Money Never Sleeps: Big money tips for small business owners
Welcome to Money Never Sleeps, a webinar designed to make sure YOU can get some sleep without always worrying about the finances of your growing small business – during this pandemic and afterward. Because small business owners are busy people, we’re going to move briskly today. If you have questions, we leave plenty of time – and of course, we’ll tell you how to connect with experts who can help you. Let’s get started.
First, let me introduce where I’m from and who I am. Consolidated Credit is one of the nation’s largest and oldest credit counseling agencies. Over the past 27 years, we’ve helped more than 6 million Americans get out of debt. That’s included many current and aspiring small business owners. We also provide educational resources to help you MAKE and SAVE money, which is why we’re here today. This is a scary time, but it’s important to know you’re not alone. Today, we’ll show you who your allies are.
Small business faces big challenges
Let’s take a moment to acknowledge all the pain out there. But let’s also frame today’s solutions. First, we’ll talk about getting the most out of the government programs available to you. Then we’ll discuss how you can run a leaner and meaner business, so you can preserve the resources you already have, both now and after life slowly returns to normal.
Small business administration
Here’s the worst-kept secret in small business relief: The federal government’s Small Business Administration has been offering money to get you through this shutdown. Some of it has been controversial, but almost all of it has been confusing. So let’s break it down in plain English and point you in the right direction.
Paycheck Protection Program
This is the one you’ve been reading about. The one where major employers like Shake Shack and the owner of Ruth Chris Steak House returned tens of millions of dollars in loans. The SBA has $249 billion set aside just for the Payroll Protection Program, but as you can see, it comes with restrictions. You can only use the loan for payroll, interest for mortgages, rent, and utilities, and three-fourths must go to payroll. You also must maintain existing salary and full-time employee levels. Do that for eight weeks, and the loans will be forgiven. Even if you don’t follow all these rules, you can still get loan payments deferred for six months.
Economic Injury Disaster Loan Advance
The name is dramatic, but this loan could provide you with a business-changing amount of money. Small businesses can now apply for a loan advance of up to $10,000 to provide relief for plunging revenues. The funds will be accessible within days of the application, and the loan advance doesn’t need to be repaid. Right now, this program has been frozen because it’s spent all its allocation, but it could return at any time. Congress is considering it.
Express Bridge Loan
Another program that expired but could return any time is called an Express Bridge Loan. It was done in mid-March, but we mention it here because, like we’ve been saying, Congress is still considering aid to small businesses, and this could easily come back. These kinds of loans might prove popular during a pandemic recovery, so keep your eyes open for news.
SBA Debt Relief
SBA isn’t just giving you loans – it’s also making it easier to pay them off, too. The SBA is automatically paying the principal, interest, and fees of current 7(a), 504 and microloans for six months. This perk will be available until Sep. 27. And if you have a current SBA Serviced Disaster Loan that was in “regular servicing” status as of March 1, you’re in luck, too. The SBA is giving automatic payment deferments until Dec. 31, although interest will still accrue. As of 2021, those who canceled automatic monthly payments will have to sign up for them again as well. To apply, contact your SBA lender.
You should have SBA.gov marked as a favorite in your browser. That’s where you’ll find out what you can apply for now, and you can learn when new funds will become available. It’s well worth a daily visit.
Other government help
The federal government isn’t the only one helping out small businesses. For example, Lakewood Ohio is giving $3,000 grants for rent payments. Hillsboro Oregon is giving $5,000 grants especially for bars and restaurants. And Iowa is giving up to $25,000 in sales and tax deferrals. Who knows what your city, county, or state are doing? Check out their websites now.
Know the SCORE
Finally, there’s SCORE, which a great resource in good times as well as bad Simply go to the website for SCORE, a nonprofit that was founded in 1964 as the “Service Corps of Retired Executives.” It was basically a bunch of thoughtful and smart retired business leaders giving back by mentoring new business owners. Now it’s just SCORE, much like KFC no longer stands for Kentucky Fried Chicken. Their job is to help YOU.
SCORE can’t give you cash relief, but they can help you with a marketing plan. That sounds like the last thing you need, doesn’t it? Marketing during a shutdown! But it’s important to keep whatever business you can, and to set you up for a strong return. As you can see from the ideas above, the best small business owners are using their forced time at home to keep a digital presence and to offer their customers emotional support as much as anything else. For the rest of this shutdown, think of your entire marketing plan as long-range.
