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How Cash (Or Lack Of It) Kills Businesses

There is a reason why the International Reporting Standards require corporations to create cash flow statements: many businesses have crashed due to cash flow problems, usually those in their early stages.

Cash flow mirrors a company’s health,  which makes cash flow statements a required document for all businesses. 

Studies show that 9 out of 10 failed small businesses have shut down due to poor handling of their cash flow. While the formula for cash flow management looks simple – it can be challenging to make sure that money comes in more quickly than it goes out. Thus, we see a high rate of business failures related to cash flow issues.

Cash flow explained

Companies have three kinds of cash flows. These are investing, operating, and financing. One way of measuring cash flow health is free cash flow.

Free cash flow is the amount of operating cash flow created over the needed cash for vital expenses like those for capital spending.

One of management’s responsibilities is to pay attention to the time difference between cash collection from customers coming from a sale and when cash has to be spent to pay suppliers and other costs. If there is a wide time discrepancy between these two events, then that signals a cash flow problem.

While monthly cash flow analysis is critical, a business’ management team that is spending their time worrying about cash flow issues can get distracted from making long-term strategic decisions that are critical to their business’ success.  The difference here is attention spent on short-term versus long-term thinking, but both are important. 

How cash flow deficits ruin early-phase businesses

To further understand how problems with cash flow arise and how they ruin companies, let’s take a look at how startups work. For this article, let’s take a simple business model of a coffee shop as an example.

An entrepreneur needs to rent a space to build their store. This will take cash; either owner equity, or borrowing. If the entrepreneur has no access to funds, then the business will never take off and the business idea dies.

Next is the inventory.  Since a coffee shop cannot operate without supplies, much of the time businesses pay on credit, usually for 30 days. If you are the business owner in this situation, you have just 30 days to generate enough money to pay your suppliers.

Now, the owner needs to hire and pay salaries. There will also be bills to pay, and the owner needs to set aside money for marketing costs. These are all expenses to be dealt with and the business has not even started operating yet!

The solution, of course, is to get plenty of customers as soon as they open so they can pay off all the people they owe money to. Those that do not generate enough sales die in less than a year of operations.

Cash flow problems are a fact of life for all startup businesses, so careful planning is very important.

Operating, financing, and investing

We separate cash flows into three categories to make reporting simpler.

Operating activities, as its name suggests, are functional requirements for the business to run. These include things like collecting payments from customers, paying salaries and utilities, taxes, and loans.

Financing activities mean borrowing money or inviting new investors to participate in the business. Cash outflows in financing activities include paying off loans and paying dividends.

Investing activities involve investing in the operating capacity of the company. This includes things like buying new equipment or purchasing a building.

Tips on how to avoid cash flow problems

1. Profitable businesses also have cash flow problems

Profitability does not necessarily equate to cash and a viable business may still be in danger due to cash flow problems. Lowering your expenses can help free up some cash.

2. Do not forget to forecast regularly

Forecast as regularly as you can because it can help you deduce your future cash situation. Also, forecasting can help you prevent any surprises and diminish any risks before it is too late.

3. Businesses do not realize revenues until expenses are paid

Even if your monthly budget is balanced, you will still have a cash flow problem if your clients have yet to pay before the due date of your monthly bills.

4. Suspend your loan payments

Lenders are lenient, so you may be able to negotiate with them regarding payment of loans. Your lender will most likely consider a loan payment suspension or partial payment rather than receiving no payment at all.

5. Plan for emergencies

Emergencies and unexpected expenses like natural calamities, illness, and so on, and can affect your revenues. Be prepared for these eventualities, by having business insurance, emergency funds, and business continuity plans.

6. Learn how to be an effective collector

For many businesses, especially small ones, late-paying clients are a big problem. Studies show that only fifty percent of clients pay on time, and sixty-four percent of small businesses say clients do not pay for at least 60 days.

The key here is to search for ways to invoice promptly, setting reminders to clients, and collect as soon as the due date comes.

7. Understand seasonality

Seasonality in business can greatly affect cash flow. If the products or services you are offering are seasonal, you should assess trends closely and determine the highs and lows so you can manage your inventory and hire accordingly.

Bottom line

To prevent any cash flow problems from happening, analyze the operating, investing, and financing cash flows in your business. Devote some time figuring out your operations and the time lags associated with collecting cash and paying your bills. Also, recall that many profitable organizations have died an untimely death because they did not handle their cash flow accordingly.

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Underwriting: All You Need To Know

Underwriting is the system through which a person or business takes on financial risk for a fee. Typically, this risk involves investments, loans, insurance, or real estate. It is called underwriting because risk-takers literally write their name under the amount of risk they are willing to take on for the agreed-upon fee.

Over time, the process has evolved and the process is much different, but underwriting remains a major function in investing.

Real estate investors need to understand the process of underwriting that all lenders use. Does real estate underwriting influence the entire process of getting a mortgage? How long does it take? What exactly is real estate underwriting?

How does underwriting work?

Underwriters research and assess the extent of risk each applicant or entity brings in before taking on that risk.

Exercising due diligence allows for fair lending rates for loans, provides the right premiums to sufficiently cover the real cost of insuring policyholders, and establishes new markets for securities by pricing investment risks accurately.

Risk is the number one factor in all underwriting. If an underwriter sees that the risk is too high, he or she may refuse coverage.

For loans, the underwriter evaluates whether the borrower will be able to pay back or not the mortgage as agreed on. With insurance, the risk involves the possibility that policyholders will file claims too soon. As for securities, the underwriter assesses the profitability of the investment.

Underwriters assess loans, especially mortgages, to find out if the borrower will pay at the specified time with the specified amount and that the applicant has adequate collateral in case of default. 

Features of underwriting real estate

Underwriting in real estate is similar to that of other industries. But, it does have some other features not present in other sectors. Real estate underwriters do need to have a good understanding of the market, and they need to cover a wider scope of analysis.

Also, they not only need to assess the applicant’s ability to pay, but they also have to evaluate the property itself. Below are the basic elements of the real estate investment underwriting process.

  1. Cash flow projections

The initial step for underwriters is to estimate the cash flow that the income property will generate. This step is crucial because it provides the lender with information on the investment’s capacity to service the debt.

