Tag Archives | funding

Taking Credit Cards for Business: Good or Bad?

taking credit cards for businessPeople, myself included, are generally more hesitant with taking credit cards for business on anything major… and I don’t blame them! There’s typically a 2% charge on sales. However, if you use your credit cards the correct way, it may be worth considering. To save you time and risk, here’s a few things that we learned from using a credit card in a business, and maybe you can, too.

Benefits of Taking Credit Cards

Why are credit cards useful in your company? Credit cards serve several purposes. At The Strategic CFO, we only cut a few checks per month due to the power of credit cards. Our accounting is automated, we experience a boost in productivity, and depending on your business, you might even free up enough liquidity to take advantage of discounts on payables.

Experience a Boost in Productivity

Daily sales outstanding (DSO) is a calculation used by a company to estimate their average collection period. The higher the DSO, the more problematic for a company because your liquidity is tied up in receivables. For example, let’s say you’re a plumber and your average DSO is 45 days. By accepting credit cards as payment, you could potentially reduce your average DSO from 45 days to 15 days… maybe less than that! An extra 30 days’ worth of liquidity can drastically improve a company. If a company averages sales of $2,000 a day, that’s almost $60,000 in your pocket earlier than it would have been! So what will you do with that extra cash? Now, you can pay off bills, invest the money, or take advantage of discounts on payables.

Take discounts on your payables

Certain vendors provide a discount on payables if you pay early. 2/10 net 30 is a popular discount given on payables. Specifically, you can get a 2 percent discount for a payment to a vendor in 10 days, or pay the full amount in 30 days with no discount. This reflects well on your supplier-consumer relationship, because the sooner you have your cash, the sooner they have their cash.

They’re a Good Source of Funding

It is recommended that you use a credit card when you need less than $50,000 and you cannot get a bank loan. One of the biggest benefits of having a credit card is that it is a flexible source of funding. You can buy as little or as much as you need, but only have to pay back a small amount monthly. Used responsibly, it can help establish your business’s credit as well making that next loan a little easier to get.

Dell

One of the best examples of how accepting credit cards can be a game-changer is Dell Computers. Back in 1984, when computer sales were gradually taking credit cards in businesspicking up pace, Michael Dell operated a computer-building business in his dorm room. He was funded $1,000, but how was he supposed to fund the rest? He strategically used the credit card cash to cover the expenses. Dell would take orders over the phone, gather the credit card information from the clients, and then make the computers. As a result, his cash conversion cycle was negative! This is one of many success stories for businesses who use credit cards as a source of funding.

This is one of many ways you can increase and optimize your cash flow. Read the rest in our free guide: 25 Ways to Improve Cash Flow!

Consequences of Credit Card Usage

So we’ve highlighted the benefits of taking credit cards, but be wary. Credit cards are still not universally accepted due to a few reasons. Not all businesses can take credit cards; in fact, some might have to pay more fees than others to even accept them. Here are just a few more reasons why people should be careful when taking credit cards for business…

Businesses Need to Have Reasonable Gross Profit

Let’s say the bulk of your sales are via credit card. If you want to stay in business, your gross profit must be substantial enough to cover the credit card fees. In this case, certain industries should not accept credit cards.

General Contract Work

Contract work such as painters, plumbers, and music teachers make only 3-5% of gross profit. Taking 2% of sales with credit would be too much. That would mean waiting on the customer to receive majority of gross profit. This can affect every other aspect of your business… especially overhead.

Real Estate

Another example of an industry where credit cards don’t make sense is real estate. There tends to be a 10% net operating income within the industry. If you’re generating 10% net operating income, it will hurt your business to have 2% credit sales. Taking a 2% hit would cut the investment down by 20%, which is why you sometimes can’t pay large sums (like rent) with credit cards.

Credit card tactics aren’t the only way to improve cash flow. Check out 24 other ways with this whitepaper!

Some properties do accept credit cards, but those tend to be the higher-end properties. Like suppliers, the landlords usually pair the early payments with benefits like points or discount on rent.

Where’s My Money?

taking credit cards for businessAnd of course… waiting for customers to pay, and depending on the customers’ credit terms, is an issue with accepting credit cards. Credit cards come with all sorts of issues technologically that are out of your control. If credit cards are canceled or stolen, that ultimately affects your automation system. Make sure you have a system in place when accepting a customer’s card, whether it be a contract or a secondary source of funding from the customer. Always be prepared for something to go sideways.

Conclusion

In conclusion, accepting credit cards in a business (no matter how big or small it is) is a risk. Then again, what new business decision doesn’t come with a risk? Like most decisions, it’s just a matter of preparation, research, and credibility. There are many contingencies associated with credit cards such as customer responsibility, and making sure your company generates enough gross profit. Conversely, there are benefits of taking credit cards such as discounts on your payables and a boost in productivity. Make sure to do your research, and be prepared for change.

Prepare yourself for change. Read our 25 Ways to Improve Cash Flow whitepaper and watch the company gradually grow with each step!

taking credit cards for business

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What Does A Lender Want To Know?