Now let’s talk about what you can do to help yourself. Getting money from customers and relief programs is crucial, but so is keeping as much of it as you can. Let’s talk now about what you can do AFTER the shutdowns are over. Why? Because this WILL end, and life WILL get better. When that happens, solid and sound business practices will matter as much as ever.
If you don’t budget in your personal life, start now. I’m deadly serious about this – because there’s no way your business will survive, much less thrive, if you don’t make a budget and stick with it.
A business budget in 6 easy steps
A business budget is a little more complicated than a personal budget. If you don’t have a personal budget, you need one for the reasons we just mentioned. But it’s also good practice for making your business budget. You’re flexing some of the same muscles, so if you don’t have a personal budget, I urge you to consult Consolidated Credit’s website for easy-to-follow advice.
1. Add up your revenue
Once you’ve mastered the budgeting basics in your personal life, it’s easy to do a business budget. Let’s start at the beginning.
First, you add up your monthly revenue sources – and remember, we said revenue. Not profit. You want to include all the ways you make money before expenses are deducted.
Ideally, you’ve been in business for at least a few months, possibly a year. Why? Because you want to do this same calculation for several months, then take an average. Few businesses earn exactly the same each month, so coming up with a monthly average is important.
2. Subtract fixed costs
Now you want to do the same thing with your fixed costs, which is defined as any cost that doesn’t change with the output of your business. That includes line items like rent, taxes, and equipment. Depending on your business, you might have more or less fixed costs.
Sometimes, new small business owners confuse this term to mean, “Costs that I can’t negotiate.” That’s not true since you can obviously negotiate your rent. But these costs remain whether your business is doing well or poorly. So for example, if you leased a widget machine and business is slow, you’re still making payments on the widget machine.
Now you want to do the same thing with your fixed costs, which is defined as any cost that doesn’t change with the output of your business. That includes line items like rent, taxes, and equipment. Depending on your business, you might have more or less fixed costs.
3. Determine variable expenses
Obviously, variable expenses are the opposite of fixed expenses. Here we’re talking about things like wages, supplies, and utilities. Why are these variable? Let’s go back to the widget machine. You need to keep making payments on it, but if business is slow, you’re using it less, which means your electric bill is cheaper. You can also save on the wages of the widget machine operator.
Conversely, if business is booming, you might pay for an extra shift and run the widget machine night and day, driving up your wages and utilities but earning you more revenue.
In other words, variable costs can fluctuate with business activity. Just like you did with revenue, estimate these costs over a series of months. While most variable costs are monthly (like utilities), others can be charged quarterly or annually (like marketing costs).
4. Set aside a contingency fund
A contingency fund for a small business is like an emergency fund for a family. Here again, if you handle your personal finances according to established principles, you’ll find doing the same for your business will be a breeze.
If you don’t have an emergency fund, and more than a quarter of Americans don’t, you need to start one pronto. Again, Consolidated Credit can show you how. Just go to ConsolidatedCredit.org and search for “emergency fund.” No amount is too small to start with, and you’ll learn some principles of a contingency fund.
So what are those principles? Well, a contingency fund is all about “unforeseen circumstances.” Your personal emergency fund can cover the financial costs of a sudden illness or job loss. But for a small business, a contingency fund is often used for more than just emergencies.
For example, it can be used to replace that widget machine if it suddenly breaks down beyond all repair, or it can be used to upgrade the technology of the widget machine. So while you’d use the contingency fund if, say, a natural disaster damaged your office, you’d also use it to generally repair or improve your business.
The trick is to make sure you don’t dip into your contingency fund for typical business expenses. In other words, you don’t use this fund to cover your payroll. Your budget should already account for your fixed and variable expenses. We’re talking about big, one-time costs that either keep your business humming or can dramatically improve it.
5. Make a P&L statement
Now that you’ve created a monthly budget you can stick to, and a contingency plan for unexpected catastrophes and opportunities, time for a profit and loss statement. If you’ve done the previous steps well, a Profit & Loss statement, or P&L, is simply addition and subtraction. This is your actual budget.
Once you add up all your income and subtract all your expenses, you’re hopefully left with a positive number. If not, don’t panic. Many small businesses take awhile to become profitable, and they’re not always profitable every month. But if you have a negative number, make sure it’s not a deal-breaker or a heart-stopper. Otherwise, you might need to rethink your business model.
6. Create your projections
This is the strategic part of budgeting, and also the fun part. It requires more than just some basic math skills because once you have all your business numbers in one place, you can make big plans. What months do you conduct the most business? Which months are slow? What can you do to deftly handle the busy times? What can you do to boost business during the lulls? Now you can devise a real business strategy supported by hard data.
