September 16, 2021
How To Use a 401(k) To Start or Buy a Business
There are three ways you can use your 401(k) to start or buy a business. You can cash out funds, borrow against your 401(k), or use a rollover for business startups (ROBS). The only option that does not result in penalties, taxes, or interest charges is a ROBS, making it ideal for most situations. If you are considering using retirement funds to start a business, a ROBS allows you to use savings in your 401(k) or individual retirement account (IRA) with no penalties or immediate tax obligations. If you have at least $50,000 in your retirement accounts, will offer a free ROBS consultation. 3 Ways of Using a 401(k) to Start a Business Use a ROBS A ROBS lets you invest your retirement account in a new or existing business without paying taxes or early withdrawal penalties. A ROBS is not a loan or withdrawal from your retirement, but it allows you to tap your retirement funds to fund your new or existing business. If you decide to utilize a ROBS, we strongly recommend selecting a ROBS provider to help navigate this complex transaction. How a ROBS Works A ROBs makes sense for individuals with over $50,000 in retirement assets who intend to work in their business full time. A ROBS can be a great way to fund the establishment or expansion of your own business without borrowing money or raising equity. For a ROBS to be a good financing option, you need to: Work full-time in the business: If you plan on keeping outside employment or investing passively in the business, you will not qualify for a ROBS. Have enough retirement assets to start or buy a business: A ROBS will help you finance your business without having to take out a loan or accumulating business debt. A ROBS can also work well with additional financing to lower your overall debt. Identify a good provider: Using a knowledgeable provider can make the process more efficient and help ensure that your ROBS is compliant. Some additional ROBS qualifications include: You have an eligible retirement account: Both a traditional 401(k) and IRA are eligible, but you cannot use a Roth IRA for a ROBS. Your retirement account must be a tax-deferred account and needs to be more than $50,000 to be worth the setup fees. Your business is a C corporation: You must have your business registered as a C-corp. This is because the business is selling shares to a 401(k) account. You must offer a retirement plan to eligible employees in your business: A ROBS provider will help you set up and, in many cases, administer a retirement plan for your eligible employees. If you want to set up a ROBS, is one provider that guarantees the use of outside legal counsel if the IRS audits your ROBS plan. It will help you through the whole process, give you expert advice on setting up your plan, and guide you through administering it afterward. You can contact Guidant today for a free consultation. Borrowing From a 401(k) or IRA to Start a Business Those who have a 401(k) can borrow up to $50,000 or half of the vested plan, whichever is less. Loan terms on 401(k) loans are five years with interest paid to your retirement account. You can also withdraw funds from your 401(k) for up to 60 days without penalty, provided you fully repay the funds. You are allowed to borrow money against your 401(k), and even though there are monthly interest payments of around 8%, the interest is repaid in the form of increased contributions to your retirement account. If you need less than $50,000, borrowing against your 401(k) makes sense. A ROBS is a more cost-effective choice if you need more than $50,000. How Borrowing Against a 401(k) Plan Works IRS rules on 401(k) loans include: Limited to $50,000 or half your vested balance Loans limited to five-year terms Interest rates are set by the administrator, comparable to five-year business loans Interest payments go back into your plan Employers may also establish rules for how you can borrow against your account. Some employers limit loans to the contributions you’ve made into the plan while others allow you to borrow against both your contributions and the employer’s matching contributions. If your employment ceases while you still owe money on your 401(k) loan, you are responsible for repaying the loan on an expedited timeline. You will have until the due date of your next federal tax return to repay the remaining balance owed. If the funds have not been fully repaid by the time your federal taxes are due, the remaining amount owed will be treated as taxable income. How ‘Borrowing’ Against a Traditional IRA Works Neither traditional nor Roth IRAs allow loans like a 401(k) plan may. Both account types permit penalty-free distributions in some circumstances—such as paying for education—but there is no penalty-free distribution for starting or buying a small business. You can withdraw funds from your IRA for up to 60 days without penalty. If you cannot pay the money back within that 60-day window, it will count as a distribution from your account, and you will be taxed as if you cashed it out (gross income tax with a 10% penalty). Each IRA account only allows you to do this one time within a one-year period. In this case, borrowing from a traditional IRA is very much like a short-term loan, provided funds are paid back within 60 days. Cash Out a 401(k) or IRA to Start a Business Cashing out your 401(k) is when you take a full or partial distribution. If you are under retirement age (59 1/2), any nonqualifying distributions are assessed income tax and a 10% penalty. Qualifying distributions include things like buying your first house or going back to school. For this reason, cashing out your 401(k) or IRA to start a business should be your last option. However, there are two exceptions where cashing out a 401(k) becomes an acceptable financing option. If you are at least 59 1/2 years old, or you have a Roth IRA with a significant amount of contributions that have been in the plan for over five years, cashing out may make sense. If you cash out your 401(k) to start a business, you will need to request paperwork from your provider to start the process. This typically can be requested online or over the phone. Implications of Withdrawing From a Traditional 401(k) or IRA Cashing out your 401(k) before age 59 1/2 can generate a lot of tax liability and