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How to Handle Small Business Finances

If starting a business is not something that you have not done before, keeping track of finances could be a very complex and sometimes an overwhelming task. Even though there are many acronyms and accounting terminology that a layman may not understand – here are few steps to get you started.

The most important step in keeping your finances, is document every expenditure and gain for a financial year. Always retain receipts and write down all non-receipted expenditures as you go. You do not need complex accounting software to do this, just use a simple journal. Keep a note of the amount spent or received, date, source and purpose. If you have a lot of cash coming in, but there is barely some leftover at the end of the month, it could be a reason that that there are many undocumented cash expenses in your account.

Another important point is, always keep business and personal finances separate. Of course as a small business owner you will need access to both sources at difficult times, however keep a track of where the money goes. Whenever you withdraw more than allocated amount from either of the accounts, be disciplined to work a little harder to pay that back as soon as possible.

Learn about the tax-deductions and exceptions in your industry. Governments give tax exceptions to some expenses for your personal services because you are the business owner. Therefore spend some time learning about the taxation rules and benefits that can affect your business both positively and negatively.

4 Key Tips to Help Increase Your Chances of Getting Small Business Financing

As a small business owner your ability to secure small business financing will in fact determine how successful you are. Unfortunately, few business owners know how to improve their chances of getting a business loan which is why when the time comes they are not able to secure the loan they need to keep their business running.

Tip no. 1: Familiarize yourself with the bankers in your community’s financial institutions

Prior to applying for a loan you should find out exactly which institutions in your community issue loans to businesses like yours. Not every bank specializes in giving business loans and those that do may only lend money to businesses in certain industries. Some lenders only lend to businesses that are at a certain stage of their business cycle. This is why it is important that you only work with bankers who are familiar with your industry. One big reason why you should work with banks that know about your industry is because they can give you some solid business advice. This advice stems for their experience working with other businesses in your industry and so they have come to understand the problems they face.

Tip no. 2: You should be able to easily describe your business’s “Value Proposition”

You need to able to clearly communicate what value proposition you have. You should work on drafting a business plan that outlines three main scenarios i.e. worst case, most likely, and best case. You will want the banker to clearly understand all three of these scenarios. You should also be ready to discuss in great detail the assumptions that you make in each of these scenarios.

Tip no. 3: Weigh risks and benefits

If you want to get small business financing you need to start seeing things from the bank’s perspective. Banks see things in terms of risk and benefit. You need to have a solid and viable plan which will mitigate the risks. Bankers do risk analysis regardless of if you do it or not but being prepared for it means that you stand a better chance of being considered.

Tip no. 4: Two ways to be able to repay the small business loan

Bankers always like small business borrowers who put forth a primary and secondary source of repayment. As a small business owner you are in the best position to determine all possible repayment alternatives. However, you should discuss the options with your banker. Secondary sources of repayment include the pledging of personal or business collateral. The more certain a banker is the higher your chances are of getting the loan.

Applying for and getting a small business loan can be a time consuming and tiresome chore. However, all business owners will have to apply for a business loan at least once during their time as businessmen. So, it is always a good idea to know what you’re getting yourself into prior to applying for a loan.

Business Financing For Small Businesses

Start-ups and small businesses have traditionally had difficulty raising capital through outside sources and, for new companies, the chances of getting a bank loan is close to zero. Most banks today won’t even consider lines of credit or loans for companies that have been in business less than 3-5 years. Start-ups haven’t built up adequate credit history and banks are just not willing to give money to companies with no credit history. Without adequate money coming in, it is difficult for a small business to maintain payroll and pay its bills.

No wonder we keep reading the statistic that 85 percent of business start-ups fail in the first five years. Some research has indicated the reasons for these failures are a lack of funding and poor planning. These facts combined with today’s economy makes small business financing more important than ever.

Well, there are ways for small businesses to avoid funding issues and find alternatives for obtaining business financing. One method is receivables financing, also known as receivables factoring, invoice factoring, invoice discounting or debtor financing.

Receivables financing enables small businesses to obtain the cash necessary to keep the company running by getting the money they need without having to go to a bank for a loan or take on additional debt. What they can do instead is sell their receivables at a discounted rate to a factoring company. Factoring companies pay cash for the invoices and handle the collection process.

A factoring company usually pays 70 percent to 90 percent of the total invoices. Then, after collecting the invoices, the factoring company returns them to the small business owner. For this service the small business will pay a fee of 1.5 percent to 3.5 percent of the total invoices.

As you can see, factoring differs from a loan in that invoices are being sold to the factoring company and not being offered as collateral. The small business or start-up is then able to convert its invoices into operating cash and not have to wait 30, 60, 90 days or more to receive payment.

There are numerous benefits to factoring for any business, but especially for a small business or start-up. Receivables factoring will shorten the collections process giving a small business the cash flow they need without taking on new debt. Factoring can also be a great option for a small business or start-up that has been attempting to obtain a loan and is having trouble qualifying with a bank.

Many small businesses that are in a start-up situation will find it difficult to receive a bank loan making factoring services essential if they want to maintain an adequate cash flow.

Most small businesses don’t have a collections department or adequate personnel and working with a factoring company provides this much needed service. Factoring provides them with the required cash flow to survive and enables the business owner to focus on the day-to-day operations.

Receivables financing, receivables factoring or invoice factoring places the time, cost, and effort of collection into the hands of a factoring company. This enables the business’ staff to concentrate on what they were hired to do and not worry about how to sustain the business financially.