Episode A.018 How Is Your Credit and It's Time To Stop Funding Out of Your Pocket

3/6/2020

Author's Notes
We are introducing a new format to our Show Notes and Broadcasts. We received feedback our podcasts are too long (average 26 minutes). The shows have been restructured into 13 minute segments - each with a specific objective. Segment 1: What the show will cover and why it is important. Segment 2: What do you need to know to take action. Segment 3: How do you apply it and the tools available, and Segment 4: Tips and Insights from our experience. Thanx for the Feedback and keep it coming.

What are Today's Topics & Why is it Important?
The answer to this is really simple

You should build a portfolio of credit and cash to smooth out cash flow and create a budget, and;
Coming our of the forced shutdown it maybe your only alternative to stay in business until revenue begins to pay the bills.

Knowledge to Take Action

Improving Cash Flow: this is always the best choice however if you are experiencing long delays in collecting AR or there has been little forecasted revenue, cash flow will not be enough.
Leasing: Operating Lease has lower monthly payments and gives the business owner the option to own the equipment at the end of the lease term by paying fair market value; Capital Lease has higher monthly payments and structured more like a traditional loan. Unlike the Operating Lease it doesn’t appear on your balance sheet. When the lease period is completed, there is a buy back component at a nominal price like 10% of the purchase price.
Lease Buy Back: is where you sell the asset then lease it back for a predetermined period. You wind up with keeping the equipment, just paying more than planned. Your ticket with bad or no credit are asset based loans. Instead of a signature loan based on your track record, use assets as collateral for the loan. This is the easiest to get because the lender is taking no risk - you don’t pay they take the truck.
Lines of Credit: he bank agrees to lend you up to a certain amount on an ongoing basis. You can use as much as you need (up to your limit) and pay back at least a minimum amount every month. You pay interest only on the amount you borrow.
Unsecured Loan: “Secured” credit means that the lender knows you have the assets, or collateral, available to repay them. For example, to qualify for $1,000 of secured credit, you would need to provide the bank with proof that you have $1,000, either in cash or another acceptable form, such as equipment or investments.
Secured: Loan: “Unsecured” credit has no collateral attached. This means your personal assets are not a factor in the loan deal.
SBA Loan: Loans or credit lines from the U.S. Small Business Administration (SBA). To qualify for most SBA credit, your business should have a good credit history and show the capacity to repay. For most SBA loan programs, you apply to a financial institution, but the SBA helps you, the business owner, by guaranteeing to repay the lender a certain percentage of the loan amount if you were unable to. Your business may be able to borrow a higher amount or receive a better interest rate than you would without an SBA guarantee. Checkout SBA 7a Small Business Loans for the Pandemic.

What You Need to Do
The Decision - 3 Questions Plus

The first question is a business or personal loan? This is based on your business entity. If you are reporting to the IRS as a sole proprietor, then the choice is personal because it is not considered a business by many lenders. Subchapter S, LLP’s (Limited Liability Partnerships), LLC’s (Limited Liability Partnerships), and Chapter C corporations should go the business route otherwise you are guilty of doing what incorporation is trying to avoid - comingling business and personal finances. Start with a business credit card.
The next question is the purpose of the loan. Is it to purchase something or used to ensure cash on hand? If the issue is having enough money during the seasons of low revenue, consider a line of credit. Determine how much money you need to get through these periods and go to your bank (or lending institution) to apply. What makes this interesting is the flexibility - a set amount to be spent as you choose. The smart move is to keep it close to zero during the fat months so you can draw upon it during the lean. Establish a line of credit.
If you are seeking a loan to acquire equipment, instead of owning it why not lease? Some of the best deals can be found with manufacturer leases. They want to move inventory and will do deals that lower either its purchase price or offer you better interest rates. This also allows you to walk away and not deal with selling used equipment. Take manufacturer leasing if you can get it.
The third question is your credit rating or ability to take on more debt. If you don’t have any credit, then it may be smart to get a loan even if you don’t need it, in fact when you don’t need it is the perfect time. Never go to a bank or lending institution when you’re desperate, start small when you don’t need a loan so when the day comes, and it will, you have a relationship and track record to build on. BTW a good credit score adds value to the business. Make your business loan payments early not just on time.
Alternative Financing: Factoring is a financial transaction in which a company sells its accounts receivable to a financing company that specializes in buying receivables (called a factor) at a discount. Accounts receivable factoring is also known as invoice factoring or accounts receivable financing. Two types of factoring are Transfer with recourse: the factor can demand money back from the company that transferred receivables if it cannot collect from customers, and Transfer without recourse: the factor takes on all the risk of uncollectable receivables. The company that transferred receivables has no liability for uncollectable receivables. Requirements are examination of your company’s financial statements, your accounts receivables, and your payables aging reports. The factoring company will also ask for information on your customers so that your receivables can be confirmed. One last note - make sure you have a written contract with customer's being factored.