penalties. Contributions made to 401(k) and IRA accounts are made from pretax income. Taxes are charged not in the year you contribute funds, but in the year you withdraw funds. There are exceptions to the 10% penalty that you may qualify for in either a 401(k) or IRA cash out, but they are not related to starting or buying a business. These exceptions include: Qualified educational expenses Certain medical expenses Financial hardship as defined by the IRS When you cash out your 401(k), you will have to pay both federal and state taxes on the amount you withdraw as gross income for the year. This could also adjust the tax bracket you fall into. When you withdraw funds, your plan administrator will withhold 20% of the funds and send it to the IRS to cover your federal taxes. On top of taxes, you will also have to pay a 10% penalty for withdrawing funds before retirement age (59 1/2). This yields an initial 30% in taxes and penalties, with the potential for additional tax liability at year-end. Implications of Withdrawing From a Roth IRA or 401(k) Contributions to a Roth retirement account are taxed in the year the income is earned, and all withdrawals after you hit age 59 1/2 are made without tax obligations as long as your plan is at least five years old. Similar to traditional retirement plans, cashing out your Roth IRA before that age will cost you a 10% penalty on all earnings within the plan. For example, if you put $20,000 into your IRA in 2019, then you can withdraw that $20,000 tax- and penalty-free at the end of 2023, but any money that $20,000 has made is not eligible. Using a Roth IRA to start a business may be ideal if you have a large number of contributions that have been in your retirement plan for at least five years. Using Retirement Funds With Startup Loans While the current average 401(k) balance has never been higher, according to Fidelity, it is only $123,900. This amount may not be enough to start or buy the business you want, and you may need additional financing. Small Business Administration (SBA) loans are a popular source of financing for businesses; however, many business owners also utilize personal funds to help get the financing they need. You can utilize your retirement funds as part of your financing needs. Most lenders will require 20% of the loan package as a down payment. However, if you have sufficient funds available without significantly impacting your retirement account, you can lower your total debt and monthly payments by adding additional money down. Bottom Line If you are considering using part or all of your 401(k) to buy, start, or expand a business, it’s important to know the options available and the tax consequences of those options. A ROBS conversion of your retirement account is preferred if you have at least $50,000 available. Withdrawing from your traditional 401(k) or IRA should only be considered as a last resort or if you are age 59 1/2 or older and are willing to claim the withdrawal as taxable income.
September 16, 2021
5 Best Business Loans for Bad Credit
Many business owners cannot qualify for traditional business loans because they have bad credit scores, but several online lenders offer small business loans and lines of credit to borrowers with credit scores of 600 and lower. These lenders provide a potential lifeline to businesses in need of financing; however, borrowing costs will be higher because of the risk of extending credit to someone with a poor credit score. In evaluating the best business loans for bad credit, we looked at lender minimum requirements, cost of borrowing, terms, application process, customer service, and funding speed, placing more focus on the first two factors. We also looked for lenders who could offer multiple financing options to clients. These options include term loans, lines of credit, equipment financing, and invoice factoring. Fundbox: Best Overall Financing Terms Why We Like Fundbox: offers both revolving lines of credit and term loans for borrowers. Fundbox only requires businesses to be in operation for 6 months and owners to have a credit score of 600 to qualify. It also offers a reasonable starting annual percentage rate (APR); however, borrowers with poor credit should expect higher rates. Fundbox offers next-day funding. Rapid Finance: Best for Longer-term Financing Why We Like Rapid Finance: provides lending options with terms of up to 5 years. For most loan types, businesses need to be in operation for 2 years; however, for merchant cash advances, the requirement is only 3 months. Rapid Finance’s payment plans are flexible, offering daily, weekly, and monthly options. Lendio: Best Line of Credit Options Why We Like Lendio: is a business financing platform that matches applicants to more than 75 funders. Lendio can offer multiple options for business owners with poor credit, including term loans and lines of credit. While funding speed is slower compared to others in our guide, Lendio provides the best opportunity to shop around and find a competitive offer. Credibly: Best for Fast Approvals Why We Like Credibly: offers working capital loans for businesses whose owners have credit scores as low as 500, providing up to 18 months of needed working capital in a term loan. Loan amounts can be as small as $5,000, which provides added flexibility if a business needs just a small boost of working capital. Business expansion loans are also available for borrowers with credit scores of at least 600, provided they have been in business for 3 years. National Funding: Best for Discounts for Paying Early Why We Like National Funding: offers fast approvals (as quickly as one day) and will approve loans for borrowers with credit scores as low as 500. Interest rates and fees can be rather steep—as high as 38% including origination fees—and payments typically are made daily. However, if you have poor credit, National Funding is an option worth pursuing, given that their borrowing requirements are incredibly fair. Discounts are also given to those businesses that pay off their loans early. Bottom Line Business owners with bad credit shouldn’t be discouraged if they are rejected for a traditional bank loan because there are many lenders who may offer financing. Depending on your personal and business situation, each of these lenders will consider you and possibly extend an offer of credit.
