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Small Business Finance – How to Calculate Your Needs

Your optimism on the future of the business may overshadow the crucial aspects and specific details required in keeping the business on the progressive status. Sometimes, owners happen to be very aggressive and confident in terms of financial standing that they tend to become very lax when dealing with borrowing money. This creates a big problem since every cent of the money borrowed needs to be put into proper use. Unfortunately, what happens to some is that when they have the chance to borrow money, they borrow more (or less) than they require.

So when it is time for you to take a small business finance, you have to know how to calculate your needs.

There are several factors that affect the amount of money you need. They are worth discussing one by one.

Credit rating – The eligibility for a loan, especially on small business finance, is based mainly on the credit rating of the person. A good credit score means higher amount of loan and lower interest rate. Tip: Obtain a copy of your credit report long before you approach a lender. With a good lead, you have enough time to improve it further or to have your score fixed should there be any inaccuracies. Also gather all your business documents. This includes financial statements with attachments and schedules, tax returns, financial statement (interim year-to-date), and other documents that will help the lender assess your loan application. By doing so, the processing time is reduced.

Savings – Establishing a business or keeping a business running requires a good capital. Pulling out money from your saving will significantly reduce the amount of money you require for a loan. Tip: before you borrow money from lender, tap your resources first. This can cut the amount of money borrowed and the interest you pay, which in turn will increase your profit further.

Expected return/monthly expenses – Before borrowing money, project the amount you can afford to pay back. Your expected income minus the monthly expenses should be well over your loan payment.

Amount required – How much money do you need? Where should the loan go? These 2 questions should be answered first before you go to a lender. You do not simply say, “as much as you can lend” when you asked by the lender on how much money do you need. A reply like this will definitely shut your chances of getting a loan. Have a good estimate of how much money you need. Know where the money should be spent. This way, you can better plan the repayment or project whether or not you can afford to pay the loan back. Another good thing about knowing exactly how much you need is you can carefully manage your finances against other factors that were mentioned above.

Your credit rating, savings, expected return, monthly expenses, and amount of loan required should therefore be included when calculating your needs.

How to Calculate Your Needs?

Once you know where the money should go, identify which items are optional and which are necessity. Having a good funding on your small business is imperative but creating an impartial judgment towards management of funds will bring you a long way. Pinpoint the total amount of money you need by enumerating the small detail. For example, the start up expenses you may include: installation of fixtures and equipment, fixtures and equipment, decorating and remodeling, starting inventory, licenses and permits, legal and other professional fees, deposits with public utilities, consulting and software, advertising and promotion for opening, cast, etc.

Then ask yourself, “Can you afford to pay for the loan?” Borrowing is easy, paying it back can be a problem. So to make sure that you can afford to pay the money back, make a good projection of the future income of your business. Compute your monthly expenses which may include the following: monthly expenses, salary of owner-manager and staff, rent, supplies, advertising, telephone, utilities, delivery expenses, insurance, interest, taxes, maintenance, legal and other professional fees, etc. Deduct these expenses from the projected monthly income. Is your net income more than enough to pay your loan? If yes, then the loan can be borrower. If not, then it is not worth the risk.

Finally tap all your available finances. Do not rely entirely on your lender. Subtract the amount of money you need from your savings. The difference should only be the money you should borrow.

7 Ways to Get Small Business Financing

Money is always an issue for small businesses, especially when starting out. However, the need for cash injections can continue long after you get that first dollar. Even same industry businesses can differ greatly, but they all have in common the need for money as well as the places they can go to get it. Here is a look at seven opportunities to get cash for your small business.

Small Business Loan

Probably the most known source for small business cash is the small business loan. This most often comes from a bank or the SBA; for startup capital or an expansion. The lender looking at your proposal needs to feel that you are a good investment and you can help them decide in your favor. Wherever you go to get the loan, there are several things you will need in order to give your business its best chance to get that loan.

Your business plan will tell the lender about your business and you. They will see how much planning you have done, your grasp of the industry, and how effective the loan will be.

A good cash flow projection tells the lender not only how you will pay them back, but when. Your best bet is to show hard, but honest numbers.

Your personal financial statement helps the lender to understand where you are coming from and where exactly your business is at. After all, you’re tied to your business at the hip.

Bring past business tax returns if you have them. It will show the lender how your business has done and how you have managed money in the past.

Your credit rating is key for establishing trust. The lender may be giving money to your business, but they are forming a pact with you. A credit report will fill in the rest of the details of who they are about to trust with their money.

Microloans

From the SBA, the microloan program may be a perfect fit for your current financial needs. With a maximum of $35,000, a microloan can be less daunting to acquire, if not a little easier than a small business loan. The most common use for a microloan is short-term working capital and equipment purchases. Since most microloans require collateral of some kind, the best use is probably equipment, since the equipment can then be the collateral.

Supplier Credit

While this source of income may not work with all businesses, it is ideal for manufacturers and retailers. A supplier makes money by you buying their products, but if you can’t first buy their products to make yours, they lose a sale. If you cannot be billed – net 30 days – or if it may take longer to receive your money, it is possible to work out a deal with your suppliers. An ideal situation is to procure credit out to sixty days. If that isn’t possible, maybe they will take a percentage of the sales of the end product on top of the cost of the supplies. This temporary solution could generate higher interest than a loan, but in some situations, it could be your only choice.