3 financial statements you need…
Now that you’ve done your budget, you have the tools to create three key financial statements. One you’ve just done. That’s the P&L. Along with that are two other documents.
A balance sheet is simply a financial snapshot of your business. It’s an equation that looks like this: your liabilities plus your equity equals all your assets. As the U.S. Small Business Administration says, “The two sides of the equation must equal out.” Confusing? Hold that thought for a moment.
A cash flow statement is simpler. This highlights how much money is coming in (called cash inflows) and going out (cash outflows, of course). Cash inflows include not only cash sales but also accounts receivables you collected and loans and other investments. Meanwhile, cash outflows include equipment you bought, expenses you paid, and your inventory.
Overcoming cash-flow problems
While solidly built budgets and financial statements are required to be truly successful, they can’t prevent the inevitable cash-flow problems many small businesses face at one time or another.
There are several common causes for cash-flow issues. First and foremost is the obvious: You’re not selling enough of your product or service. This doesn’t mean you’re business is failing. Many businesses have a slow season where they’re just scraping by.
Many businesses also have a collections conundrum: Sometimes your best or newest customers are late with their payments, and you need to decide how hard to push. Sadly, that often means pushing very hard, because those payments simply never come.
Finally, there’s a situation much more within your control: Your own expenses. Are you buying items you don’t need, or can you get items you do need for cheaper?
Fortunately, cash-flow problems have more solutions than they have causes. Some are easier to implement than others. Let’s review your options.
Seven ways to solve cash-flow problems
1. Have a “flash sale”
In the old days, you had a sale. These days, you can host a “flash sale.” These are defined as ultra-brief sales that you advertise mostly through social media. They typically last for only a day. If your financial statements are otherwise sound but you need a cash injection, a flash sale might be an easy way to do that quickly.
2. Hike your prices
This might seem to contradict the first point we just made. But if you’re sales are strong but you still have trouble with cash flow, it might be you’re charging too little for a valuable product or service. Experts who study pricing say you might lose your most price-conscious customers, but the majority will stick around if you’re business model is sound. And that will not only make up the difference, but it could establish you as a quality product or service worthy of paying a little more for.
3. Crack down on collections
Ask most small business owners, and they have at least one horror story about a client who owes them and pays late. Just like trying to figure out the perfect price, small business owners have to balance pushing their late payers without pushing them to their competitors.
If you need cash now, you need them to pay up. But you don’t have to harass them. Consider offering your customers incentives. If they pay early, perhaps they receive a 10 percent discount. Sure, you lose 10 percent, but you gain 90 percent. Do the math to make sure the tradeoff is worth the cost, but you might want to consider this carrot instead of just a stick.
4. Accelerate your invoicing
Many small businesses invoice all at once, on a single day of the month. It’s easier for a harried owner to set aside that one block of time. But it’s not always the best practice if you have a cash-flow problem. Instead, invoice immediately following the delivery of your goods or services. The sooner you send that invoice, the sooner you get paid.
5. Delay your payments to your vendors, or negotiate with them
While you’re trying to speed up your customer’s payments, try slowing down your own. Figure out how late you can go without incurring a late fee or the wrath of your best vendors. Coupled with speedier invoicing, this might cover your cash-flow discrepancies.
If not, you can always call your vendors and explain your situation. Trust me, you won’t be the first customer who’s told them they’re suffering a temporary cash-flow situation. For reliable and long-term customers, they’ll often cut you some slack.
6. Slash expenses
If following all these steps doesn’t help, time to look inward. You need to consider cutting costs. That could mean layoffs. It could mean selling assets that aren’t making you money. It could even mean selling equipment and leasing the same equipment, to free up money in the short term — even if it costs you in the long term.
7. Get a loan
Finally, you have the option of using other people’s money. From small business loans to small business credit cards to complex procedures with names like “invoice factoring,” there’s probably a financing solution that suits your situation and comfort level. Let’s start looking at those now.
The ins and outs of small business loans
Qualifying for a small business loan requires preparation, and there are so many variables, it’s difficult to spell them all out here. Whether it’s the amount of the loan, its length, or its interest rate, you really need to do your homework to make sure you get the best terms. So let’s cover the basics. And let’s start with SBA loans, which are backed by the federal government.
The U.S. Small Business Administration’s loan program has been a savior for many small businesses in this country. Think of SBA loans like federal student loans. In both cases, the government doesn’t actually lend you money. Instead, a bank gives you a loan, which the government backs. In both cases, this allows banks to take a bigger risk on someone than it might otherwise.