September 15, 2021
21 Microfinance Statistics You Need to Know
Microfinancing stimulates economic growth by providing small loans to those that cannot obtain conventional lending. Microfinance is used worldwide, with loans smaller than $100 offered in some underdeveloped countries. In the United States, microfinancing refers to loans of $50,000 or less. The following 21 statistics offer an opportunity to learn more about how microfinancing works and about those it serves. 1. There Are More Than 10,000 Microfinance Institutions Globally Microfinance institutions aren’t banks—they are organizations geared specifically toward low-income populations. They provide credit and banking services to those most in need. There are approximately 10,000 microfinance institutions throughout the world. 2. Microfinance Lenders Provide More Than $120 Billion in Lending According to the Microfinance Barometer, microfinance institutions worldwide serve more than 140 million borrowers and have a total loan portfolio estimated at $124 billion. Prior to COVID-19, microfinance lending portfolios grew by at least 8% for three consecutive years. 3. South Asia Accounts for 60% of Global Microfinance Borrowers More than 85 million microfinance borrowers reside in South Asia, the world’s largest microfinance borrowing region by population served. South Asia is also the second biggest microfinance borrower, at $36.8 billion, or nearly 30% of the global microfinance industry. Latin America is the largest, at nearly $48 billion. 4. Women Make Up 80% of First-time Microfinance Borrowers The intent of microfinancing is to provide small loans and financial services to those who would otherwise be unable to obtain credit. Women are often disadvantaged both because of poverty and because of social norms. Some microfinance lenders choose to focus primarily on providing financing to women in an effort to encourage economic growth and to work toward gender equality. 5. Microfinance Loans Had a 98% Repayment Rate Prepandemic Traditionally, microfinance loans have had a 98% repayment rate. Since the development of the COVID-19 pandemic, repayment rates have dropped below 90% in some developing countries such as India, consequently resulting in a substantial decline in new microfinance lending in these areas. 6. Microfinance Portfolios Are Growing Slowly Despite COVID-19 COVID-19’s impact on microfinance has been substantial but hasn’t threatened the industry. Microfinance data from the Consultative Group to Assist the Poor (CGAP) identifies loan portfolio growth at around 2% in most parts of the world, which shows that individuals are still able to gain access to money. However, the number of new borrowers has declined as lenders have focused on supporting existing borrowers’ financing needs. 7. More Than 2 Billion People Lack Access to Financial Services Despite the extensive efforts to provide funding through microfinance, more than 2 billion people globally are still outside the banking system. Only 20% of the world’s estimated three billion poor have access to microfinance. While microfinance has grown extensively in the past decades, it remains unable to reach the majority of its target market. 8. However, More Than 1.2 Billion Have Access to Mobile Money Accounts Mobile money accounts (MMAs) allow individuals to send money to each other or to purchase goods and services from businesses authorized by an MMA provider. MMAs provide additional security by no longer requiring money to be stored at home, making theft less common and leading to additional wealth. Globally, the number of registered MMAs grew by 12.7% in 2020. 9. More Than 3 Times as Many Africans Use Mobile Money Accounts vs Traditional Banks Approximately 11% of Ugandans have a conventional bank account. However, 42% have access to MMAs. In Kenya, MMAs have lifted nearly 200,000 households out of extreme poverty during the 2010s. Throughout Africa, the use of MMA services is allowing individuals to move money quickly and safely for the first time. Additionally, MMA services are allowing many individuals to save money securely, reducing the risk of theft. 10. Self-employed Poor Make Up Half of the Labor Force in the Developing World Despite being the majority of the labor force, entrepreneurs in the developing world cannot obtain financing from conventional financial institutions. Microfinancing allows them access to capital to grow their business, their personal income, and the economy of the surrounding community. 11. Microfinancing Is Projected to Reach $394.8 Billion By 2027 Despite uncertainty about the short-term impacts of COVID-19 on finance globally, projections strongly suggest microfinancing will continue to grow. One estimate suggests microfinance lending could reach $394 billion by 2027. Despite the pandemic slowing the growth of new microfinance borrowers, some analysts project that, as the world recovers from COVID-19, there will be growth in new borrowers receiving microloans. 12. The Average Microloan Globally Is Less Than $1,000 Among the more than 140 million recipients of microfinance support, the average microloan is approximately $885. Microloans can be as small as $100 or less; however, the average amount of an SBA 7(a) loan approved in the last federal fiscal year was $501,216. 13. The Average Interest Rate for Microcredit Globally Is 37% While the global average is high, keep in mind that microfinancing serves populations that are considered high risk, as well as those who lack access to traditional financing. Some people consider the high interest rate to be problematic, as it places borrowers at risk of not being able to pay their loans back. Fees can rise as high as 70% in some locations. 14. Almost Half of Smaller Business Loan Applications Aren’t Approved Fully American small businesses seeking to apply for loans of up to $25,000 often don’t receive their full application amount. 48% of those surveyed didn’t receive all the money that they were looking for when they initially applied. 15. In 2020, $85 Million in SBA Microloans Were Approved The Small Business Administration has been offering microloans since 1992. In 2020, it gave out $85 million in microloans to 5,890 people. The average loan was $14,434 and the average interest rate was 6.5%. These microfinance statistics detail the past five years of SBA microloans: Small Business Administration Loans 2016 to 2020 Source: Small Business Administration 16. Minority-owned Businesses Received 51.5% of SBA Microloans in 2020 Of those businesses that chose to provide demographic information, minority-owned or -operated businesses received 51.5% of SBA microloans in 2020. Those loans represented 38.7% of the available amount to be issued. 17. Women-owned Businesses Received 46.6% of SBA Microloans in 2020 About 46.6% of all SBA microloans approved in 2020 went to women-owned or -controlled companies, totaling 38% of the total amount. 18. In 2020, 80% of SBA Microloans Were Used for Working Capital The SBA Microloan program is often used for more than one purpose. In the last fiscal year, SBA microloans were most commonly used for working capital (80.3%), equipment (20.5%), materials (12.0%), supplies (3.7%), and inventory (0.3%). 19. Small Businesses Are Earmarked to Receive $20 Billion in Microloans in 2021 This is one of the most important statistics for American entrepreneurs who are interested in microfinance in 2021: the SBA has allotted $20 billion to microloans for disaster relief, with plans to pass funds out to 6 million small businesses. 20. In the US, 19% of Microfinancing Went to Rural Borrowers This statistic isn’t surprising, given that 80% of the US population resides in urban areas. The 60 million rural Americans who comprise the remaining 20% of the US population received a proportionate amount of SBA microloans compared to those in metropolitan areas. 21. Globally, 65% of Microfinancing Went to Rural Borrowers Unlike the US, where the majority of SBA microloans were advanced to those in cities and suburbs, urban recipients are in the minority globally. The Microfinance Barometer for 2019 indicated that most recipients worldwide were those in rural areas. Bottom Line Microfinance plays an important role in our global economy. It provides access to financing to underserved communities and increases the economic livelihood of the world’s most impoverished. Microfinancing stimulates the economy by allowing new businesses to open, helping microenterprises to grow, and changing the lives of those who receive funding.