See Also:
Relationship with Your Lender
Finding the Right Lender
The Dilemma of Financing a Start-up Company
Every Business has a Funding Source, Few have a Lender
Required Rate of Return
Venture Capital

What Does A Lender Want To Know?

I had a conversation with a prospect that needed working capital funding. He asked, “What does a lender want to know?” I hear this from every prospect I meet with. So, I gave my normal answer, “We will need personal and business financial statements, a completed application, detailed information on accounts receivable and inventory, and that is just the beginning.” After leaving the prospect, I realized not only did I not answer his question, but also I have never totally answered that question. I now know, the prospect is really asking me what information the lender is looking for so he can get the money.

When I answered this question in the past, I just gave a list of requirements and never explained why they were important to the lending decision process. This information is telling the company’s story to the lender. To start with, think of the financial statement you provide the lender as a score card. In the lender’s mind the more income you make the higher your score. As an example, the more runs a baseball team scores the more powerful the team is.

Tell Your Lender This

So after you tell the lender the score of your company, what else does a lender want to know? You should tell the lender about your company with the following information:

How much money do you want to borrow?

How much money do you want to borrow? The lender needs this information to determine the potential to loan you money.

Why do you want the money and how will it be used?

Why do you want the money and how will it be used? Think of this one as if your child or family member asked to borrow money from you. I believe you would want to know what they were going to do with the money.

What primary source will generate the funds to repay the loan?

Some ways the lender might expect you to repay the loan are; selling a building, producing a product and selling the inventory, or increasing the profits of your business to generate cash flow.

What is the secondary source of repayment?

Amazingly, lenders want to be repaid as you would if you were loaning money. So they consider such things for their repayment as liquidating equipment or injecting additional capital from personal funds.

How will the loan be secured?

How will the loan be secured (collateral)? The lender wants a security interest in whatever you are going to do with the money.

Who will guarantee the loan?

Who will guarantee the loan? From the lender’s point of view, you must be 100% sure of your ability to repay the loan. And, you must be willing to put your personal assets on the line. Otherwise, they would be risking their job by making a potentially bad loan.

The better you tell your story the better your chances are of getting the money.

If you want more tips on how to improve cash flow, then click here to access our 25 Ways to Improve Cash Flow whitepaper.

lender want to know
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Venture Capitalists Definition

See Also:
Why Venture Capital
The Dilemma of Financing a Start-up Company
Angel Investor
What is a Term Sheet
Working Capital

Venture Capitalists Definition

A venture capitalist is an investor who invests in risky startup businesses. The venture capital investor provides funding to an entrepreneur who may not have access to substantial bank loans or other sources of capital. Venture capitalists also invest in small companies that are expanding. They also invest in private companies planning to go public. They will often want to participate in the decision-making of the business in which they invest.

Venture Capital Investor

The venture capital investor may be one of the following:

Consider venture capital investing to be high risk and high yield. Additionally, the recipients of venture capital loans are typically small startup companies with great growth potential.

Venture Capital Funding

Venture capital funding is a source of private equity for startups, small expanding companies, and private companies that are planning to go public.

The startup business is usually at the earliest stages of development. In addition, it may be little more than an idea and a business plan. Because the startup enterprise has no record of success, the venture capital investment is considered risky. In return for the venture capital funding, the venture capitalist typically wants high returns on the loan as well as a stake in the equity of the startup company.

If the recipient is a small expanding company or a private company planning to go public, then they may not have access to substantial funding from commercial bank loans or capital markets. In any case, the venture capitalist can be a good source of funding when the business has few or no other alternatives.

Venture Capitalist Funds

Venture capital funds are pools of capital from various investors, such as wealthy individuals or investment banks. They are managed and invested in various startups or other risky enterprises. The funds seek investment opportunities with great growth potential. Consider the venture capital fund a high risk investment. As a result, investors expect to be compensated for the high risk with high yields. If you want to remove any potential destroyers risking your investment, then download the Top 10 Destroyers of Value whitepaper.

Venture Capitalist Funds, Venture Capital Investor, venture capitalists definition

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Venture Capital

See Also:
Every Business Has A Funding Source, Few Have A Lender
Don’t Tell Your Lender Everything
Due Diligence on Lenders
The Relationship With Your Lender
What Does A Lender Want To Know?

Venture Capital Definition

The Venture Capital definition is a funding source for start-up businesses or turnaround businesses. There is typically more risk associated with these types of investments, but high returns as well.

Venture Capital Meaning

The Venture Capital meaning is when a lender, usually a private equity group or high net worth individuals, provides financing for a new business, a business that needs cash for growth, or a company attempting to make a turnaround. Associated with these different business needs are the different stages of venture capital.

Seeding Stage

The first stage for the companies that are just starting up is known as the seeding stage.

Growth Stage

The next stage is the growth stage for those businesses that are not quite ready for an Initial Public Offering (IPO), but are in need of some financing to get them to that point. Often times venture capital firms provide the funding for these companies knowing that they are high risk. However, these lenders usually earn a high return as these companies go public. This is because the lenders receive large compensation in the form of equity in the company or a large cash settlement. If a company is in a turnaround stage this is the highest risk of venture capital.

