely to accumulate debt from other places as well.

Get a signed agreement. Do yourself and your business a favor by making sure your customer signs some sort of written agreement before you provide them with any services or products. If you do not secure their signature on an agreement, you will not have a leg to stand on in court. This is not good, as you will lose the money that you are owed, and probably end up eating the court costs as well.

Charge a down payment or deposit. With large purchases or ongoing/lengthy work, you should make sure that you charge the customer some sort of up front payment or deposit. This will, at the very least, ensure that you are able to obtain a portion of the money for services rendered or products sold. Insert a clause into the contract that the customer does not get full ownership until the payment is made in full for the services or products.

When you are running a business, it is important to look after the business’s best interest. By allowing customers or clients to build bad debt, you are not looking after the best interest of the company. Following the tips above will most definitely save you money in the long run, and keep your business healthy and profitable.

Tags: Accounting, bad debt, credit cards, customer credit, debt, Finance, Finance and Accounting
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Avoid Getting In Too Much Debt Before Your Business is Started

Wednesday, September 19th, 2007

Tags: Accounting, debt, Finance, Finance and Accounting, loans, MrAllBiz.com, small business expert, Starting a Business, Steve Strauss
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