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Commercial Real Estate Loan Basics For Small Business Owners

The most challenging aspect in commercial borrowers reacquainting themselves with the “basics” for commercial mortgage loans is likely to be the need to not only focus on the “old basics” but also on numerous “new basics” created by a massive shift in commercial loan services. There have been surprising difficulties and changes for small business financing, and this is particularly illustrated by the current commercial banking climate for commercial mortgages. Because the issues currently impacting commercial real estate loans are so widespread and effecting business borrowers everywhere, it is appropriate for business owners to “get back to basics” before they finalize any new business loans.

The outcome that effective commercial real estate financing is becoming harder to find is the biggest net result of the changes and challenges involving commercial mortgages. This observation applies equally to new commercial loans for buying a business and commercial refinancing efforts. Very few commercial lenders are providing a candid assessment of their inability to provide commercial mortgage financing for a wide variety of small businesses, and this makes the challenge almost insurmountable.

The need for small business owners to be prepared for an extremely difficult commercial lending environment is an intentional emphasis in this discussion. Obtaining commercial mortgages can no longer be taken for granted by small businesses because of the recent ineffectiveness that prevails with commercial banking. Large corporations continue to have more leverage and resources for dealing with their banks. In a mirror image of that situation, small business borrowers are increasingly likely to have less resources and leverage when negotiating with any bank.

Fewer banks providing this kind of financing to small businesses is one inescapable “new basic” for commercial real estate loans. It will frequently be even more difficult to secure a commercial mortgage from a new and unfamiliar lender if the current bank for a business is not willing to help. Nevertheless that is a likely funding scenario that currently confronts business borrowers everywhere. A particularly growing (and annoying) trend as noted above is that when banks have reduced their commercial loan activities, they are not generally being straightforward in telling prospective commercial borrowers. Banks are more intertwined than ever with political influences after a large number of them received government bailouts that helped to keep them operating. Very few banks have actually followed through on the promise to return to a “normal” level of lending once they received bailout funding.

A reduced amount of leverage for most small business loans is another “new basic” that seems likely to prevail. Needing larger down payments to buy a business will be one result for borrowers. Especially when combined with decreasing commercial real estate values currently being experienced on a widespread basis, commercial debt refinancing will be more difficult because of the reduced leverage.

We previously published a companion piece describing the need to get back to basics with working capital financing. In terms of the growing challenges with commercial refinancing, the points made in that article are directly relevant to this discussion. Our primary point is that any current effort to refinance a business loan is likely to be much more difficult than expected, and a small business owner might experience obstacles in getting needed cash by refinancing an existing commercial mortgage loan even when they have substantial equity. When commercial real estate refinancing cannot be obtained, commercial borrowers should consider a working capital loan as a “Plan B” solution.

Four Easy First Steps to Small Business Accounting

When starting a new business one of the most daunting tasks the entrepreneur will face is that of accounting. Many small business owners neglect this important area of business, particularly during start up. Making this mistake can be fatal and many companies fail because of a lack of knowledge of the business’ finances. Keeping good records and having good accounting practices from day one is paramount. There are many simple, yet effective techniques that can help the small business owner get their finances on track.

The first, and most important thing, you can do is to set your business up as a legal entity separate from yourself. This means setting up some type of corporation, or LLC. This simple step is overlooked by too many entrepreneurs. Keeping your personal and business finances and taxes separate is the main reason for this, but there are other benefits as well. Which of the different entities is right for you will depend on many factors of your business, and you should consult a CPA and an attorney to help you with the process.

Once you have decided on which entity you will use and have followed your state’s guidelines to set it up you will need to file form SS-4 with the IRS to obtain your EIN, which will be your business’ federal tax ID number. As soon as you have set up your business entity your next step will be to visit your bank (be sure to check out the competition’s offers as well) to open your business checking account. Most banks offer free small business checking accounts with no minimum balances. If the bank is going to charge you for small business checking, or a debit card, find another bank.

