Archive for the 'Insight' Category
In Credit Crunch, Business Comes First
September 8th, 2008
By The XBanker
Business owners are electing to pay business debts at the expense of personal debts, reports Experian(tm). In a comprehensive study covering 2.7 million business owners over the course of a year, the global information services company found that found that business owners with a severe mortgage delinquency were more likely to pay their business obligations instead of their mortgage.
Experian’s research showed that because of deteriorating equity, high mortgage payments and limited refinancing options, business owners chose to ensure the business’ survival, preserving their source of income at the risk of losing their home. That’s the bad news.
Here’s the good news:
Business owners were less likely to experience a 90+ day delinquency on their mortgage than other consumers. In fact, by April 2008, the average home owner was 1.5 times more likely to experience severe mortgage delinquency than the average business owner
Additionally, Experian’s study found that small-business owners are relying on commercial lending options more often than personal financing options, to support their businesses. We think that’s smart business and it may very well allow the business owner to keep their business even if they have to start over personally.
But of course, the downside is that business owners’ personal credit can impact their business financing. Experian, which sells a credit score that blends the business owner’s credit with the credit of the business, points out that consumer scores work great for assessing consumer risk, but their blended score performs nearly twice as well as a consumer score for assessing business risk.
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Save Your Business in Bankruptcy
August 11th, 2008
By The XBanker
My Xbanker colleague Garrett Sutton has written extensively on the value of incorporating a small business, and here’s another reason to do so:
Incorporating can literally save your business.
I doubt many sole proprietors realize that filing for personal bankruptcy (due to medical debts, divorce or many of the other reasons people file) could mean the end of their business.
I didn’t.
But in a recent post on the Bankruptcy Law Network, California bankruptcy attorney Cathy Moran describes a recent case in which a couple who owned a business as a sole proprietorship were in danger of losing it – even though it was doing just fine – because they had to file for personal bankruptcy due to real estate investment debts.
She points out that:
…(the) business was a sole proprietorship. If we filed Chapter 7 now, Chapter 7 trustee’s first reaction to a going business is to shut it down. The trustee is concerned about his liability for regular business debts the operation may incur and the possibility that a customer may be hurt on the premises. The trustee wants to preserve the status quo by shutting the doors, even if there is nothing in the business that he can sell for the benefit of creditors.”
In this case, she was able to incorporate the business to save it.
But as another California bankruptcy attorney Douglas Jacobs points out in another post, waiting until you are contemplating bankruptcy to incorporate your business is risky business. It can be considered a “fraudulent conveyance” and can backfire.
If you haven’t been convinced yet that you need to incorporate, what else can I do to convince you that you need to check it out? It may literally save your business.
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Credit Investors: Partnering For Personal Credit
July 18th, 2008
By The XBanker
Like it or not, your personal credit will open or shut doors for financing your business. If you have terrible personal credit, we can help you obtain trade credit, credit cards, equipment leasing and potentially some bank financing. However, we can obtain much more financing, if a business owner has great credit (preferably 700+ FICO). This has important consequences for you, if you are trying to finance a business and have poor personal credit. You need to consider bringing on a credit investor or partner that can help you obtain bank financing for your business.
Last week, I asked an entrepreneur about his loan readiness and he told me his credit was in the toilet. So I turned to his partner, “My credit is even worse,” was his reply. I guess when it came to selecting partners, this criteria slipped their minds – don’t make the same mistake. Unless a partner brings irreplaceable technical expertise, they can always be replaced with someone that brings skills and credit to the table.
If you’re an entrepreneur with poor personal credit, you should consider bringing on a credit investor or partner. Ideally, you’ll need someone with 700+ FICO scores and good ratios (feel free to ask one of our consultants to do an analysis of a potential partner before you tie the knot). You may have better luck finding an investor or partner with good credit, than finding one with cash.
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Preventing Unnecessary Dilution
July 15th, 2008
By The XBanker
One of the biggest mistakes entrepreneurs make is that they give away too much of their business too soon. I’ve spoken with entrepreneurs that own less than 2% of their brainchild after diluting for “friends, family & fools” and for venture capital. You need to properly stage the financing of your business and to do so under the best circumstances possible to prevent unnecessary dilution.