September 14, 2021
How to Apply for PPP Loan Forgiveness
Under a Paycheck Protection Program (PPP) loan, small business owners were able to borrow money for payroll, rent, mortgage interest, and utilities. The loan was available from any Small Business Administration (SBA)-approved lender as well as through online loan brokers like . Approximately $284 billion were authorized in the second draw of PPP loans, and program funds were fully exhausted in May 2021. As the eligibility period to use borrowed funds concludes, businesses can apply for forgiveness of the second offering of PPP loans either through their lenders or through a portal that has been established by the SBA. PPP Loan Forgiveness Process The sum of the following costs, up to $2 million, is eligible for forgiveness: Payroll costs, including taxes Employee salaries and commissions of up to $100,000 per employee Insurance premiums and costs associated with healthcare benefits Mortgage interest Rent payments Uninsured property damage costs due to vandalism during 2020 Utility payments Documentation Needed The documents required to verify loan forgiveness include: SBA Paycheck Protection Program forgiveness application Payroll tax filings—forms 940 and 941 State income, payroll, and unemployment insurance filings Canceled checks, payment receipts, and bank account statements to verify mortgage, lease, and utility obligations If you borrowed $150,000 or less in the second round of PPP loans, you may not have been required to submit supporting documents at the time of application. However, you should still have these on hand in case your lender or the SBA asks for verification. Applying for Forgiveness Businesses that borrowed over $150,000 will be required to apply for forgiveness directly through the lender they used for the PPP loan. This process varies by lender and involves either using an online portal hosted by the lender or emailing the SBA forgiveness application to their lender directly. Businesses that borrowed $150,000 or less may be eligible to apply directly through the SBA if their lender has opted for this. Check with your lender for specific instructions. Once you apply for forgiveness, your lender will have up to 60 days to review before submitting your application to the SBA. The SBA will then have up to 90 days to complete its review; however, most reviews will not take the full allotment of time. Applying Through Your Lender Businesses that are required to use their lender to apply for forgiveness may be asked to complete an online application on the lender’s website or submit the SBA’s forgiveness application directly to the lender. There are three application forms that the SBA has created: SBA Form 3508: Any borrower who received more than $150,000 and reduced employee salaries by at least 25% or reduced the number of full-time equivalent (FTE) employees is required to use this form. This form is very similar to the one used in the first forgiveness application. SBA Form 3508EZ: Businesses who received more than $150,000 and didn’t reduce employee salaries by at least 25% or cut FTE employees may use this form. Form 3508EZ doesn’t contain Schedule A, which requires you to list employee compensation and FTE status. SBA Form 3508S: Businesses that applied for $150,000 or less and aren’t directed to apply through the SBA’s portal generally can use this form. However, businesses that are affiliates of or contracted with another business that took out a PPP loan—with combined PPP loans totaling more than $2 million—will be required to use Form 3508. Applying Through the SBA Portal Many businesses with PPP loans of $150,000 or less may be eligible to use the SBA’s PPP Direct Forgiveness Portal. The SBA’s forgiveness portal requires businesses to register online prior to applying. If your lender has opted out of using the SBA’s forgiveness portal, you will need to apply for forgiveness through your lender. The SBA’s forgiveness portal comprises the same information that is on Form 3508S over a series of pages. While most businesses that have borrowed up to $150,000 from eligible institutions can use the Direct Forgiveness Portal, there is one restriction: Businesses that are affiliates of or contracted with another business that took out a PPP loan with the combined total of PPP loans exceeding $2 million will be required to apply directly through their lender. What Happens When Not All of Your PPP Loan Is Forgiven? Should any funds be used for expenses not forgivable in the program, those funds will remain in a low-interest SBA loan with a 2-year repayment term. Your lender will continue to service the loan until this portion is repaid. The forgiven portion of the loan will be canceled and removed from your loan balance. The terms for the remainder of the loan are: Guarantee: The SBA will continue to guarantee the remaining portion of the loan Repayment term: Up to 2 years from the date of issuance Interest rate: 1% fixed Calculating Estimated PPP Payments The portion of the loan not forgiven by the SBA has a term of 24 months, with an interest rate of 1%, and the payments will be due each month. If you wish to recreate this calculation, you can use the payment function (=PMT) in Excel. Make sure the interest rate is divided by 12 so that it matches the payment frequency. The only other thing left to add is the accumulated interest, which you can figure out by following these steps: Multiply the loan amount by the interest rate (.01). Multiply again by 10. Divide by 12 to get 10 months of deferred payments. Tax Treatment of Forgiven Debt Debt forgiveness of PPP loans doesn’t count as income on tax filings. This is an exception in the CARES Act to avoid penalizing businesses that needed help from the loan. Bottom Line Applying for PPP loan forgiveness is relatively straightforward, provided business owners have kept track of their payroll, lease, and utility payments over the use period of the loan. Most businesses that have taken out a PPP loan of $150,000 or less will be able to utilize an expedited form or application process through their lender or the SBA. Preparation and record keeping are critical to ensure that the application process is easy.