The lender will look at different metrics like the gross income and net operating income. If they see that the property will provide positive cash flow, then it is highly likely that they will approve the loan.

  1. Estimation of potential ROI

The next thing they do is to forecast the possible return on investment of the property. To do this, just divide the net operating income by the appraised value or sale price of the property. This will allow the lender to ascertain the cap rate of the investment property.

  1. Reviewing the borrower’s credit history

This step is just as vital as any step in this process. Here are the things lenders look at when reviewing a borrower’s credit history.

  • Payment history
  • Credit use history
  • Amount of outstanding debt
  • Track record of responsible use of credit
  • Debt-to-income ratio

If the lender is satisfied with the applicant’s credit history, they may assign the applicant a credit rating. Borrowers with a poor credit history will be rejected.

  1. Reviewing the asset involved.

Here are some of the most important questions about the property that underwriters need to find answers to.

  • Is the property in a good location?
  • Is the purchase price below market value?
  • Is the property in good condition?
  • If the property needs rehabilitation, how much will it cost?
  • How long will the project take to finish?
  • What is the exit strategy?

How to maximize your chances of loan approval

If you wish to apply for a loan, you have to make sure your application is organized. Here are some tips to increase your chances of getting a loan approved by underwriting.  

  1. Get ready to share all financial details with the lender.

The worst thing you can do is to hide your financial details from the lender. Lenders would naturally want to know your financial situation, so it is important to share your documents that show your income. Among these documents are income tax returns, certificates of employment, and pay stubs.

  1. Hire a professional to appraise your collateral

How much your collateral is worth is one of the major factors that influence the lender’s decision to approve the loan or not. It is therefore important to have a general understanding of mortgage lending and property appraisal. 

Always keep in mind that the underwriter works to protect his or her employers, so they will always set the terms that are favorable to them and not you. They typically issue a loan based on the loan to value ratio. Thus, appraising your property is a must before you apply for a loan.

  1. Submit all required documents

It seems common sense, but some borrowers forget to submit all required documents. Some loan applications get rejected due to incomplete documents. Take time to organize everything before applying for a loan. 

  1. Make a good first impression

Lenders tend to trust individuals who have strong personalities. Also, borrowers who have a clear business plan and can communicate it confidently will gain the lender’s trust. 

Other types of underwriting

  1. Insurance underwriting

Here, the focus is on the possible policyholder. Insurance underwriting evaluates the risk of insuring possible policyholders based on their health, lifestyle, age, family medical history, occupation, hobbies, and other factors determined by the underwriter. It can result in either an approval o rejection and set rates.

  1. Securities underwriting

Securities underwriting evaluates risks and the correct pricing of specific securities. It is usually related to an initial public offering. In this case, underwriters perform due diligence on behalf of a potential investor. The potential investor would buy the securities based on the results of this process.

Conclusion

Underwriting is an often-overlooked process because underwriters work behind the scenes.   The process varies by sector but ultimately is about accessing risk.  This process diminishes the risks of expensive defaults and allows lenders to give competitive rates to those borrowers who are less risky. In the investment realm, many platforms and brokerages do additional underwriting, digging into the details of an offer to give their clients more information and peace of mind in their investment choices. 

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Bankruptcy: Good or Bad?

There is a common notion that bankruptcy spells doom for companies who file. While it is true that only businesses and individuals who are in trouble file for bankruptcy, it does not exactly mean the end. It can instead be one option they take to make sure they survive.

Most people do not understand the whole concept of bankruptcy. It would be wise to know what filing for bankruptcy could mean for you and how it can help you get back to your feet, just in case. 

Is bankruptcy good or bad? Let’s find out.

I. What is bankruptcy?

According to Wikipedia, bankruptcy is a legal process wherein an individual or organization is no longer able to repay debts to lenders and has sought relief for some or all of their debts. Typically, a debtor initiates bankruptcy and a court order imposes it.

So if you or your business are being tormented by bill collectors, have enormous liabilities that you cannot pay back, are behind in your mortgage payments, and are near foreclosure, then declaring bankruptcy might be the solution to your problems.

Bankruptcy should not be confused with insolvency.

II. Bankruptcy types

There are six types of bankruptcy, but the most common ones are Chapters 7, 11, and 13. For this article, we will discuss only these three.

  1. Chapter 7

Chapter 7 controls the procedures in asset liquidation and permits liquidation of assets as payment for debts. A bankruptcy trustee liquidates nonexempt assets to pay lenders. When all the proceeds are spent, the unpaid debts are discharged.

There is a stipulation in Chapter 7 that outlines the order in which the borrower will pay the creditors. Unsecured debts are divided into categories, with each category having priority for payment. 

The trustee will oversee the payment of unsecured priority debts first. Some examples of this type of debt are child support, tax debts, and personal injury claims against the borrower if any.

There are also secured debts, which are debts that are secured by collateral. Collateral reduces the risk related to lending. 

Next, they pay secured debts. After all secured debts have been paid, they then pay nonpriority, unsecured debts with what is left of the funds after the assets are liquidated.

In case the funds are no longer sufficient to pay for the remaining debts, the debtor will still pay the debts but on a pro-rated basis.

  1. Chapter 13

The debtor is required to report all creditors and the amount of money owed to each one. The debtor is also expected to document all property owned, income information, and a detail of monthly expenses.

After all the lists, the debtor will agree on a monthly payment to an appointed bankruptcy trustee who will then consolidate all payments as well as the debts into a monthly amount. It is the job of the trustee then to distribute the funds to all the listed creditors. Debtors do not speak with the lenders under Chapter 13 protection.

There is a certain amount of debt required before a person can qualify for Chapter 13. For unsecured debts, the limit is $419,275, while for secured debt it is $1,257,850. Debtors are also required to take credit counseling as part of the requirements to qualify.

  1. Chapter 11

Chapter 11 bankruptcy is the most publicized of them all simply because it is mainly for businesses. It involves a restructuring of a debtor’s business, debts, and assets. 