Let’s say you are raising $250k from investors to start your business, if the business is only worth $500k, the investors will own 50% of it; if the business is worth $1m, they’ll only get 25%. The higher the valuation, the greater the percentage of your business that you’ll retain. It can be challenging to justify your valuation without revenue – which is where promising entrepreneurs routinely get taken to the cleaners. This is why I typically recommend convertible debt to raising hard equity, and why I recommend obtaining debt financing in the early stages of your business.
First of all, most business won’t raise a dime in outside capital. Investment networks are flooded with hopefuls that burn time and money trying to raise money – not recognizing the complete tooling they will receive in the event that someone actually believes their concept has merit and wants to invest. It is a lot easier to attract capital, and to do so on your terms, if you have successfully proven the concept and have some traction.
Unless you’re building airplanes, you can probably get things moving with less than $100k. This is why the XBanker is an important asset in the Shared Success family – we are here to help entrepreneurs establish a strong foundation, nailing the fundamentals and obtaining “seed credit” so they can get things moving. So if you are still slumming on the investment networks and forking over gobs of money for a business plan that no one will read (and if they read it – they sure won’t believe it!) – stop. Let us help you get your first $200k, so you can bring on investors under the right conditions.
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What’s Your Hurdle Rate?
July 9th, 2008
By The XBanker
My mother always taught me that “beggars can’t be choosers” and my father preferred the “don’t be penny-wise, but pound foolish” – either expression is fitting for this topic. In the last week, I’ve had three experiences that made me think about being wise when you need money for your business and understanding the concept of a hurdle rate.
My first experience was a discussion with a consultant to a portfolio of companies in various stages of their business – all with immediate capital needs. We were exploring potential solutions for these people. Most simply needed $50-100k to purchase inventory or to invest in new opportunities – getting the money is critical to their success. Yet, as I started asking questions, I was being shot down with every possible financing option. It was apparent that these business owners were looking for $100k for 2-3 years at less than 5% interest with no colateral and no personal guarantee and they wanted it now, despite their less than stellar credit.
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What's Your Hurdle Rate?
July 9th, 2008
By The XBanker
My mother always taught me that “beggars can’t be choosers” and my father preferred the “don’t be penny-wise, but pound foolish” – either expression is fitting for this topic. In the last week, I’ve had three experiences that made me think about being wise when you need money for your business and understanding the concept of a hurdle rate.
My first experience was a discussion with a consultant to a portfolio of companies in various stages of their business – all with immediate capital needs. We were exploring potential solutions for these people. Most simply needed $50-100k to purchase inventory or to invest in new opportunities – getting the money is critical to their success. Yet, as I started asking questions, I was being shot down with every possible financing option. It was apparent that these business owners were looking for $100k for 2-3 years at less than 5% interest with no colateral and no personal guarantee and they wanted it now, despite their less than stellar credit.
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Government Screwing Small Business Owners, Part 1
June 25th, 2008
By The XBanker
It must be difficult living life as a politician; you have to pretend to look out for small businesses to win elections, while screwing them through acts of commission or omission the rest of the time. I usually try to ignore politics, I have better things to do – like creating jobs and making money (imagine that). Sometimes I get a bit upset when I hear a career politician talk about all the jobs they’ve created – as if they are the ones that father innovation and birth new ventures. Most of us would be on welfare if we ran our businesses like these clowns run the country.
Business owners are routinely tooled by the government. We are easy prey. We are too busy creating value to show-up at protests. We have better things to do. Which is why politicians typically cater to the unproductive (welfarees) or unproducing (retirees & students). I typically avoid these issues, but I think it is only fair to surface items that I think may impact you. So I’ve decided to start a new series to call-out politicians and bureaucrats that vilify, target or hurt small business owners. Don’t worry, I’m not some partisan hack. I trust politicians about as far as I can throw them, regardless of party.
