Archive for February, 2008
Why Incorporate?
February 29th, 2008
By The XBanker
Every so often I need to step back and focus on the basics. I deal with corporations and limited liability companies (LLCs) every single day and for me it is an automatic slam dunk that Americans need to be incorporated.
But I need to remember that we are not taught in schools why we should be incorporated. And we’re certainly not born with it. So now and then it is important to step away from all the bylaws and agreements and strategy brainstorming and pose the question: Why incorporate and what are the benefits of incorporating your business?
The answer is threefold: Protection, Taxation, and Credit.
The first big reason to incorporate is to gain asset protection. As you probably know – doing business in your own name as a sole proprietorship (or worse yet, as a general partnership) offers no asset protection. One claim and everything you own – not only your business assets but your personal assets as well – are exposed.
Using corporations and LLCs can protect your personal assets from creditor claims. And provide you with peace of mind.
You can also use more than one entity for even greater protections. For example, if your business corporation gets sued a judgment creditor could reach inside the business. But what if the valuable assets – the equipment, the trademarks and the machinery – were in separate LLCs and leased back to the corporation?
The answer is that those assets are not owned by the corporation. They are beyond the creditor’s reach.
The right use of entities can also save you on taxes, particularly on payroll taxes. Work with a good CPA and you will see the savings immediately. And remember, sole proprietors are audited at a five times greater rate than corporations and LLCs. A good financial advisor can help you maximize the benefits of business taxation.
The third excellent reason to incorporate has to do with credit. Credit for your business can be obtained through a corporation or LLC separate and apart from your personal credit. Remember, as your business grows and your credit needs grow with it you will certainly hit the limits on your personal credit. You need to establish an independent business credit profile for your future success. A corporation or LLC is the best vehicle for carrying forward this important strategy.
Three important strategies – asset protection, tax minimization and credit enhancement – are the core reasons for why you should incorporate.
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Almost Famous!
February 26th, 2008
By The XBanker
I’ve been invited to publish a series of posts on The XBroker blog relating to small business financing for professionals in the real estate and mortgage industries. Check out my first post: How To Maximize Your Income and Minimize Your Liability as a Real Estate Professional.
If you’ve never visited the XBroker blog, I highly recommend spending some time there. The XBroker’s advocacy of transparent mortgage rates is a thorn in the side of a banking and mortgage establishment that continually stings consumers with marked up interest rates and bogus fees.
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What Is The Difference Between A Term Loan And An Unsecured Line Of Credit?
February 26th, 2008
By The XBanker
You will find that some banks offer two options to small business borrowers: term loans or unsecured lines of credit – it’s important to understand the difference between a term loans and unsecured lines of credit. The easiest way to think about an unsecured line of credit is to consider it as “access to capital.” If you get approved for a $50,000 line money doesn’t change hands, you simply have access to this money – you don’t pay any interest until you actually use it. With a term loan, you receive the money upfront and begin paying principle and interest for the term of the note.
My bias is towards unsecured lines of credit, because you can build a healthy reserve without increasing your monthly debt burden – until you actually use them. However, a term loan may make the most sense if you know that your cash flow will cover the payment and that you will immediately use every penny from the loan.
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Common Mistakes Made By Business Borrowers
February 22nd, 2008
By The XBanker
Premature Application. This is probably one of the most frequently made mistakes by business owners. Applying for credit without taking the time to research options and not being relatively certain about chances for success is a costly mistake. Whether you’ve put off your hunt for financing until it has become an urgent issue, or if you’re acting on an impulse – don’t be careless with the application process – you’ve got one shot to get it right. With most banks, you can only apply once every six months – a denial can set you back for 6-12 months.