Companies file for Chapter 11 bankruptcy if they need time to reorganize their debts. Chapter 11 can help give companies a new lease on life, though the terms depend on how the debtors would be able to fulfill its responsibilities under the plan of restructuring. 

Chapter 11 is the most complicated and most expensive of all types of bankruptcy proceedings. That is why a business should file for Chapter 11 only after exhausting other options and with a careful analysis of their situation.

A court will assist a company to reorganize its debts and obligations. Most of the time the company continues to operate. Many large U.S. corporations have filed for bankruptcy and have recovered. Some even became stronger than before they went bankrupt.

An individual may also file for Chapter 11, but it will take a long time and will be quite costly.

III. The Bankruptcy process

  1. Counseling and filling out forms

Those who wish to file for bankruptcy need to go through credit counseling. After counseling, the applicant is required to complete many forms to jumpstart the official proceedings.

The forms are very detailed. Filers need to give their personal information like finances, assets, income, creditors, and expenses. After filing, the creditors will be prevented from collecting their debt. This process is called an automatic stay. 

  1. Trustee appointment and meeting with creditors

The court handling the bankruptcy case will appoint an unbiased trustee to see through all of the proceedings. The trustee will study the assets and choose which ones to sell so that they can pay the creditors.

After liquidating the assets, the trustee would then set up a meeting with creditors to confirm the validity of finances and petition. This meeting is where the debtor and creditors meet to negotiate.

  1. Repayment of debt

The trustee reviews all the personal finances and assets of the debtor. The law assures that the debtor should still be able to maintain basic standards of living, so there are properties exempted from the liquidation process. Properties that are not exempted are seized and are up for liquidation. 

Exempt properties are different for each state. Most of the time, the debtor gets to keep his primary home, car, and personal belongings.

  1. Discharge of remaining debt

Under Chapter 7 bankruptcy, most debts are discharged. This will release the debtor from any obligation to pay. 

Child support, alimony, income taxes, federal student loans, and some government debts are not included in the discharge during bankruptcy. The U.S. Bankruptcy Code lists 19 categories of debt that are not allowed for discharge. 

Before discharge of remaining debt, the filer needs to take a debtor education course. This course will advise on money management and budgeting. The filer will get a certificate after the course, which is part of the requirements.

IV. Bankruptcy consequences

Both Chapter 7 and Chapter 13 bankruptcy have negative consequences.

Chapter 7 bankruptcy will be on your record for ten years. Chapter 13 bankruptcy, on the other hand, will remain on your record for seven years.

Declaring bankruptcy will make you look like a risk to businesses that would want to look at your credit score. These companies may include insurance companies, lenders, potential employers, and banks.

V. Alternatives

Bankruptcy may not be for everyone, and it may or may not be for you. Before filing for bankruptcy in case the need arises, consider other options first. If you are in financial woe, do not panic. Maybe you just need a few simple adjustments to remedy the situation.

You can go to your creditors and renegotiate your terms. Most creditors are willing to listen if you only ask. They would rather receive payment later or in part rather than not receiving anything at all.

For mortgage payments, you can try calling your loan servicer to find out what options you have. A forbearance, or stopping payments for a specific period, may be an option. A loan modification may be another, which would change the term of your loan permanently. 

Money owed to the IRS may be eligible for an offer in compromise. It will allow you to pay your debts with the IRS for an amount less than what you owe.

VI. Conclusion

Bankruptcy is a life-changing event. If you are considering bankruptcy, it means you are most probably dealing with complex financial problems.

Bankruptcy law serves to help people who have an unmanageable amount of debt through no fault of their own. They might have incurred large medical bills or other unexpected expenses. 

Bankruptcy allows both individuals and businesses to make a fresh start. But it is not a simple process and does not always lead to the desired result by the filer.

Before filing for bankruptcy, make sure to exhaust all other alternatives that would have lesser implications on your future. Keep in mind that once you file for bankruptcy, it will be on your records for years.

Another thing is that bankruptcy is highly preventable. By managing your finances carefully and paying bills on time, you would never even have to think about bankruptcy at all.

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Be Recession-Proof With These 5 Tips

The last time America was in a recession, banks were within 24 hours of shutting down, the stock market crashed, thousands of Americans were left homeless and unemployed, and many more lost their life’s savings. 

This year, we find ourselves in a similar situation, albeit under different circumstances. While the 2008 recession was probably caused by a string of human errors, this year was caused by lockdowns due to COVID-19. 

Our economy has been at the mercy of COVID-19 since March 2020, and we all knew back then that recession was imminent. Is there something we can do to protect ourselves from financial ruin?

Fortunately, we can. But to survive a recession, we must first understand what it is.

I. What is a recession?

A recession is defined as two consecutive quarters of negative growth in the economy. It is caused by numerous factors, like financial panics, economic shocks, swift changes in economic expectations, or a mix of all three. 

Businesses suffer during a recession simply because the demand for many products and services is lower. Also, there is uncertainty about the future. 

There is also a financial risk, risk of default, and bankruptcy.

Recession is a normal part of the economic cycle, and along with it can come real harm. It is important to note that while the economy will start to recover after a recession, it will not go back to its pre-recession levels, at least not in the near future. Individuals affected by a recession continue to struggle after the recession is over. For instance, unemployment rates in the past usually continued to rise even after the economy started growing. 

II. Can we predict a recession?

We cannot accurately predict a recession. If so, we would prevent it from happening. Fortunately, there are some warning signs that economists use to tell if a recession is coming. Here are the signs that a recession may be on the horizon.

  1. High unemployment rates

A high unemployment rate is an example of what economists call a lagging indicator. When more people are losing their jobs, their purchasing power decreases, creating a huge void in the economy.

  1. Inverted yield curve

An inverted yield curve points out the relationship between the yield of a short-term government bond and a long-term government bond. Under ordinary circumstances, the long-term yield will be greater. If the yield curve is inverted and the long-term yield is lower, that can warn economists of a lack of faith in the economy and that a recession may not be far behind.

It should be noted that an inverted yield curve has preceded every U.S. recession since 1970.

  1. Decline in manufacturing jobs

Low demand for manufactured goods can be a manifestation of diminished consumer spending. If factories cut employees or stop hiring new ones, that can mean reductions in other industries are next.

