Small Business Financing

According to NIFB, businesses are slightly more confident in plans to expand than a year ago.   This is on the backdrop of a bottoming out of sales declines experienced in the past two years.

The question one must ask, as a small business owner, is:  when should I initiate my plans to expand?  You could wait for your competitors to expand and move with the herd.  You could expand too early or too late.  Or you could expand at exactly the right time.  Ideally, that time would be: (a) when the cost to expand is lowest, and (b) immediately before the demand for your products and services increases.

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The President’s budget proposes contains initiatives that are both good, and bad, for small business owners.  We explore these and conclude on balance that most small businesses will be helped slightly.

With the release of President Obama’s FY2011 Federal Budget on February 1, 2010, we can now track the proposed changes that will affect every business and citizen of the United States. The final budget will change between now and whenever Congress finishes their work, but there are a few noticeable proposals that will have good and bad affects on American small businesses.
The Budget Document that describes the actual monetary proposals is 192 pages long (download here http://www.gpoaccess.gov/usbudget/fy11/index.html ) and can be, well frankly boring.

We have identified 4 proposals that we find are both good and bad for small business.

4 Good Proposals
• Eliminating capital gains tax for investments in small businesses. This should attract considerable amounts of new investment capital.
• Immediately implement a small business job and wage tax cut in 2010. This should give you confidence to hire and expand your business with a $5,000 tax credit for each new employee.
• Immediately implement a small business investment tax credit. This will allow you to write off up to $250,000 in qualified investments in 2010.
• Making the research and experimentation credit permanent. This will continue to attract investment for start-ups and investors in innovative businesses.

4 Bad Proposals
• Re-instate the 36% tax rate for individuals making over $200,000 and families over $250,000. Successful small business owners and families will pay more income taxes.
• Changes to IRS worker classification regulations. This will expand the definition of employee and reduce the independent contractor status leading businesses to hihger the benefit costs.
• Changes to accounting rules on inventories. This will lead to increase in taxes on inventories.
• Changes to accounting rules on transactions. There will be increased reporting requirements on deals over $600, increasing the number of transactions being taxed.

In general, we feel that these changes will help the small businesses that need financing now. These are changes that encourage you to hire and expand your business. We can provide the small business loan, cash advance for your business to grow in 2010.

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Imagine this – you work hard at your business. You’ve put in all kinds of hours and it has been a grind the past year. Wouldn’t it be nice to take a vacation? Well, if you read between the lines, President Obama’s State of the Union address proposed giving small business owners an all expense paid vacation some time during the year 2010. You may say, that is crazy. Why would he do that? Well, here is how….

1. The $33 billion hiring tax credit proposal would offer small business owners a $5,000 tax credit for each new employee hired.
2. You could hire this new employee to work for you while you work on other projects – and importantly take some time off.
3. If you need to get some of the $5,000 credit cash in your accounts now to hire this person, you could get get some short term working capital in place very quickly, counting on the credit in the future.

While it is true, this may not have been precisely the intent of the President’s proposal was meant for, let’s face it – when you are burnt out from working too hard, your productivity is much lower than after a nice relaxing vacation.

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A good time to invest in your business is when you expect it to grow.  This is because your ability to pay back will become easier as revenues and profits become larger.  One could argue that now is the time to make such investments given the modest rebound in economic activity.  Ideally, you’d tap into your hard earned credit at the earliest moment you find opportunities to expand or when your existing business has stabilized.  The vast majority of small businesses use credit cards to enable this growth.  Soon, it will be more difficult to use credit cards to grow your business.

It is tough to get loans or other forms of credit, and the on February 22, 2010, the U.S. government will be making it tougher.  Credit card lenders will be required to consdier an applicant’s “ability to pay”, which for a small business owner will likely be the performance of the business in the recent year.   If you are like most small business owners, 2009 wasn’t your best year.  For some, it was the worst.   So, if you plan to use credit cards to finance your small business, the experts argue that would be best to tap this form of credit before 2/22/10.

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One reason it is so difficult for small businesses to obtain a small business loan is because the existing portfolio of loans at banks is experiencing delinquencies and late payment status at a very high rate. As of November, delinquencies were slightly over a percent and late payers were over 5%. Imagine if a bank then assumes it’ll have a “typical” default rate of 1%. This may not seem like a lot, but imagine if for every $100 dollars loaned out, that $7 probably won’t get paid back. This is the reality that banks are facing today when considering to make a small business loan. To compensate for this, some banks or finance companies are just not making the loans. Others are chosing to offer alternatives to loans, or to make small business loans available at somewhat higher rates than historical rates.

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We’ve learned a secret that restaurant owners should take advantage of, especially given the relatively high mortality rate of restaurants today.  Take advantage of this long, drawn out recession and make your restaurant a better place.  What we’re talking about is monitoring the pace of equipment sales, going out of business sales, and business for sale by owner (or broker) notices.  You’d be surprised at how easy it is to set up such a system, and take it from me, this is the kind of intelligence you’d wish you had when you started up your restaurant.  But, it is better to start this system up now, than it is to wait.