September 13, 2021
Equipment Leasing ― The Ultimate Guide for Small Business Owners
Equipment leasing allows businesses to acquire equipment without purchasing it. Leasing agreements can be obtained from some of the same sources as equipment loans: banks, dealerships, equipment manufacturers, and even nontraditional financing companies. Lease payments are often significantly lower than loan payments, although balloon payments may be due at the end of the lease. Smarter Finance USA offers equipment leasing for new and used heavy equipment. Requirements include a credit score of at least 600 and at least 5% down. Borrowers who qualify can secure financing of up to $250,000. Visit website for more information or to apply for lease financing. How Equipment Leasing Works Leasing requires businesses to make regular payments in exchange for the use of equipment. It is ideal for companies that need equipment that may have to be upgraded regularly or equipment that would be too expensive to purchase outright. Depending on the type of lease, the borrower may gain ownership of the equipment, or there may be no transfer of ownership. Equipment leases usually fall into one of two categories: Capital lease: The business receives all benefits and drawbacks of ownership. The most common form of lease, a capital lease, is best for expensive equipment that a business intends to keep long-term. With a bargain purchase agreement, the business gains ownership at the end of the lease. Operating lease: The business doesn’t receive benefits and drawbacks of ownership with an operating lease ― it is simply a rental. Ownership doesn’t transfer upon the completion of the lease, which is ideal for items that need frequent replacement due to short useful life. Equipment Lease Qualifications, Rates & Terms Equipment lease qualifications are often similar to equipment loan qualifications. The equipment is used as the collateral for the lease, meaning rates are lower than using an unsecured line of credit to purchase equipment. 5 Factors That Determine Qualification As is the case with equipment financing, several factors determine the likelihood of approval when obtaining an equipment lease. Those factors include: Credit score Business history, including time in business and annual revenue Type and size of the lease Length of the lease How well the equipment keeps its value as it depreciates Businesses will need to provide at least one year’s worth of income tax returns; however, two or three may be required by some lenders. Interest rates will be better for well-qualified borrowers, with some lenders offering rates as low as 6% for equipment leases. To determine how much an equipment lease may cost, you can try our equipment lease calculator. Equipment Lease Tax & Accounting Treatment As with equipment purchases, equipment leases can be deducted from your business taxes in certain circumstances as you can claim the depreciation on the equipment. In some cases, the entire amount of depreciation can be claimed in year one instead of graduated depreciation during the life of the lease. As always, consult your tax professional for guidance on the tax benefits of leasing. 5 Types of Equipment Leases There are five common types of equipment leases, each with advantages and disadvantages depending on tax implications, monthly cash flow considerations, and ownership considerations at the end of the lease. We recommend speaking with a certified public accountant (CPA) or tax professional about these options before you decide. $1 Buyout Lease A $1 buyout lease is similar to an equipment loan. Borrowers make payments to rent the equipment, and at the end of the lease, have the option to purchase the equipment for $1. This makes the payment size the highest of any of the lease types. The asset leased and liability will show up on your balance sheet. Interest rates will be the lowest on this type of lease. Use this type when you want to own the equipment at the end of the lease. $1 Buyout Lease Tax and Accounting Treatment Here are some potential tax and balance sheet implications of the $1 buyout lease. Consult your tax professional for more information. Depreciation: Under Section 179, equipment value can be deducted up to $1 million Payment deduction: Interest payments can be deducted as interest expense Balance sheet: The equipment will be listed as an asset and a liability Who it’s best for: This is best for borrowers who want to purchase the equipment but want to spread out the cost of the equipment into equal payments instead of having a larger lump sum at the end of their term. 10% Option Lease Like the $1 buyout lease, a 10% option lease allows the borrower to make payments and have the option to purchase the equipment for 10% of its initial value at the end of the lease. For example, a $50,000 piece of farm equipment would have a final payment of $5,000 at the end of the lease to transfer ownership. The monthly payment would be lower on the 10% option lease than the $1 buyout lease, with the larger balloon payment held at the end of the lease. While the 10% option lease can be used for equipment that a borrower would want to gain ownership of at the end of the lease, the borrower would also have the option to walk away at the end of the lease, foregoing the 10% payment and returning the leased equipment. 10% Option Lease Tax and Accounting Treatment Here are some potential tax and balance sheet implications of the 10% option lease. Consult your tax professional for more information: Depreciation: Under Section 179, equipment value can be deducted up to $1 million Payment deduction: Interest payments can be deducted as interest expense Balance sheet: The equipment will be listed as an asset and a liability Who it’s best for: This type of loan is best for businesses that aren’t sure whether they want to purchase the equipment at the end of the term. Fair Market Value Lease A fair market value (FMV) lease allows the borrower to make payments and use the equipment throughout the lease and allows the borrower to purchase the equipment at the end of the lease for fair market value. Borrowers can also choose to renew the lease or return the equipment at the conclusion of the lease. In contrast to the first two types of leases discussed here, the borrower does not get the benefits or drawbacks of ownership. It also means that only monthly payments can be deducted from the lessee’s taxes. These leases are the hardest to qualify for, meaning a strong credit score and high annual revenue are needed and, usually, the equipment leased must be a high-value item. This is not an ideal lease type if a borrower plans to purchase the equipment at the end of the lease. Monthly payments are lower, but the interest rate will often be higher than the $1 buyout or the 10% option because the lessor has a higher risk due to the likelihood of having to find another renter for the equipment. FMV Lease Tax and Accounting Treatment Here are some potential tax and balance sheet implications of the FMV lease. Consult your tax professional for more information: Depreciation: Not available Payment deduction: Only full payments can be deducted as operating expenses Balance sheet: The equipment must be listed as an asset and a liability Who it’s best for: An FMV lease is best for businesses acquiring equipment that they know they will replace at the end of the term or equipment that has a very short shelf life. 10% Purchase Upon Termination Lease The 10% purchase upon termination (PUT) lease is the same as the 10% option lease with one significant difference: the borrower does not have the option to walk away. This decreases the risk for the lessor because the lessee must purchase the equipment at the end of the lease. Also, this makes it easier for borrowers to qualify for 10% PUT if they have bad credit. All other information regarding payments and tax implications from the 10% option lease apply here. 10% PUT Lease Tax and Accounting Treatment Here are some potential tax and balance sheet implications of the 10% PUT lease. Consult your tax professional for more information: Depreciation: Under Section 179, equipment value can be deducted up to $1 million Payment deduction: Interest payments can be deducted as interest expense Balance sheet: The equipment will be listed as an asset and a liability Who it’s best for: This type of lease is best for businesses that want to purchase the equipment at the end of the term but need a lower payment than the $1 buyout or 10% option leases would provide. Terminal Rental Adjustment Clause Lease A terminal rental adjustment clause (TRAC) lease is typically used for semi-trucks and other vehicles. It can be either a capital or operating lease. This lease gives the lessee flexibility to set up a higher balloon payment at the end of the lease, which is why it is ideal for truck or vehicle loans. It has lower monthly payments throughout the lease because of the higher balloon at the end. Borrowers should have strong credit profiles because of the increased risk to the lessee with the high balloon at the end. This type of lease is used when the lessee doesn’t want to own the asset at the end of the lease, usually because they want to upgrade to a newer-model vehicle. TRAC Lease Tax and Accounting Treatment Here are some potential tax and balance sheet implications of the TRAC lease. Consult your tax professional for more information: Depreciation: If it is a capital lease, it can be depreciated. Operating leases cannot be depreciated. Payment deduction: Full payments are deductible if it is an operating lease. Otherwise, interest paid can be deducted in a capital lease. Balance sheet: This will be listed as an asset and a liability in most cases. Check with your tax professional. Who it’s best for: A TRAC lease is only for vehicle purchases or leases and is right for those who need more flexibility in deciding how much to pay at the end of the term if they want to purchase the vehicle. When to Use an Equipment Loan Instead Many equipment leases are very similar to equipment loans. One of the biggest differences is that equipment loans always result in a transfer of ownership at the end of the loan. Also, loans can be paid off early with no prepayment penalty. For businesses looking to upgrade equipment at the end of a repayment period, leases give the borrower more flexibility. In some cases, lessees can walk away from a balloon payment at the end of a lease, making for lower monthly payments than loans with no ownership requirement at the end. Businesses should consider the following when deciding between a lease or a loan: Are lower payments necessary? Leases often offer lower payments. Is ownership necessary or desired at the end of payments? This is guaranteed with loans, although certain types of leases allow for this as well. Will the borrower look to upgrade at the end of payments? Leases make more sense for businesses looking to upgrade because, with many leases, they will be walking away from balloon payments. Bottom Line Many factors go into the decision to get an equipment lease ― as opposed to an equipment loan ― and the type of equipment lease. Consult a tax professional on all large capital expenditures to determine the best course of action for the business. In many cases, leases make sense, especially if the business intends to upgrade equipment at the end of the lease or if it needs lower payments provided by leases with balloon payments at the end. If a business wishes to lease equipment to gain ownership at the end, a $1 buyout lease or a 10% PUT lease makes the most sense.
August 25, 2021
5 Best Non-recourse Factoring Companies
With non-recourse factoring, if your customer fails to pay an invoice, your business isn’t held liable by the factoring company to make payment. Qualifying for non-recourse factoring is more difficult than qualifying for recourse factoring because businesses often need a higher invoice volume and customers with stellar credit. While most invoice factoring companies will offer non-recourse factoring to their top customers, we've selected the five best options for small business owners. Triumph Business Capital: Best Overall Why we recommend Triumph Business Capital: tops our list of non-recourse factoring companies because of the combination of its low minimum revenue threshold and its high factoring capacity. Its ability to service both smaller businesses and larger clients makes it an attractive choice for anyone seeking non-recourse factoring. altLINE: Favorable for Short Repayment Terms Why we recommend altLINE: is a great provider of non-recourse invoice factoring for small business owners who want a solution with short repayment terms. The way altLINE structures its fees makes it advantageous for invoices that are repaid within 30 days. For a small business that has a high-quality and fast-paying customer, altLINE would be the best solution. Riviera Finance: No Minimum Requirements Why we like Riviera Finance: offers funding within 24 hours of approval and will advance up to 95% of your invoices. An added perk is that there is no monthly minimum revenue requirement, which is unusual in the invoice factoring industry. Rates may be a bit higher than competitors. However, smaller businesses with high-quality clients may be able to qualify. 1st Commercial Credit: Higher Advance Rates Why we recommend 1st Commercial Credit: is an established provider that has earned a reputation for its flexibility around providing funding to less-qualified borrowers. In some cases, the company reports that small business owners can receive non-recourse factoring, but you’ll need to contact the lender directly for more information. Online customer reviews indicate that there are a number of fees tacked on to the advance rate, thus increasing the overall cost of factoring. However, it will advance up to 95% of invoices, which is one of the highest rates in the factoring industry. eCapital: Favorable for Freight Why we recommend eCapital: offers non-recourse invoice factoring and specializes in the trucking and freight industries. It will advance up to 90% of invoices and has a factoring capacity of $10 million. Also, eCapital won’t pull credit information on you or your business and is only concerned with the creditworthiness of your customers. How We Evaluated Non-Recourse Factoring Companies When evaluating non-recourse factoring companies, first, we considered the overall cost and terms that each of these companies offered. Then, we looked at the time it would take to receive funding and other requirements like time in business. Bottom Line While getting non-recourse factoring can be more challenging than getting other forms of financing, it also protects the business owner from downside risk. The best way to qualify for non-recourse factoring is by establishing a long-term relationship with a factoring provider so that the history of payments from debtors can be referenced easily when you request a non-recourse contract.