Angel Investors

Best in times of growth, angel investors can be a boon to help a small business get over the hump to where they need to be. Angel investor loans fill the space left after you’ve gotten your small business loan and other capital. Unfortunately, they are few and far between and spending too much time looking for them can be even more detrimental to your business than cash problems. The best time to look for an angel investor is when you already have growth, you’re approaching the breakeven point, or you’re expanding. The worst time is when you’re hemorrhaging money. Take care, you still have your business to run. Plan to spend four to six months looking for an angel investor, but use only a quarter of your time. Like getting a small business loan, be ready with all that proof that you are worthy of an angel’s blessing.

Credit Cards

It’s a source of quick, red-tape free cash, but credit card cash advances can eventually kill your business if you’re not careful. Always keep in mind the high interest charges when you are looking at credit cards as a cash source. Use them, but only for quick-turnaround, time-sensitive, and/or small scale solutions. Treat credit card advances like you would a fire; it’s great for quick warm ups, but really hurts if you leave your hand in there too long.

Home Equity Loans

Like credit card advances, a home equity loan for your business is a personal risk solution. They are more attractive however, because of their lower interest rates. The catch is that if things go south, you lose your home. Depending on how personally invested you are in your business, this may not be such a different outcome from credit card advances, or even small business loans if calamity strikes. The main thing to remember when considering the bad side of a home equity loan is that due to consumer protection laws, it’s a much longer process to seize your house than it is from a normal bank loan.

Family or Friends

Nothing ruins a friendship or splits a family faster than money problems. When you are considering approaching the people you are closest to, you must know the best way to handle the situation, as well as the potential pitfalls. Some common relationship killers due to business loans is the recipient squanders the money, doesn’t use the money as indicated, doesn’t pay the money back, or doesn’t pay it back in a timely or agreed upon manner. If you can avoid those situations, you’re way ahead of the game. The best course for loans with friends and family is to handle it as professionally as a bank loan, or even more so. Make sure there is a formal agreement with signed paperwork stipulating how much is to be loaned, collateral, interest rate, how it is to be repaid, and what happens if it cannot be repaid. If you spell out everything on paper, there is no room for disaster due to misunderstandings. Remember always: these people trust and believe in you… don’t make them regret it!

Simple Tips for Small Business Accounting

Small business accounting is perhaps one of the most difficult challenges that business owners perceive. This is because accounting for a small business is not their forte. For most small business owners, they go into a start up because they are good at providing a particular service. Be this a catering business, contracting business or being a wedding planner.

Introduction to Small Business Accounting

To be successful at small business accounting one does not need to be a wizard at math. Being organized in keeping track of your cash flow is the key to good accounting for a small business.

Good accounting for a business also means that you are handling the financing of your business well. Since capital for start up is either taken from loans or from leasing equipment and other assets, you can be sure to formulate a good plan to cover your expenses.

Small business accounting is also important because of the tax implications. As the business owner it is your duty to file taxes properly to avoid getting any penalties.

At the end of the day, accounting simply means keeping the records clean for your business. You take in all of what you have earned and then subtract your expenses, what you have left is your income.

For a start up business that relies on financing, accounting takes a crucial role because it tells you if you are earning or not. Your income is then projected so you can see if you are earning enough to cover any debts or seed money infused into the business. Seeing how your financial standing looks like will guide you in making wiser decisions in your business.

Image illustrating business accounting

Below is a simple overview of some business accounting terms:

Revenues or earnings:

1. Payment for services rendered – labor, consultation fees and the like

2. Payment for goods sold – products, materials, etc.

Expenses:

1. Leasing expenses – rental cost you pay for equipment, etc.

2. Cost of goods sold – what you paid for your inventory

3. Office supplies – necessary items for your office

4. Salaries – your payment to your staff

5. Representation costs – dining or entertainment expenses, these are usually for taking out prospective clients although only 50% is usually deductible

6. Depreciation costs – for assets you own that decrease in value over time, this can be an allowable expense

Small business accounting is then just taking the total of the two and then subtracting the expenses from the earnings. Your income of profit is the difference. These profits are then subjected to taxes to make your total profit for the year.

Small business accounting is simple and straightforward because of the scale of the numbers involved. It just seems more difficult because it is often up to owner to do this by himself. But through proper and disciplined book keeping, you can make Accounting for a business a habit and it will get easier over time.

The important thing is to get the system in place right off the bat so you can track down all expenses and income properly.

How Financing Options Impact Small Business Accounting

Small business accounting is affected by the method of how have taken in financing. First, this impacts the period of the return of investment you put in. next it also impacts what you can claim as deductibles or expenses.

The amount of time a business is able to get returns on the initial investment is taken by dividing the investment amount by the monthly income. This is especially important when you have taken a loan because you do need to pay off debts in a certain amount of time.

Good Business and Marketing Practices.

Use free marketing tools. The internet and social networking sites are great marketing tools. There are a lot of free sites and online coupon offers you can participate in. this makes for good and free marketing, at very low costs.

Save your receipts. Official receipts are a record of what you have bought and what you have sold. A well receipted accounting record can go a long way in helping you file taxes and not end up paying too much in terms of taxes.

Treat the business an entity in itself. In short, you are not the business and the business is not you. Don’t mix personal expenses with business ones, this will only confuse the records and you might end up losing more money.

Treat small business accounting as an integral part of operations and you’ll see your business do well.