Now, for some background.

Nearly every single reader who has found this blog entry knows about craigslist, no doubt.  There are many other similar services, as well, but you needn’t stray far to accomplish the goal of major intelligence.  A poll of my friends, however, suggests that the use of so-called RSS feeds is far less well known.  If you put craigslist + RSS feeds together, you can create something akin to a scrolling headline of what’s happening in your industry in various geographies (of your choice), in various restaurant types (of your choice), or for certain thing (equipment sales, or whose restaurant just up for sale).

I was able to put together this this system in about a half an hour.  I spend something like 10 to 15 minutes a day scouring it, but for various reasons I look at this beyond just one geography.

Here is how to do it:

1. Select (and download if necessary) an RSS Reader.  I personally like Feedreader, which is free software that runs on your desktop.   Other alternatives include Google’s RSS Reader.
2. Select geographies you want to track.  Lets say you want to track items in Las Vegas only.  The way RSS Reader works is you set up a New Feed (F3 button) and the make sure the http://lasvegas.craigslist.org/ address is put into the new feed location.
3. Then, using RSS Reader, I set up a Smart Feed, which is basically a keyword filter.  For this example, I chose the word “fryer” in the body and in the title of each post.
4. You should see the software will populate with postings placed by others on the craigslist site in the new feed you just set up.  Also, the Smart Feed should show those posts that include the word “fryer.”

We actually created this smart feed and tracked how many times do people advertise or otherwise mention the word “fryer”, across about 1/3rd of geographies the craigslist covers.  You might wonder what the incidence of the word fryer looks like.  Its shown in this graph.

Number of times "fryer" was mentioned across many cities on craigslist

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Over the past year, financing has become very tight for small business owners, with many traditional sources of capital drying up, such as Advanta, American Express Small Business and CIT to name a few. Recently, financing for large businesses has become somewhat easier to come by, as proxied by the stock market’s rise. Small business owners who compete on Main Street with the larger companies are taking a double-whammy, as their revenues suffer with unemployment at near record highs in the U.S., while at the same time, chain stores of their large competitors have easier availability to capital. When the recession fades and the economy begins growth again, this gap will still persist, we believe. What many small businesses owners do not know, is that there is a form of financing available to address this gap, even when corporate credit cards, lines of credit, business loans, unsecured loans and equipment financing is unavailable. This business loan alternative is called a Business Cash Advance.

Here is how a business cash advance (sometimes called a merchant cash advance) works. A business cash advance financing company will purchase a portion of a small businesses’ future credit card sales. In return for this purchase, the small business will receive a lump sum of cash, deposited into its business checking account. It is quite common for the small business owner to receive this money within a week of being approved. Most companies in this financing industry will offer a one-day approval process once receiving a completed application.

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Small business owners must read the fine print when it comes to getting money from a bank.  This goes for taking out a loan or getting a corporate credit card.  Most of these contracts that accompany such forms of credit require that if the business cannot meet the payback obligations that the owners of the business repay the loan.  If your business fails and you made a personal guarantee, you – the owner – are on the hook.

The Wall Street Journal wrote a sad story citing examples of personal bankruptcies resulting from failed businesses.

We point this out mainly because there are alternatives to business loans that frequently do not require a personal guarantee to repay in the event a business fails.  These are so-called standard business cash advances.  There are many providers of such business cash advances, also known as merchant cash advances.

Are there drawbacks to using sources of business capital that do not require personal repayment guarantees?  Yes. The first is these frequently require that the business switch its credit card processing to a new provider. The second is that this form of financing usually provides a smaller amount of money than a longer-term loan-like product would provide.  This is because the financing company assumes repayment will occur in a year or less, whereas loans repayment terms often assume a longer duration, ranging from one to five years.  Third, this form of capital is viewed as expensive by some.

However, when you consider the benefits of a business advance, frequently including no personal repayment guarantee and access to capital in under a week, these more than offset the potential negatives.

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Two months ago, we assisted a shoe retailer in Northern California with a business cash advance.  The purpose was to buy inventory to increase sales.  We have kept the name of this customer confidential.

At the time, monthly credit card sales were $40,000.  The cash disbursement happened about a week after the approval process.  The shoe store had inventory for a new set of more popular shoes delivered shortly after the cash showed up.

The next month’s credit card statement shows $60,000 in sales, owing in no small part to the increase in inventory.  Certainly there were other factors at play like back-to-school shopping and perhaps the economic revival so often-reported.

Still, we were pleased to be part of the company’s success in leveraging an injection of new working capital to increase sales.  We hope to report back about how this special retailer’s sales are going in a few months.

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We are recruiting experienced salespersons to market and sell our merchant cash advance services.  Knowledge of merchant services, business cash advance, business loans and/or consumer loans is a plus.

You may contact us at 1-877-221-3003 or learn more about the opportunities.

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