This is good news for a small business owner who might not qualify for a traditional bank loan. But of course, there’s a catch. A few, actually. First, there are several kinds of loans, all with unenlightening names like 7(a) and (CDC)504. Second, deciphering how to apply can be a chore. And third, most banks won’t issue one to a brand-new business.
SBA loans: where to start…
Unlike many other government agencies, the Small Business Administration has a website where you can shop for lenders and learn the crazy details. Check out sba.gov slash funding programs slash loans. Better yet, peruse the entire SBA site for helpful tips, and to get an understanding how the SBA works – and what it can do for you.
Traditional business loans: 5 steps to success
To land a traditional bank loan, you need to do many of the same things you’d do for a personal loan. For instance, focus on your credit score. For small businesses, that means checking with the three business credit bureaus: Experian, Equifax, and Dun & Bradstreet. If your score is high enough to apply for a loan, shop around – because just like a personal loan, banks offer many different products at different rates.
Once you’ve found one or more banks to target, assemble all your financial data – because they will ask. This includes everything from your articles of incorporation to your financial statements (which we just talked about). Include a resume showing your relevant business experience and your financial projections if you don’t have much of a financial history. Again, we recommend you consult SCORE or the SBA websites for more details on this. Ditto on writing your business plan.
While it’s true that many small businesses start without a business plan and can succeed, that’s often because of the sheer willpower of the owner. But if you want financing, you need that business plan, so lenders can gain some insight into what you plan to do with their money.
Finally, you need to list any collateral you have. Collateral is just a fancy word for assets, and that can include your widget machine, any real estate you own, and even your inventory — basically, anything the lender can seize and sell should you fail to make your payments. If you don’t have enough collateral, you probably won’t get the loan. If that happens, you still have some options. And that’s what we’ll discuss next.
Six alternatives to small business funding solutions
1. Finance your business with credit cards
This sounds like a recipe for disaster, doesn’t it? Who in their right mind would fund their business with credit cards? But there’s a method to the madness. The secret is to secure the right credit cards. There are several that offer zero-percent APR for up to 15 months, because they’re intentionally designed for small business owners with irregular cash flow.
Why would these cards forgo interest payments for so long? Because they want your business when you’re no longer a small business. The most popular cards are American Express Plum, Discover It Business, and Capital One Spark.
Obviously, there’s a dangerous side to these cards. If you don’t pay off your balances within the zero-percent time period, you’ll face steep interest rates. But if you’re looking for an easy way to generate cash flow, study this.
2. Lines of credit from OnDeck and Kabbage
What the heck are OnDeck and Kabbage? They’re the cutting edge in short-term financing. These are online companies that provide short-term funding through automated lending platforms. They’re competitors in this space, which is good — because it means more choice for you.
You can borrow between $2,000 and $500,000 in just one to three business days. To qualify for Kabbage, you need a minimum credit score of 560, at least one year in business and have annual revenue of at least $50,000. For OnDeck, you need to have been in business for at least one year, earn a minimum of $100,000 in annual revenue, have a personal credit score of 500 or better, and have had no personal bankruptcies within the past two years.
While it’s easier to get a loan through these platforms than from banks, you’ll pay more for the privilege. Check out their websites and do your research before applying.
3. Merchant cash advance (MCA)
Now we’re getting into even more dangerous territory. A merchant cash advance isn’t a loan, although it resembles one. It’s an advance on your future earnings. A lender basically gives you a sum of money and then recoups that advance by sharing in your percentage of your daily sales — plus, of course, steep interest. So the amount you repay fluctuates with your daily sales, which makes planning your payments nearly impossible.
So you can see already there are massive downsides to this. The upside? If you can’t qualify for more traditional financing, you can often get an MCA immediately.
4. Invoice factoring
In this variation, you don’t repay short-term loans with a percentage of your invoicing — you actually sell your invoices. A third party, called a “factor,” buys your accounts receivable for, say, 80 percent of their value. You get immediate cash, while the factor’s profit is the other 20 percent. The downsides here are obvious, starting with the fact that you no longer control your own collections process. The factor does. Two of the more popular factors are Fundbox and BlueVine, but there are others, each with their own peculiarities. So shop around.
Now we’re back on more familiar territory. Most folks have heard about crowdfunding sites like Go Fund me and Kickstarter, most likely for charitable causes. But those sites are even more popular for raising equity for business ventures. There are so many to explore that might suit your particular business, including Indiegogo and Kiva. If you have a compelling story or product, this is a low-risk way to raise money.