Interest Rate Haggling. When you are approved for financing, don’t get caught up in the rate that you’ve been given. For credit cards and business lines of credit, you’ll usually have a prime + 1-9 points (which is the prime interest rate plus additional interest rate, if this is new terminology). Your initial rate will be determined by the strength of your application and the banks lending guidelines. I’ve seen business owners foolishly turn down approved lines, because the rate was 1 or 2 points higher than they wanted. Unwise. Take whatever you’re given. Once you have your foot in the door at a bank you’ll be able to prove yourself. With a good track record getting a rate reduction or line increase is easy to do. I recommend calling every 6 months to request a rate reduction and line increase. The bottom line is to take the credit and be smart with it. Don’t spend it on activities that won’t produce a return greater than your rate. It’s that simple. Don’t get hung up on your initial approval amount either – for the same reason.
Don’t Explore Options. You need to make sure there is alignment with your financing goal and the lending option that you choose. Just as it would be foolish to purchase a home with credit cards, it’s just as crazy to use an unsecured line of credit to purchase equipment and property (unless you are just flipping them). You need to explore all your options. For instance, trade credit allows you to finance purchases from other businesses such as office supplies, equipment, courier services, printing, etc. Leasing, factoring and merchant account cash advances are all options that might best fit your current needs (I’ll address each of these options later). With a little homework and preparation you might just get the money you need under the best possible circumstances.
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The Credit Myth That Just Won’t Die…
February 21st, 2008
By The XBanker
I’ve heard it so many times…”I pay my bills on time, I have excellent credit.” Yes, paying your bills on time is very important but – sorry – it does not guarantee excellent credit.
Your payment history is only about one-third of your credit score. Other factors such as your debt levels, new credit and the length of your credit history make up the other 65% of the credit you have been building. Credit myths are everywhere, so so get caught in the hype.
It is entirely possible to pay all your bills on time and not have excellent credit.
And one sure score-killer is maxing out credit cards — even those credit cards you are using for your business.
If you must tap personal credit for your business, it’s essential that you choose business credit cards and loans that don’t report to your personal credit files. You may have to provide personal guarantees (PGs) and you may be subjected to personal credit checks, but don’t take on biz loans that will drop your scores.
Otherwise, your “excellent credit” may not be as hot as you think.
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Your Annual Tax Increase
February 20th, 2008
By The XBanker
If someone tries to tell you federal taxes haven’t increased for the last few years please set them straight.
Federal taxes increase every year.
Although the individual, capital gains and corporate tax rates may not have changed, the most insidious of all taxes continues its skyward march.
Payroll taxes. The money deducted for Social Security and Medicare. The money that is supposed to be set aside in a trust fund for future retirees. The money that actually gets spent by the government the minute they get it.
Payroll taxes are imposed at the rate of 7.65% on the employer and employee alike. So on a $1,000 paycheck the employee loses $76.50 and only receives $923.50. And the employer has to pay $76.50 on top of the $1,000 to the employee (and the government).
But what if you own the business and are the only employee? Then you are paying 15.3% on everything you pull out in salary. So don’t believe the apologists who say it is only 7.65%. When you own the business it is double that: a hefty 15.3% on all the salary you take up to the yearly wage base. Which is why you may want to use an S corporation to minimize your payroll taxes by taking some money out as a dividend distribution, which isn’t subject to the 15.3% tax. But that’s another post.
The point is that these payroll taxes keep going up every year because the government keeps raising the wage base. This year the 15.3% rate applies to all income up to $102,000, resulting in a tax of $15,606 per employee. On salary above $102,000 wage base, the Medicare tax of 2.65% continues to apply.
In 2009, the wage base is expected to be $106,800, up to $4,800 from this year. Or, for the owner of the business another $734.40 in extra payroll taxes. On just one employee!
The government is already estimating a wage base of $111,600 for 2010, $116,100 for 2011, and $121,500 for 2012. So in 2012, your payroll tax will be $18,589.50, up almost $3,000 in four year’s time.
Remember, these taxes are insidious because they get paid throughout the year by your bookkeeper or payroll service. You may not notice them.
But they are very real and you and your team must plan for them.
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The XBanker Manifesto
February 15th, 2008
By The XBanker
The question is not “who is the XBanker?” but “why the XBanker?”