Other leading indicators are a contraction in the stock market, declining home prices, and a dearth of new small businesses.

III. Preparing for a recession

A recession is a part of the normal business cycle. It is an economic reality and there is no way to avoid it. There have been 13 recessions in the United States since the Great Depression, so that is more than 1 per decade on average.

According to the Motley Fool, millions of Americans still have not recovered from the Great Recession of 2008, and perhaps some never will. But there are ways to prepare for a recession, and here is what you can do.

  1. Pay off your debt

Many people ask if they should pay off their debt during a recession. The answer is yes! Give more importance to high-interest debt, and then keep your other debt to a minimum.

If you pay off your high-interest debt, you will reduce your monthly expenses. Thus, you will have more money for necessities and savings.

  1. Upskill

They say your best investment is in yourself. Try to learn new things and maybe add a new certification to boost your resume. Many people struggled to find work during and after the last recession. Employers cut costs by letting go of employees they feel they can do without and hire the ones possessing skills that they need.

  1. Set aside money for emergency savings

It is advisable to set aside at least 6 months’ worth of expenses for your savings. That would mean you will have enough money to pay for food, utilities, housing, and other financial obligations. 

Of course, building up emergency savings will take time. Once you reach your six months’ worth of savings, you can continue saving until you reach a one-year-savings goal. Your aim should be to keep on saving until you have enough for retirement.

  1. Build your portfolio

The stock market tends to drop during a recession, so it is best to build your portfolio for the long-term. Moreover, the market also tends to recover quickly too. 

Inexperienced investors tend to panic during a recession and sell their stocks or mutual funds expecting that their stocks will fall down the drain. Unfortunately for them, the stock market usually recovers quickly and as a result, they miss out on wonderful opportunities.

Wise investors take the “buy and hold” approach when investing in stocks. They are never in it for immediate gratification. Instead, they think 5 years ahead, some even 10 years. By thinking of the long-term, you would not be making the mistake of selling at the worst time.

  1. Plan to buy stocks during a recession

It may seem counterintuitive to the average person, but smart investors continue to buy even during a recession as it gives them the best opportunities for investing. You should find it useful to put aside some funds during strong economic times so you can invest accordingly during a recession.

IV. Conclusion

It is futile to attempt to predict a recession. Even the best economists are not able accurately predict its arrival. And no matter how much we try to avoid it, it will come. History tells us so. 

The hard truth is that we may lose money during a recession, so the best thing to do is to be prepared. Be calm and follow the advice above so that you will be better equipped than anyone in the face of a recession.

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COVID-19 Business Liability Protection: Is It Fair?

Last August, businesses across America began to reopen as lockdowns eased. And as they try to put their businesses back on track, business owners are struggling to figure out how to operate safely without endangering their employees and customers as COVID-19 lurks. 

Meanwhile, authorities are gearing up for a probable wave of COVID-related damage suits in the forthcoming months or even years. To curb the possible tide of lawsuits, some states have passed protection laws. Congress is also contemplating a federal directive.

Understandably, we cannot stay in our houses forever. Life must go on. But as we try to get some semblance of normalcy, the risk of getting the virus is still very real. While brick-and-mortar shops will be following the latest safety regulations, customers and employees will still be vulnerable. For that reason, new laws are being established in some states, and they call it COVID-19 Business Liability Protection.

I. Background

Throughout the country, some large companies are facing lawsuits filed by employees who claim they contracted the coronavirus due to employer negligence. 

Usually, states rarely find businesses liable for employee deaths related to the workplace, according to the Wall Street Journal. That is because it is hard to prove employer culpability and also because states often restrict such complaints to employee compensation systems.

But legal experts in the U.S. agree that the pandemic could change that trend as most of the lawsuits filed are focused on whether businesses followed the minimum health standards for battling the spread of the coronavirus. 

According to legal experts, businesses that failed to follow health standards could be liable in court for employees catching the virus. 

But wouldn’t that scare businesses from operating? Many business owners might find that it is not worth it to reopen their locations if a potential lawsuit could hang over their heads.

II. What is COVID-19 Business Liability Protection?

The lifting of restrictions across the country will see many businesses reopen. As operations begin, owners, employees, and customers are at risk of getting the coronavirus. At the same time, owners and operators of these businesses are also at risk for civil suits and claims as a result of exposing their employees and customers to the virus. They worry that what happened to some major retail chains might happen to them.

For the peace of mind of business owners and to keep the economy running, many states have passed COVID-19 business liability protection measures. Its main purpose is to protect businesses, schools, and other institutions from being liable as long as they are following approved safety guidelines. With such protections in place, future complainants would have to prove without a shadow of doubt the negligence of the business or institution in question.

III. How to protect your business against COVID-19 lawsuits

Congress is still contemplating their next moves as to how to protect everyone both from contracting the virus and getting sued. 

If you are running a business, here are a few things you can do to prevent costly COVID-19 -related lawsuits.

  1. Be familiar with your insurance policy.

Reread your business insurance policy carefully. You might find something there that may help with litigation costs. It may be easy to just call your insurance company, but not all of them act the same way. Some insurance companies may find loopholes and leave you hanging. Andrea Sager, a small business attorney, told Business.com that without a federal law, some small business owners who have insurance might not be covered at all.

  1. Implement CDC health guidelines.

States have different policies. Some do not require the wearing of face masks, nor are there any social distancing policies. Nonetheless, the Center for Disease Control has set guidelines that you can enforce. By doing so, you set yourself up to standards that can hold up in court.

  1. Do not reopen if it isn’t legal.

States have identified which types of businesses can reopen. If your business does not belong on the list, then you should stay closed. If you reopen illegally, then you can be arrested or get fined at the very least. Aside from that, if your business is sued for COVID-related damages, then you will surely lose. So check with local guidelines to find out if your business is allowed to reopen. 

  1. Keep your communication lines open to your employees and customers.

It is important to share information with your customers and employees when dealing with any safety precautions. Let everyone know that you require wearing of face masks and social distancing so they would not have any excuse for not following your rules.