August 12, 2021
Business Line of Credit: What It Is & How It Works
A business line of credit allows a business to take draws against an established credit limit as needed rather than receiving the full amount of the loan upfront. Lenders charge interest on the amount used, and borrowers must repay it in installments. This makes lines of credit best for small business expenses, especially unexpected ones. If you feel like a small business line of credit is the right financing option for your business, Bluevine offers business lines of credit of up to $250,000. With Bluevine’s business line of credit, the borrower pays interest only on the amount used, and there is no prepayment penalty. For more information or to apply for a business line of credit, visit website. How a Small Business Line of Credit Works Business lines of credit are similar to credit cards in the way they work. First, a lender qualifies a business for a predetermined credit limit. Then, as long as there is unused credit available, the business can borrow against the line of credit at any time. The key difference between credit cards and lines of credit is the length of time allowed to repay the borrowed amount. As long as minimum payments are met, credit card balances can be carried indefinitely. However, a business line of credit has a set repayment period. Lines of credit and short-term business loans can both be used for small business expenses. However, the difference between lines of credit and short-term loans is that borrowers can draw against lines of credit as the funds are repaid while short-term business loans are paid out in full by the lender and then repaid by the borrower in installments over a fixed repayment term. How To Select a Business Line of Credit To get a business line of credit, you can go through either a traditional or an online lender. Both offer similar products, but there are differences in qualifications, funding amounts, and repayment terms. For more information on choosing a lender, see our article on the best small business lines of credit. The chart below details some of the differences between online and traditional lenders: When choosing the right small business line of credit, consider the four steps listed below. 1. Determine the Amount You Need Because lines of credit typically have lower borrowing limits than term loans, they are ideal for small or unexpected capital expenses. In the past, traditional lenders had higher credit limits than online lenders. However, online lenders, such as , now offer lines of credit of up to $250,000, so consider online lenders as a viable alternative. 2. Determine How Soon You Need It Funding speed is another area where the gap between online and traditional lenders has closed. One of the biggest advantages of online lenders has been rapid funding and availability of funds. However, most traditional lenders now have a strong online presence, so many fund loans in days rather than weeks. If you need access to funds quickly, online lenders still have the edge, albeit a smaller one than before. 3. Review the Qualification Requirements In general, even if a borrower’s credit score is lower, online lenders will likely fund loans and lines of credit. As long as the FICO score is higher than 600, online lenders will usually work with a business that meets annual revenue and time-in-business requirements. Business owners with credit scores above 680 will likely get better terms and interest rates through both traditional and online lenders. 4. Review the Costs When considering a business line of credit or a term loan, borrowers should keep the repayment term in mind when calculating the loan cost. Short-term loans might have higher interest rates, but the interest cost is generally lower because borrowers repay the loan in six to 18 months. The benefit of low rates on lines of credit can be offset if balances are carried for longer periods of time. To apply for a business line of credit, check out line of credit product. What a Small Business Line of Credit Can Be Used For Small business lines of credit are best used for small expenses and unexpected costs. Lines of credit should not be used for large capital expenditures such as heavy equipment or real estate purchases. They can also be used to offer credit to your customers, especially to cover unpaid invoices. A line of credit is also beneficial for small recurring expenses, or seasonal needs. Four examples of how small business lines of credit are used are listed below: Short-term working capital: Use lines of credit to make payroll or cover expenses while waiting for invoices to be paid or for seasonal business to pick up. Unexpected expenses: Because borrowers can draw against a line of credit at any time, it can be a safety net for unexpected expenses, such as small equipment repair or replacement. Unique purchasing opportunities: Having an available line of credit might allow a business to buy items that the company might not have cash on hand to purchase—for instance, something that becomes available for a limited time or in a bulk quantity. The business could save money long-term by using the line of credit to make the purchase. Offer trade credit to customers: Because accounts receivable invoices can often be repaid late―30 days or later―offering trade credit to customers provides a cushion to cover for these late payments. This allows the business to maintain its cash flow while waiting on those invoices. When To Apply for a Small Business Line of Credit While a business can’t always wait for the right time to apply for a small business line of credit, if it can plan when to borrow, a business can secure strong interest rates for larger amounts of money with a reasonable repayment schedule. There are four things to consider when trying to find the right time to apply for a business line of credit: When your credit score is strong: A strong credit score means the business will likely get a larger line of credit at a lower interest rate. Business owners should keep close tabs on their credit scores and work to resolve any issues before applying for new credit. While revenues are trending up: Regardless of whether you use a traditional or online lender, each of them has a minimum requirement for annual income. If your income is trending up, the lender can likely use a 2- or 3-year average to calculate your income. Declining revenue requires the lender to use the most recent year’s income, which can result in a declined loan application. When you hit a key business milestone: Lenders will look more favorably on a business as it continues to hit milestones on time in business, revenue, and credit score. As those milestones increase, lenders will offer better terms to the business. Before a small capital need: The better a business plans ahead on capital expenses, the more options it will have when looking for funding—it won’t have to settle for the first loan offer to come along. Pros & Cons of a Business Line of Credit Bottom Line Business lines of credit can be an excellent choice for businesses looking to cover small expenses and unexpected costs. Businesses should apply for financing before the need arises to secure the best rates and terms. Traditional banks typically offer higher lines of credit at better rates. However, online lenders such as are now funding higher amounts faster than some traditional banks. Bluevine should be considered along with traditional lenders when looking for business lines of credit.