I don’t want there to be any misunderstandings as to my intentions here. I love small business and believe that entrepreneurship can be one of the greatest forces for good in the world. I’ve worked with thousands of small business owners and I’ve seen the same mistakes made over and over again when it comes to the most important part of building a business: accessing capital.
Rather than sit here and lament the small business failure rate, I prefer to do something about it by providing three things: 1) Insight, 2) Action, and 3) Results.
INSIGHT
What you don’t know about bank financing can and will hurt you. It can be challenging enough to avoid the many financing scams out there that plague small business owners.
But in fact, they’re the least of your worries. There are plenty of other well-hidden landmines along the path to successful financing that can cripple your business, wipe out your assets, and destroy your personal credit.
My goal is to help small business owners access the capital they need in the safest and most rewarding manner possible.
ACTION
The last thing the world needs is another business advice column. Most just walk readers into booby traps anyway. Me and my team aren’t just spouting good ideas—these are real world solutions you can use.
The fact remains, you can’t read your way into a successful business; you’ve got to work at it to make it happen. If I had a dollar for every person who’s asked me to do it for them, I would be retired by now. There just aren’t enough hours in the day and cloning isn’t an option (yet). In the meantime, we’ve developed a suite of products and solutions that do just that.
RESULTS
At the end of the day, it’s results that matter. If what you read here saves you time and money, or opens the door to the capital you need to grow your business, that’s success to me. We built XBanker to serve the needs small business owners everywhere, helping them finance their businesses and preserve equity, while protecting their personal credit.
There you have it.
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Using Quality Financial Professionals
February 13th, 2008
By The XBanker
With all due respect to the many excellent accounting professionals out there, I am constantly amazed at the number of CPAs who willfully ignore the litigation explosion and the need for asset protection. These CPAs provide useless legal advice to their clients by suggesting that they are too small to incorporate.
Their advice is to operate as a sole proprietor, or worse, as a general partnership with others because it is easy and does not involve annual filing fees to the state. The problem, of course, is that you are never too small to get sued. And when you operate as a sole proprietor or general partnership the liability exposure is against all of your personal assets for many years to come. So the question isn’t are you too small to incorporate.
The accurate question is do you and your family have any sort of financial future to protect?
And given that that answer will always be yes, then the need to incorporate and utilize asset protection strategies is a given. You need to start protecting yourself as soon as you start your first business and buy that first rental property. You need to implement asset protection strategies at the start and then throughout your wealth building career. Remember, it is too late to protect your assets after a problem comes up. You need to act at the beginning so that there is no gap in your protection, no chink in your armor, as you move forward.
Another problem I have against lesser accounting professionals is that they argue that an extra corporate or LLC tax return is too cumbersome and/or expensive for their client. To this my first reaction is: Have you ever filed a corporate or LLC tax return? They are not difficult and should not be expensive. In my mind this particular ‘tax pro’ is giving the bad legal advice not to incorporate to cover up the fact that they do not know how to file anything other than a personal return. If you are dealing with such a person it may be that you have outgrown their services.
You need to work with professionals who understand the importance of asset protection, and will work with you to accomplish your important financial and protection objectives. It is important to know that the right team can make all the difference towards your future success.
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Mortgage Mess and Small Business Financing
February 13th, 2008
By The XBanker
The Wall Street Journal reports this morning that the recent mortgage meltdown is starting to impact student loans and other borrowers (full article requires subscription). I’ve been asked a lot about this issue lately, as business owners are concerned that it will impact their ability to obtain financing and their overall business. I’ll leave the macro-economic implications to more studied minds and focus on the business financing component.
The banks have “tightened-up” their lending guidelines the last couple of months. The response has varied by institution, but in general the industry is taking a conservative approach with their small business loans. The mortgage industry is in turmoil because shady brokers and dirty bankers pushed unqualified borrowers into mortgages that they could barely afford – cutting corners every way they could.
The banks were complicit in this mess, lowering guidelines and funding bad paper – so don’t feel too sorry for them when they announce their earnings or downsize their staff. A similar phenomenon has happened on the business banking side, shady brokers and dirty bankers running the same tricks – fudging numbers and files to get a quick rip.