IV. Liability protection established by some states

Some states have enforced some liability waivers that meet their specific requirements. As of August 2020, these states have already begun enforcing measures: Alabama, Arkansas, Georgia, North Carolina, Utah, and Wyoming. Those who have measures in the works are Arizona, Iowa, Louisiana, Minnesota, Mississippi, Ohio, Pennsylvania, New Jersey, New Mexico, New York, South Carolina, and Tennessee.

While provisions vary by state, there are some similarities in what the lawmakers for each state have implemented.

  1. It does not protect willful negligence

State governments did not include businesses that failed to comply with the established safety policies in this list. If proven guilty, no protection will be accorded to them.

  1. Retroactive protections

When COVID-19 first began to spread, there were no available tests yet. Due to that fact, some states have backdated their rules to January 1 while some opted to backdate theirs to mid-March only.

  1. Protections for healthcare providers

Some states have also made amendments to their policies that protect medical practitioners from potential litigation.

V. The case against COVID-19 liability protection

Timothy Lytton, in an article for USA Today, argues that COVID-19 liability protection is not the answer to this crisis. The most effective way to curb the virus is for businesses to know that potential lawsuits are waiting for them should they be careless about utilizing health safety measures in their businesses.

However, as we have pointed out earlier, willful negligence by businesses will not exempt them from possible lawsuits.

VI. Conclusion

Whether there are protections in place or not, businesses should take it upon themselves to protect their employees, customers, and themselves from the virus that has already claimed the lives of millions. It should never be the fear of being sued that should drive them toward precautions, but rather a sense of responsibility in keeping everyone safe. 

With that said, some form of protection from lawsuits will probably give business owners a gentle nudge to reopen. Our economy needs all the help it can get, and we expect small businesses to be at the forefront if our economy is to fully recover.

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Positive Financial News You May Have Missed During The Pandemic

We have been continuously inundated with so much negative news the whole of 2020 that we all need something to lift our spirits.  We get it! 

You may be thinking, where can we find positive news these days? Well, we do not have to look further than the United States economy, where economists see positive signs and a relatively brighter future ahead.

I. Positive economic signs amidst COVID-19

“Do not trust to hope; it has forsaken these lands.” – Eomer of the movie The Lord of The Rings.

We do know that the good guys will win towards the end of the LOTR trilogy, as all good guys do, but that quote encapsulates how everyone felt as they battled evil throughout the saga. 

Meanwhile, back on earth, people share the same sentiment, especially in the early stages of the pandemic. Everyone talks about job losses, financial losses, and – worst of all – death. 

But eight months into this lockdown, we are starting to see positive signs that can make us “trust to hope” once again. 

Here are some of the thighs that are making us look forward to the coming months.

  1. The construction machinery sub-sector is not as affected now as it was during the Great Recession.

The current crisis has affected different sectors in varying degrees. While many industries have been brought to their knees, one particular sector has fared better than others. 

The expected government infrastructure stimuli resulted in the construction machinery subsector being less-severely affected than during the Great Recession of 2008. Also, auto production saw a 107% jump in production in June 2020, which contributed to the partial resurgence in industrial production.

  1. New business applications were up in August 2020 and are on track to outpace recent years.

Business closures peaked in the spring while business formations were slow compared to its pre-crisis levels. 

But that may be a thing of the past. Recently, many new high-propensity businesses – or businesses that are likely to hire employees in the future – have filed for application. By August this year, there are already 56 more new applications compared to August 2019. It is worth noting that states that have heavy manufacturing bases rebounded the fastest.

The Economic Innovation Group provides us with a few explanations for this surprising increase.

  • There may have been a backlog in applications due to court closures during the lockdown;
  • Those who recently lost their jobs might be forming their own businesses; and
  • There may be some entrepreneurs who are taking advantage of new opportunities brought about by the pandemic.
  1. There is a demand for new kinds of products due to the pandemic

Demand for health products has risen, opening up new opportunities for many enterprising individuals who are out to take advantage of this boom. Consumers have also gone online for their purchases, so e-commerce sites have been making a killing, and we see it continuing for years to come. We also see high demand for delivery services as people refuse to leave their homes and instead are letting the goods come to them.

  1. Personal savings rate is at record levels

Spending among Americans fell sharply due to the pandemic, which is one of the causes of this recession. The bright side is that savings have increased. 

Savings rates for American households got a big boost from stimulus payments, which includes unemployment benefits and federal transfers to households. As a result, we see disposable income exceeding pre-pandemic levels. While some people spent their stimulus checks immediately after receiving them, many others decided to save the money. We will probably see more spending in the next few months as consumers become more comfortable with the situation.

II. The Brexit solution is almost here

For four years now, issues regarding Brexit have caused market turmoil. It may all come to an end soon with a solution backed by a new government.

Observers note that the benefit will come in the form of stability. Stability will provide UK businesses with an environment that would let them start working again without worries, and it will in turn help global growth.

III. The automotive industry is showing positive signs

According to a report by Experian, there were positive trends in the auto industry toward the end of Q2. 

April sales for new vehicles were down by 50.8%, while sales of used vehicles went down 54%. Sales of new and used vehicles improved in June, with new vehicle sales still down but only by 10.6%. Used vehicles, on the other hand, increased by .2% compared to last year.

Manufacturers have given consumers plenty of reasons to buy cars. They hope to recapture interest through incentives. 

So far, they have succeeded. According to Experian, customers with strong credit are taking advantage of manufacturer incentives, thereby boosting sales. 

Car loan amounts reached an average of $36,072, higher by $4,000 from last year. The increase in the amount seems to be driven by consumers who prefer more expensive full-sized pickups.

Despite the increase in loan amounts, lenders found ways to make monthly payments more affordable and extend the terms for lenders.

IV. Stocks rose in September

Investors are betting on an economic rebound, hoping that the worst effects of the pandemic are behind us. The S&P 500 index rose .5% while the Nasdaq composite climbed 1.2% in September. 

V. The consumer economy

Consumers have never really stopped spending despite a slowdown in the job market. Demand for essential goods remains almost the same. Observers feared that the expiration of the expanded federal unemployment benefits could impede the recovery, but this trend has allayed those fears.