August 12, 2021
SBA Form 912: How To Fill Out a Statement of Personal History
The Small Business Administration (SBA) Statement of Personal History form, otherwise known as SBA Form 912, is used to determine a borrower’s trustworthiness and evaluate whether the applicant or their business partners have any criminal history. The information gathered by SBA Form 912 helps determine if a borrower is of good character. Completing the form accurately and in detail will help prevent delays or loan denials. Who Completes SBA Form 912 One of the eligibility requirements to qualify for an SBA loan is that you and your business partners meet the SBA’s definition of “good character.” This definition is based on the SBA’s assessment of your integrity, behavior, and past criminal records. Form 912 dives into the criminal history portion of this assessment, and it must be filled out by all principals of the business, including: Business owners: Every owner with 20% or more equity Officers and directors: Any company officers, directors, managing limited liability company (LLC) members, trustors, or any person hired by the applicant to manage day-to-day operations of the business Loan guarantors: Any guarantor of the SBA loan you’re applying for Form 912 needs to be filled out no matter which type of SBA loan you apply for. To learn more about the entire SBA loan application process, read our full step-by-step guide on how to apply for an SBA loan. How To Complete SBA Form 912 SBA Form 912 requires basic personal information, obtained in questions 1 through 6, with the most significant portion of the form requiring answers to three subsequent questions related to the applicant’s criminal history: Additional questions to answer on SBA Form 912: (Question 7) Legal grievances outstanding: Are you presently subject to an indictment, criminal information, arraignment, or other means by which criminal charges are brought in any jurisdiction? (Question 8) History of criminal charges: Have you been arrested in the past six months for any criminal offense? (Question 9) Previous probation or judgment: For any criminal offense—other than a minor vehicle violation—have you ever: 1) been convicted, 2) pleaded guilty, 3) pleaded nolo contendere (no contest), 4) been placed on pretrial diversion, or 5) been placed on any form of parole or probation (including probation before judgment)? You must answer these questions truthfully, even if your record was sealed, expunged, or is otherwise unavailable. When you sign this form, you’re agreeing that all information is correct to the best of your knowledge and agree to face potential criminal charges if you’re lying or purposefully withholding information. If your answer to these three questions is “no,” check off the appropriate boxes and make sure to fill out all the required personal identification information. However, if you have to answer “yes” to any of these questions, there may be additional work ahead for you. The rest of this article will address a “yes” response to any of these questions. SBA Form 912 Question 7 Question 7 asks, “Are you presently subject to an indictment, criminal information, arraignment, or other means by which criminal charges are brought in any jurisdiction?” If you or any other principal answers “yes,” unfortunately, you are ineligible for an SBA loan. The SBA will not guarantee loans to businesses whose principals are currently indicted, incarcerated, on probation or parole, or defendants in a criminal proceeding. Due to the chance that the owner or a principal of a business may go to prison, it may become exceedingly difficult for the business to be run effectively and also pay back the loan. The business must wait until all parties are no longer subject to any legal proceedings or are no longer under parole or on probation before you can attempt to apply again. SBA Form 912 Questions 8 and 9 Questions 8 and 9 of SBA Form 912 address your criminal record. Unlike a “yes” answer in question 7, an affirmative answer to questions 8 or 9 does not disqualify you automatically from SBA eligibility. It can, however, slow down your loan application approval. The information that needs to be disclosed depends on the severity of the conviction and when it occurred. How the SBA Handles Past Convictions All loan applications with affirmative answers to questions 8 or 9 are evaluated on an individual basis with the nature, frequency, and timing of the offenses taken into consideration. You must provide a written explanation of any offense that triggers an affirmative response. Each written statement should include: The date of the offense The specific jurisdiction where the offense took place The specific charges you faced and whether it was a misdemeanor or felony Any unpaid fines The name under which you were charged If applicable, a letter from your parole or probation board detailing that the conditions of your parole or probation have been met Once you have written your statement, sign it, date it, and attach it to SBA Form 912 along with the statement from your parole or probation board. You must also include any official court documents that validate your offense and show when it was adjudicated and resolved. As an example, here are various scenarios and how the SBA may look at them: One misdemeanor that was not prosecuted: In this case, it is possible for your lender to clear the misdemeanor without consulting the SBA. Your lender may not require fingerprints or a background check. Also, you only have to report the misdemeanor if any portion of the proceedings occurred within the last six months. Multiple misdemeanors that occurred several years before your loan application: As these occurred over six months before, you are not required to disclose information to the SBA. However, your lender may have different requirements. Make sure you understand what their rules are before you submit documentation to them. Any felony: You will be required to pass a background check and provide fingerprints. Your application must be cleared by either the Office of the Inspector General or the Office of Security Operations. Bottom Line SBA Form 912 requires honesty and accuracy to ensure the SBA will guarantee your loan application. If you answer “yes” to questions 8 or 9, it is difficult to predict how this will impact your loan application, but it is still worth it to pursue an SBA loan. Anyone who answers “yes” to questions 8 and 9 must provide supporting documentation, or their loan will be delayed or denied.