Markets have an uncanny way of correcting themselves and those who should have been denied financing prove to the world why certain underwriting criteria is in place. So how do I foresee all this impacting small business financing?
Tightening of personal credit scoring and reliance on ratios. The bank lending matrix hasn’t changed their reliance on personal credit. The minimum acceptable scores haven’t moved much and I don’t see them changing anytime soon. Where you’ll see the impact is on the rigidity of key ratios, such as revolving debt and debt to income. These ratios provide much greater indicators of an individual’s credit worthiness than their score alone.
Increasing attention to business legitimacy. This is an area that we spend a lot of time on in the Business XRay (along with personal credit and the aforementioned ratios). This area makes the most sense to tighten up – so that banks can prevent fraudulent small business loans.
Emphasis on lending to current clients. A couple banks have started to limit their small business lending products to customers that have existing accounts with the bank. I don’t know how much this will catch on, but I’ve seen it pop up already. I don’t think this will be a lasting trend. Small business loans drive new account creation with banks – which in turn drives the rest of the business, it would be suicide to cut-off potential new business.
Lower initial loan amounts. This is the most common change that we are seeing – that banks are offering a lower initial loan amount. This enables them to gauge your performance before granting you (at your request) a more reasonable amount. So if a bank approves you for $10,000 and you thought you were a shoe-in for $25,000 – take the money, use it and pay it off, and request an increase in a couple of months.
Lower Rates. One of the positive results of the mortgage mess is that the Fed has cut rates. Most unsecured business lines of credit are priced at Prime + X%. The lowering of the Prime rate will make debt financing less expensive for small business owners. So this may be the time to leverage debt financing options to grow your business.
It’s important to remember that there is always movement in the small business finance world. This is why the XBanker value proposition is so powerful: We stay on top of these changes so that business owners don’t burn their time and credit seeking financing for which they don’t qualify and that they are well prepared when they do apply.
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Business Credit With Bad Personal Credit?
February 11th, 2008
By The XBanker
The credit doctors have been around for decades. I recall one tv ad from the late 80’s where the host held up a copy of a “law” that “guaranteed the right to good credit.” When I tracked down the legislation he cited, it was a bill that had to do with the adoption of a child. It had nothing to do with credit at all.
The scams change, but one thing doesn’t. They convince people that with the right “secrets” (and enough money) you can beat the system.
A common sales pitch — one that’s been around for ages — involves the premise that you can just replace your bad personal credit with a new business credit profile and instantly open up a world of unlimited credit lines that banks are eagerly waiting to hand out to entrepreneurs.
It’s an oldie but goodie that’s still circulating on late-night cable television programs and the Internet.
The reality, as any business owner will tell you, is that you better keep your personal credit in great shape. If it isn’t, you need to make sure you get it there. Good business credit with bad personal credit is not impossible, but be careful separating the two.
Take a look at this figure from the SBA’s 2006 study of the use of credit scoring in small business lending:.
It shows the % of bankers surveyed who check personal credit scores or business credit scores before making lending decisions. It’s pretty clear — bankers like those FICO scores.
I’ve had some great conversations with PayNetOnline, a commercial credit agency that has one of the largest commercial credit databases of leasing info. We’ve talked about why biz card issuers still insist on checking personal credit. They tell me the research shows that commercial credit data is much more predictive of business financial behavior than personal credit, yet many of the bankers that are making those loan decisions cut their teeth in the consumer credit card arena, and feel comfortable with FICO scores.
Bottom line: if you are an entrepreneur your personal credit is just as important as your corporate credit. Building both means you have the best shot at getting the loans, lines of credit, and funding you need.
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Business Credit Success
Don’t you want to figure out how to build business credit? Business Credit Success can get you on the right track to getting the credit you want. How to build business credit -»
Incorporating a Small Business
Never underestimate the importance of having the right business structure when it comes to securing business financing. XBanker can help you avoid costly mistakes. Incorporate the right way -»
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