VI. Conclusion

Many other positive stories are happening around the world. During this time of fear, new heroes were born: front-line workers who never reneged on their duties; ordinary citizens sharing what little they have with the less fortunate; and individuals wearing face masks to make sure the virus would not spread. Even many private companies are operating at a loss so they can make sure their employees survive financially. 

These are all positives for the general public, and hopefully, these stories will make us look forward to brighter days ahead.

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Funding My Business: Loans vs Equity

The most difficult part of starting a company is not the generation of ideas, founders have plenty of those, the struggle is capital and how to hit the ground running. 

To raise funds for your business, there are two types of financing options available to you: equity financing and debt financing. It does not have to be one or the other; a lot of companies use a mix of both.

These two financing options are distinct from each other and thus have their own set of pros and cons.

If you have an amazing business idea and need funds to jumpstart your business, or just want information so you can avoid committing common fundraising mistakes in the future, read on.

What is equity financing?

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When you decide to take the equity financing route, you are going to take on and be accountable to investors. In exchange for the money they contribute to your company, you give a portion of your company to them. If you decide to sell 5% of the company’s ownership, then the investor who buys it becomes the owner of 5% of your company. Of course, being a part-owner gives that investor the right to be part of some business decisions from moving forward, depending on how you structure the deal.

The beauty of equity financing is that you do not commit to paying back the money you raised through it. With equity financing, you can focus on growing your company by investing available capital since you are not burdened by having to repay investors on a set timeline. 

Types of equity financing

  1. Angel investors 

Angels are investors who have a substantial amount of money that they use to provide funds for startups. They are not associated with any financial institution and invest their own money, thus they set their criteria when looking for companies to fund. 

Angel investors simply look for founders who have innovative ideas and skills to boot. If your idea catches their fancy and they like you, then your chance of getting funded is high. Angel investors also provide mentorship since they are often highly experienced business executives themselves. 

  1. Venture capital

There are venture capital firms that can help you with your financial requirements. These companies provide funds in exchange for partial ownership of your company. VCs look for a high rate of return on their investments.

While angel investors use their own money, VCs use money pooled by several investors that are managed by a fund manager. 

  1. Initial Public Offering

An IPO is when you decide to go public, by offering stocks to the public for the first time. This can be done through a publicly-traded market like the New York Stock Exchange.

If you want to go public, you need to go to the Securities and Exchange Commission to have your IPO registered and approved. If you are approved, the SEC will give your business a listing date, which is the date when your shares will be available on the market you choose to trade on. The next step will be to attract investors by letting them know about your offering.

  1. Small Business Investment Companies (SBIC)

Small Business Investment Companies offer venture capital funding to small businesses. VC firms collect investors’ money and pool them so they can invest in startups.

  1. Equity crowdfunding

With equity crowdfunding, you sell the shares of your business to the crowd. You sell a part of your business’ ownership interest to investors through a crowdfunding platform. This way, your business can remain private, yet raise funds from the public.

  1. Royalty financing

Investors in royalty financing expect to be paid after you make a sale of your products. They get a percentage of the income received from your sales.

What is debt financing?

In debt financing, you borrow money from investors and you pay them back at a certain time frame with interest. Loans are the most common type of debt financing. There are three main forms of loan programs.

  • Installment loans. This type of loan has a set term of repayment. You will get a lump-sum upfront which you will pay back in monthly installments in equal amounts. 
  • Revolving loans. In revolving loans, you do not get a lump sum. Instead, financial institutions allow you to gain access to a revolving fund of credit. You can use this to get cash, repay it, and then do it all over again.
  • Cash flow loans. Here, you get a lump-sum from the lender. You pay back a cash flow loan while you earn the revenue you are using to procure the loan.

The advantage of getting a loan instead of equity financing is that you will never lose control of your company. However, unlike in equity financing wherein you are not obliged to pay your investors, you are expected to pay back your debts regardless of your business’ performance. It is also possible that you will have to pay back your debts using your own money.

Types of debt financing

  1. Bank loans

These loans are not only offered by banks, but by credit unions and other commercial lenders as well. Bank loans have stricter requirements as compared to other forms of debt financing.

The advantage of getting bank loans is that they typically have the lowest interest rates. If you pass their requirements, then this is often your best bet.

  1. SBA Loans

SBA loans are popular for their low-interest rates and favorable terms. Sometimes, they require collateral and can have lower requirements than those of bank loans. However, the application process takes more time.

  1. Business credit cards

Business credit cards are one form of revolving loan where there is no required minimum annual revenue. You are just given a revolving fund of credit, but they do charge high-interest rates. The trick here is that you pay the full amount each month so you do not have to pay interest.

  1. Business line of credit

This is another type of revolving loan that you can draw capital from each time you need it. There is a predetermined credit limit.

Business lines of credit are advisable for short-term financing needs. However, interest rates are higher than other forms of debt.

  1. Equipment financing

You can get financing for equipment that you will need for your business operations through equipment financing. The equipment that you bought using the loan will be your collateral, say a vehicle, or a network of computers.

  1. Merchant cash advance

Merchant cash advances are usually the last resort for businesses that do not qualify for other loans. Still, this may come in handy if you need short-term capital.  Interest rates are very high and repayment is expected quickly 

Conclusion

When choosing which form of financing to use, consider the consequences for both equity and debt financing. If you are fine with losing a part of your ownership of your company in exchange for capital, then you can go for equity financing. Remember that you are not obliged to pay back your investors if things go south, which makes equity financing attractive to some founders.

However, if you do not want to lose any shares of your business and can qualify and pay the interest, then debt financing may be your solution. 

Many companies, especially in the early stages fund their growth with a combination of equity financing and loans. 

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Sources of Funding for Each Stage of the Business Lifecycle

What do businesses and insects have in common? Not much really, except that both go through life cycle stages. Businesses need capital at many phases throughout their lifecycle and avenues to get funding vary greatly depending on where your company is along the journey.

Your Business Lifecycle

What do businesses and insects have in common? Not much really, except that both go through life cycle stages. Businesses need capital at many phases throughout their lifecycle and avenues to get funding vary greatly depending on where your company is along the journey. 