6. Personal loans
Finally, we end where many small business owners start. It’s common for new owners to finance their own businesses in the beginning. If their personal credit score and credit history are more established than their business’s, they can apply for a personal loan. You can often secure a better interest rate if you’ve done like we said in the beginning of this presentation: Improved your personal finances so you can focus on your business. Here’s a perfect example why that’s so important. You can access additional financing for traditional risk, instead of delving into MCA and factoring.
Small business loan scams
So far today, we’ve talked about all the productive things you can do to help your business thrive. Now let’s warn you about things NOT to do. There are many unsavory characters out there trying to separate your small business from its capital. They’ve devised a handful of clever schemes that you need to watch out for. Luckily, knowledge is power, so here’s how to identify those schemes – and avoid them.
1. Advance fee scams
This popular scam is typically aimed at not only small businesses but also individuals facing huge debts. It’s a simple premise: We’ll give your business access to low-cost loans – or we’ll personally help you settle your credit debt – and all you gotta do is pay us a small fee upfront.
It can be called an application fee or a processing fee or even a special one-time fee. But once you pay that fee, you receive nothing. It succeeds because these scammers throw around such big numbers – we’ll give you $100,000 in loans, we’ll settle $50,000 of your credit card debt – it would seem ludicrous they’d run off with your $100 or $500 up-front fee. But they deal in volume, so the more people they rip off quickly, the more they make.
Here’s what you need to know: NO REPUTABLE LENDER charges you an upfront fee. Neither does any reputable credit counseling agency. For example, Consolidated Credit never charges you upfront, and in fact, your debt analysis is free.
NEVER pay an upfront fee!
2. Peer lending scams
When you start a small business, scammers somehow find you online. You’ve probably received unsolicited emails like this: Get a low-interest-rate loans for up to $100K! Low credit score and bankruptcy, not a problem. All borrowers are eligible. Peer loans available, apply NOW!”
Those emails – which can also be found on Facebook Messenger and sites like Reddit and Craigslist – usually explain that they’re a “peer-to-peer lending platform.” And there are some legitimate ones out there, like Lending Club and Prosper. These are websites that gather thousands of small investors who can decide to buy a portion of a loan if they earn a good rate of return.
But these sites are phony, and if they don’t charge you an upfront fee, they ask you to fill out a form with all your personal information – which they’ll then use to steal your identity and run up big bills in your name.
NEVER reveal personal data until you thoroughly research who’s asking for it.
3. Funding kit scams
Here’s another kind of email you’re likely to get. It usually goes something like this…
“You have been selected to receive an INTEREST-FREE Government Grant. This Grant Kit could put thousands of dollars in your pocket. Many grants go unclaimed every year – because most people don’t know about these programs. Don’t let this happen to you!”
Basically, this scam plays upon your suspicion that securing a business loan is so complicated, there must be a shortcut. Maybe you’ve heard the federal government is somehow involved in small business loans. So yeah, this makes sense, right? But as we said earlier, the federal government backs SBA loans but doesn’t make them.
Never respond to such emails.
4. Broker scam
Here’s another email to ignore…
“Starting a small business? Need a Consultant or Agent to work for YOU? We can help! Best fees in the industry!”
Again, this plays upon your fear that you need to hire an expert to find you the best small business loans out there. And indeed, there are reputable loan brokers. But they seldom solicit you via email, and they never charge an upfront fee like these scammers are sure to do – and of course, they’ll also require all your personal info.
If you want to find a loan broker, consult your local SBA office or SCORE office for advice on how to do it the right way.
5. Investor scam
One more shady email…
“We have a potential investor lined up for your business. Over $1 million of funding, in your bank account within 24 hours! No need to give up ownership! Just send in your $1,000 transaction fee!”
So by now, you can recognize the variations on the theme. But this one is particularly alluring because it seems to answer all your prayers. But think it through. What investor is willing to put up their money for someone they’ve never even met? Resist the temptation and ignore these emails.
Small business success
I know we reviewed some depressing topics today, as well as some complicated ones. But if you heed this simple advice, you have all the tools you need to be successful. This is really the hardest part because you know your business and customers, and you work hard
So that’s it. Obviously, we’ve just scratched the surface here. Running a small business is a full-time job on top of a full-time life. So while Money Never Sleeps, we hope we’ve put your mind at rest and given you the tools to explore all your options. If you have questions, don’t hesitate to ask us. We’re here to help! Thank you so much for spending this time with us! Hope it was worth it!