Yesterday, I stumbled across a story in the Wall Street Journal about a proposed new bill in the Senate that I think we all should be concerned about. The Senate is proposing a bill that will require credit card companies to report business owner credit card spending data to the IRS. Why does the IRS need to see what your business spends at Kinkos next month? They hope to use this data to nab business owners who under-report their income. They hope to confiscate an additional $9.8 Billion from small business owners with this move. The money is already earmarked to further enrich and bail out the banking industry. This seems like a good trade for a politician – they criminalize small business owners so they can line the pockets of the mortgage companies that gave them sweetheart deals on their personal mortgages.
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Introducing RateSpeed – The Transparent Mortgage Search Engine
June 17th, 2008
By The XBanker
The mortgage industry just experienced an earthquake – 10.0 on the Richter scale! RateSpeed, the world’s first transparent mortgage search engine launched into Beta today. RateSpeed gives consumers direct access to the rates they actually qualify for – straight from the banks. You will not be able to find a lower rate than what you see on RateSpeed, because these rates are coming directly from the banks that brokers are using and the rates can’t be manipulated or marked up.
In the Finance Traps report, I discuss the concept of YSP or Yield Spread Premium. Whenever you have a brokerage model, one where an independent broker is packaging a loan or lease with a particular bank, you will encounter YSP. Banks will tell a broker what rate you qualify for, and if you elect to have a higher rate, the banks pay the broker more commissions on the loan. This rebate is called YSP. It was designed to help pay closing costs – so rather than pay your closing costs, you can take a slightly higher interest rate and use that rebate at closing. Unfortunately, most brokers don’t explain or even disclose YSP. Instead, they markup the rates that they show you – pocketing over $3 billion in YSP rebates each year. This gravy train just got derailed.
RateSpeed will do for mortgages what Travelocity did for travel. The mortgage finance world is about to change, as is expected when you offer consumers transparent pricing and access to once-privileged data. With RateSpeed you can enter your loan information, anonymously, and pull completely transparent mortgage rates. You can see exactly how much YSP you can use to offset your closing costs, and all the loan data that your broker sees. Progressive mortgage professionals will flock to RateSpeed, some out of necessity, others out of a desire to offer flat-fee mortgages, transparently. Go to www.ratespeed.com and search mortgage rates today.
Small Business Owners On the Frontlines of Credit Crunch
June 16th, 2008
By The XBanker
While the sagging housing market has been garnering most of the attention lately, the challenges small business owners face should not be overlooked.
The credit crunch is only likely to get worse, predicts economist Joseph E. Stiglitz in a recent article in Inc. magazine titled, Raising prices amid a sputtering economy? We’ve been here before. Here’s how businesses should prepare. (June, 2008 pp. 75-76). He also warns that “…small businesses are likely to feel the pinch the most.”
“Credit availability appears to be erratic,” says Stiglitz. If you are looking to for VC money or a bank loan, that may well be the case, as The XBanker recently pointed out in his advice for getting cash fast. On the other hand, many vendors are eager to keep selling their goods and services, and may be willing to negotiate even better terms than before, especially if you can demonstrate that you’re a good credit risk.
Take action now to prepare for the worst — and the best. Things will turn around again, and when they do, your business may look very different than it does right now. If you are doing the same thing you’ve always done, don’t be surprised when that strategy no longer works. On the other hand, there may never be a better time for your business to grow.
“Stagflationary times are complicated,” warns the economist. But business owners encounter challenges all the time.
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Are You Entering The Danger Zone?
June 13th, 2008
By The XBanker
Sales are up…things look good, right?
Wrong! warns Jerry Mills CPA in his terrific book, The Danger Zone: Lost in the Growth Transition which I read on a flight to San Francisco last week. I had met Jerry a couple of weeks earlier at a conference in Baltimore, and would be seeing him again, so I knew it was time to learn more about his business.
The Danger Zone proved to be a deceptively easy read (Jerry tells me his second book is even better). I say “deceptive” because the writing style and content kept me engaged throughout the whole book. No CPA-style knuckle-wrapping here. Just solid insight and advice. But the advice he shares should not to be taken lightly. Ignore it, and your business may crash and burn like so many others have.
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