While businesses do not undergo metamorphosis as insects do, they do transition through several phases. These phases help owners determine how they should be running their companies. If you are just starting, your focus should be on exploring what customers need and want and then trying to capture them using data gathered from the research. More established businesses, on the other hand, focus more on maintaining their customers and getting new ones as well.

Of course, there are many other stages in between, and knowing what phase your business is in creates a big impact on your business strategies and operations. Around 90% of startups fail, and those failures are not due to bad luck but are often due to mistakes that could have been avoided.  Understanding where you are in the business lifecycle can help you stay on top of challenges and obstacles, as well as defy the odds.

The development or seed stage

At this stage, the founders only have the concept, vision, or idea. This is the time when you will have to test your ideas and see what works. Here, you need to research the industry, collect feedback from experts, customers, and even friends and family. This helps you find out whether your idea is feasible or not. If it is, then it will be worth pursuing. Since at this stage only you and your co-founders know about your ideas, it is often mostly self-funded. Other sources of funds are family and friends, or you can apply for government grants, loans, or dip into your lines of credit or credit cards.

The main challenge here is that since funds and time are limited, you should optimize the use of these resources for the best results. Your focus should be on matching skills and experience with the available opportunities.

Startup stage

Now that you know that the idea is viable, you can establish the business’ legal identity and initiate your startup. You need to know that, historically, the mistakes committed at the startup stage make a huge impact on the business in the years to come.

At the startup stage, you tweak your goods or services based on the feedback from your initial customers and the demand. Ultimately, you will know how to adjust your business model to increase sales and meet customer problems. Your focus should be on verifying your business cased models, building your customer base, gathering some testimonials, and building your niche.

Similar to the seed stage, funds are limited and will come from your pocket, family, friends, or government grants.

Growth stage

Now onto the fun part. You have made it past the seed and startup stages and are now in the growth stage. You should be generating a steady stream of income and getting new customers while looking forward to a slow and steady improvement in your profits. The profits should be able to help cover the operational expense as well as open up new doors for the company.

At this point, the business may be incurring either net losses or a small profit. The biggest challenge for you here is how to divide your time. Many things will start requiring your attention, including attending to customers and attracting new ones, facing your competitors, managing your operations, and dealing with your employees.

It is time to hire qualified talent with matching skill sets so that your business will fully realize its potential. As much as possible, you should be the one to handpick new hires during the recruitment process.

By now, you should be more comfortable in your role as the head of the company. Your team will be looking to you for guidance on how to take over the responsibilities that you previously handled yourself.

At this stage, sources of funds are banks, partnerships, grants, and profits.

Established stage

By this time, the business has become a successful company with loyal customers. Growth in sales is a bit more steady as you have now found your place in the market.

Despite the relative success you are experiencing, you must not let your guard down. The competition is fierce out there, and your competitors are always looking for your weaknesses. Keep your focus on the big picture, as several factors can abruptly end all that you have worked for. Competitors, economic fluctuations, and changing trends can all pose a threat. Your focus should be on improving your products and services.

Your funds can come from profits earned, financial institutions, investors, and government grants.

Expansion stage

In the expansion stage, life in the company will start feeling like a routine for you. Members of your staff are now able to handle the tasks you have delegated to them. The next logical step for you may be to expand.

Your business now enters new markets and stretches out to new locations. While this requires preparation and research, you already have the blueprint for rapid growth. 

Your focus when you are expanding should be on businesses that are similar to your existing one. A 10% market shift is often considered customary and the idea is to look at fringe cases and similar markets. Expanding to an altogether new area might prove disastrous. 

Sources of funds can be new investors, financial institutions, joint ventures, and partners. 

Decline

Most businesses do not stand the test of time. Sales, profits, and cash flow can decline. Your business may lose its competitive advantage and may soon enter its final stage. How long the company can stand will be your major challenge.  Evolving, using emerging technologies, and small shifts in your target market can make all the difference. 

At this stage, you may start looking for new opportunities. You will also start cutting costs to survive. 

The source of funds will be customers, suppliers, and yourself. 

Exit stage

Businesses do not last forever. There are two things you can do at this time: you can either sell or close it down for good. If you decide to sell, you should know the real value of your company and also that of the marketplace. 

Your focus now should be on proper valuation.

Wrap up

Sadly, 90% of startups fail in the early stages. Not all companies will experience each stage of the business lifecycle. Companies that do survive may experience them in different sequences and timelines.

Being aware of what stage you are in allows you to make more informed decisions and sound steps forward.  Also, knowing your current phase aids in predicting what is going to happen next so you can prepare your business and maximize your opportunities for success.

So what stage are you in?

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Mature Businesses Raising Capital; Why & How?

If only money poured like rain or grew on trees, raising capital would not be a problem. Any business owner will tell you that one of the biggest challenges they encounter is raising funds. The ideal situation is getting cash from profits, but sometimes this is not enough. Let’s delve into potential reasons mature businesses may need capital and how to raise it. 

Why do businesses seek funding?

Small firms, whether startups or mature ones, obtain money for four main reasons: to start a business, acquire inventory, grow a business, and build up the company’s economic foundation. Companies adopt various modes of financing depending on their purpose. Small businesses’ financing options often land into two classifications: debt and equity. Other unconventional sources can also play a strategic role in satisfying a firm’s financial demands. 

Most businesses, at some point in their existence, will eventually need to look for investors or more cash. When will that be for your business? Here is a checklist of when you may choose to raise capital.

  1. When an opportunity for growth presents itself

As an entrepreneur, you may have already encountered lots of people presenting business opportunities that promise you the sun and the moon. But once in a while, you will come across a real growth opportunity that you will not want to pass up. 

It could be an opportunity to expand your reach, or open new branches, or develop new products. Whatever it is, study your next move carefully. Will the benefits of raising capital in this situation outweigh the risk? If your answer is yes, then move forward strategically.

  1. When you need a little more help to keep your business going

Some businesses struggle to keep afloat in the first year or two, or during a down-turn in the market. They may lose money for a while before becoming profitable. Some experts advise setting aside capital that will cover up to 6 months of operating costs. But sometimes this will not suffice. This is when a secondary investor or a bank loan can help tide you over until your business makes positive revenue.