When choosing a bank be sure to ask the sales representative if the statements are cut on the last business day of the month, so that each statement represents an individual month. If the statement is cut on a floating 30 cycle, or if the cycle begins on the day of the month on which you opened the account find another bank. This simple thing can save hours when settling your account each month.

It is also a smart idea to have multiple accounts dedicated to different portions of your business as well. This may include a payroll account, an account that receives payment deposits and an operating account to name a few. If the bank only allows one free account per business find another bank. You may find that you need multiple accounts and keeping up with them all is starting to get confusing. If this happens ask your banker about the Cash Management services they offer. These services will normally include fees, but can help save you time, energy and headaches.

Once you have your new business set up and you are starting to see some cash flow you must make sure to keep your business and personal finances completely separated. This means that only revenue from the business should be going through the business checking accounts, and more importantly that no personal purchases be made through the business.

It is crucial that you take a salary from your business, rather than spending the business’ money on yourself. There are several different ways to take a salary including taking a fixed amount and/or a percentage amount based on the business’ performance.

My last point is also on the list of things often overlooked by the small business owner. Make sure you hire a bookkeeper. This point bears repeating – Make sure that you hire a bookkeeper. Even if your business is small it will be a tremendous benefit to hire someone to keep the books. Most new businesses fail to do this because they are trying to save money, but the fact of the matter is that you can get a bookkeeper for around $25 per hour depending on where you do business. Your time can be better spent on other aspects of the business that are your specialty and others can’t do. Make sure you are leveraging your time properly. There are thousands of bookkeepers out there but only one you! These types of services will usually save you a lot of money in the long run.

These are just a few points that all new business owners should make sure to focus on during start up. This was by no means an exhaustive list of accounting procedures, but only a few of the most important first steps. Finance and accounting are some of the most important aspects of business, but are so often overlooked by the new business owner.

Small Business Finance Mistakes

When you are in business the whole idea is to make a profit. Without a profit your business will go down the tube. This will even happen sometimes when there is a profit if cash flow is not seen to. While most people who run a business – especially a small business – are good at what they do, some of them are not good at managing money.

Good small business finance management is critical if you are to stay in business. Here are some mistakes that people often make in managing the finances of their business.

  • They often buy things their business really cannot afford, using a credit card. They then have to pay a great deal of interest on top of the purchase price. Rather than paying out all this money, consider other options such as buying second-hand or even doing without until the business can really afford it. Even getting a small loan will give you a better interest rate.
  • Most business owners have a transaction account for their business and this is good, but you also need to have another account with higher interest so that you can make more money from your profit. Leaving money on the table by keeping all the business money in an account that offers little interest is just plain wasteful.
  • Many business finance mistakes are made because the owners do not track their expenses. They have no idea how much they are spending or whether all the invoices have been paid. When you don’t know where all the money is, how can you know how much you have to spend? A monthly budget is a sensible idea and will help you to plan for the future.
  • Trying to do everything when you are not good at doing it is another mistake many business owners make with their business finance. Outsourcing certain chores such as accounting may seem costly but it will free up your time to do what you do best – run the business. Besides which, when you try to do things for which you have no training, your mistakes are likely to cost you more than outsourcing fees would have.
  • Trying to look flash can cost you more money than you should spend on your business. While the latest design in office furniture and fittings may look wonderful, it does not really bring in the money. Your customers will be more interested in whether you offer them value for money and treat them with respect.
  • Not learning from your mistakes can also be a costly exercise. Many business owners simply don’t seem to see where they went wrong the first time and they do the same thing over again, expecting to get different result. This is a form of insanity, according to some people.
  • Not asking for help is a big mistake in business. Flying solo is more difficult than taking on board a mentor or two, especially when much advice can be accessed for free from government agencies. A mentor can help to keep you going and show you where your worst mistakes are if you cannot see them for yourself.