  1. When you need a helping hand

Many savvy investors have a wealth of experience that they are willing to share with the world. This could even be more valuable to you than the money they may lend. Whether we admit it or not, we do not have all the answers to handle some problems within our business. An investor’s money, as well as their advice, may prove helpful along the way.

Common forms of capital 

  1. Debt Capital

Businesses acquire debt capital intending to pay back the lender at a later time, normally with interest. This includes, but not limited to, personal loans, credit card debt, and bank loans.

  1. Equity Capital

Acquiring equity capital is brought about by a sale of a stock that is acquired from common or preferred shares. Equity capital is different from debt capital because you do not have to repay it. If you opt for equity capital, you are in effect selling a part of your company — called shares — to an investor. The investor will buy shares in the hopes of getting profit from them in the future. 

How mature firms can raise capital

  1. Crowdfunding

If you have a great product that you can pitch, then you can consider crowdfunding. One example here is the case of Formlabs. Formlabs is a company that manufactures affordable 3D printers. They were able to raise $3 million through crowdfunding. This allowed the company to expand its operations and to scale its manufacturing of low-cost printers.

With crowdfunding, you will be able to connect with people you would otherwise not have met who share your interests. You can also get helpful feedback about your product whether they are interested in investing or not. You will learn how to improve your product and how to present it better. And of course, crowdfunding can help you find that much-needed capital.

  1. Using profits

Mature firms can make use of their profits for expansion. Depending on your goals, you might be able to finance your venture by withdrawing money. The best thing about this is that you will not be owing anything to anyone.

  1. Apply for a loan

This is a very traditional way to raise capital. Still, it remains the most common method for most businesses to fund their ventures. The Small Business Administration reports that 75% of financing companies have leveraged funds from business loans, lines of credit, and credit cards.

To get approved, your business must be in operation for at least 2 years, have a good credit rating, and be generating income. Not all lenders are the same though, and some are stricter than others. If you get rejected by one, you can try another institution. 

  1. Sell shares

You can raise money by selling shares of your company. Investors can buy these shares, giving them partial ownership of the company. As the business grows, these investors will be able to share in the profits.

  1. Issue bonds

Another way of raising capital among mature companies is by issuing bonds. A bond is a loan between a venture capitalist and a company. The VC provides the business with a precise amount of cash for an allotted period in exchange for reimbursement at periodic intervals. 

Conclusion

As a business owner, you have plenty of options for getting funds for your business. If one option doesn’t work for you, you can move to the next one. Being persistent and resourceful is the key to success.  And don’t forget to ask for help along the way.  There are many platforms and businesses out there that specialize in aiding businesses to raise capital.

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HOW TO UNLEASH YOUR INNER DRAGON!

I recently took the time to learn how the so-called “dragons” invest after watching a few episodes of “Dragon’s Den” on BBC and decided to write about my experience. 

To be honest, I have always been a bit timid and indecisive as to how to choose the best investments. Since I started watching the series, I feel like I have grown more confident in my investment choices.  I am not sure that I can proclaim myself a “dragon” quite yet, but the tools I am learning are giving me more confidence in my choices and I may breathe fire yet!   I would love to share my 5 key takeaways with you.

Takeaway #1:  Invest through Crowdfunding

Crowdfunding has gone a long way from being a niche market and has now entered the mainstream.  More and more people are taking the plunge, because Crowdfunding has the potential to get your foot in the door, investing in new growth businesses.  If you choose the right company to invest in, and this company makes it big, you are in for a huge payday.  

Please note that we are talking about Crowdfunding for equity investments here, so instead of a fixed return, you would get an equity stake. 

Takeaway #2:  Peer-to-Peer Business Lending

What if you want a fixed or a more stable return from your investment, instead of an equity stake?   Then you may want to consider peer-to-peer business lending.

Recent years have shown us that consumer peer-to-peer platforms have seen quite a lot of success, and in essence, this is what many of the investment television series like Dragon´s Den, Shark Tank, and others are all about.   With this in mind, I decided to look into this avenue of investing much more closely.

Certain websites allow you to join other individuals who are also looking to lend money to small and medium-sized businesses.  According to Investopedia, there are websites like Peerform, LendingClub, Upstart, Prosper, and Funding Circle that you can check out.  

Takeaway #3: Trusting your Intuition

In an interview with Dragon investor Jenny Campbell with Seedrs.com, she mentions that when looking to invest in something, you should trust your instincts.  According to Jenny, “Don’t prolong things and start doing lots of due diligence and doing lots of ´umming’ and ‘ahhing’.  If it doesn’t feel right at the beginning, then it’s unlikely to turn around.”

Of course, this advice is wonderful for investors with sufficient experience.  But in this case, I have personally come to believe that she is correct, especially when it comes to that little voice of uncertainty in your head telling you that something does not feel right.  Listen to it!

Takeaway #4:  Do Not be Greedy

Greed is not just wanting to have money, fame, and possessions, but also caring too much about them.  

In business, once you have made a profit, you have to decide when is the time to get out or stay in.  If money is your only goal, there can be a tendency to allow greed to drive these decisions.  Investing in enterprises that you have genuine interest, knowledge, and passion about can be a fail-safe against this tendency and aid you in being smart with your timing.     If you are greedy, there is a chance that you will lose everything.

Takeaway #5:  Always Know that There are Risks  

It is important to take note that all investments entail risks and that it does not guarantee you any returns.  That is why it is always wise to invest only what you can afford to lose, even on an investment that feels like a sure thing.  Diversifying your investment portfolio is also a solid preventative strategy to mitigate risk.  When you do lose some, the key is to evaluate the situation and learn from mistakes for the future.  

 


Conclusion

So these are some of the tips and tricks I have learned in my ongoing mission to become a dragon investor.  We all need to understand that investing by design is a risky proposition.  Have you heard the expression, no risk – no reward?   In today’s global economy,  more and more individuals are willing to take these risks, rather than keeping their money in banks in hopes of higher returns for their hard-earned money.  Follow these principles, and I have confidence that you will soon be soaring with the dragons!