Exit Stage

The exit strategy in this stage often go for a much higher cash option or equity stake than even the first and second stages of company development. This type of capital is often necessary because the companies in need of this financing are not large enough to obtain the capital from the markets in the quantity needed.

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venture capital, Venture Capital Definition, Venture Capital Meaning

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venture capital, Venture Capital Definition, Venture Capital Meaning

 

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Special Tax Bond

Special Tax Bond Definition

A Special Tax Bond is a bond, usually issued by a government entity. It uses a particular tax to pay off creditors.

Special Tax Bond Meaning

Local governments like cities or states normally use special tax bonds. A government entity will use a special tax bond for city or state management. Tax bond payments are usually imposed on the general population through a property tax or special income tax. This depends on the city or state. Once these payments are collected, they are sent off to creditors who provided funding for the particular job.

Special Tax Bond Example

For example, Middleland decided that it would like to build a large park in the middle of the city. Middleland thus decided to issue special tax bonds to gain financing for the project. They used the financing to accomplish the following:

  • Tear down older junky houses
  • Plant grass in the cleared out area
  • Build a running track as well as a new playground

As the land is being developed, Middleland imposes a special tax on the population in the form of extra property taxes. Once the city makes these collections, they are then sent to creditors to make coupon payments as well as principal when the project is all finished.

special tax bond

See Also:
Ad Valorem Tax
Direct Tax
Marginal Tax Rate
What is a Bond?
Coupon Rate Bond

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Mezzanine Financing

See Also:
External Sources of Cash
What Does A Lender Want To Know
Finding The Right Lender
Due Diligence on Lenders
Weighted Average Cost of Capital (WACC)

Mezzanine Financing

A mezzanine lender, provider of mezzanine financing, functions similar to a bank in terms of providing a source of capital for companies. They get their capital from private investors who look to make a profit off of the investments the mezzanine lenders make. Often times, the firm is structured as a limited partnership for tax purposes.

There comes a time in every company’s life cycle when the company and/or the entrepreneur need some more cash. Perhaps the company needs more working capital or some additional money to help fund an expansion. Or, maybe the entrepreneur feels that it’s time to reap the benefit of all those years of hard work. Whichever the case may be, the entrepreneur will be faced with many different financing options. An interesting and often over-looked option is that of bringing in a private equity partner in the form of mezzanine funding.


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Mezzanine Lenders

Mezzanine lenders are similar to banks … but they are not banks. The interest they charge is going to be higher than what commercial banks charge. Many entrepreneurs blench at the thought. But consider, other than maxing out your credit cards, what other alternatives do you have? Mezzanine lenders will charge you approximately what credit cards charge you. Their cost of capital ranges from the high teens to low twenties (18-23%). This may seem quite high, but if your enterprise is so risky that a bank will not touch it, then it is only fair that you reward someone for taking on this extra risk. Also, what bank would feel comfortable about an entrepreneur taking the bank’s money and pocketing it for personal gain? No bank would. Mezzanine lenders do.

Mezzanine lenders can also benefit the firm in other ways as well. They can help entrepreneurs upgrade their talent resources by finding professional management staff. They can help with finding better technology, placement with new customers or help you find sourcing alternatives. Remember, the best business partner is someone who brings more than just money to the table.

Financing typically comes in the form of either a loan and/or equity interest. Sometimes the debt is convertible into equity. Many people worry when they hear that their equity is compromised. This is actually not so. Mezzanine lenders are open to having their equity interest bought out. Think of it as a “pop” for taking on the risk.

Purpose of Mezzanine Financing / Mezzanine Capital

So, what is the purpose of mezzanine financing or mezzanine capital? First, let us consider a common business dilemma: 1) lack of working capital or 2) lack of funds for capital expansion. Entrepreneurs by nature are optimists and passionate people, especially when it comes to their companies. They want and need a financial partner that can grow with them. Typically, your first option of choice is your friendly, neighborhood commercial bank. There are several issues that one often encounters here:

1. Debt – Is your company too leveraged for the bank to accept?

2. Profitability – Is there enough profit to sustain the enterprise?

3. Cash Flow – Is your company generating enough cash to pay the bills?

4. Inventory – Are you turning it over fast enough?

5. Equity – Do you have enough skin in the game?

If your firm can pass the litmus test, then by all means you should go with your friendly, neighborhood commercial bank. They are typically your cheapest source of money.

Next, let us consider a more interesting question from the entrepreneur’s perspective. I’ve worked this long and hard. Don’t I deserve to be rewarded? Don’t I deserve to be a millionaire? If you don’t already have a million dollars in the bank, then the bank will probably be the first to tell you, “No.” So what’s a hard-working entrepreneur to do? Surprisingly, this issue is one that is faced by countless business owners as they face retirement or just want to “take some chips off the table” for security purposes.

The above cases represent typical situations where it makes sense to consider other financing options such as a Mezzanine Debt Financing.

Recapitalization Example

Below are some typical scenarios where you might want to consider working with a mezzanine lender:

1: Company needs capital infusion for either working capital or CAPEX.

2: Entrepreneur would like to buy out a partner.

3: Entrepreneur would like to “take some chips off the table” to provide security for his/her family.

4: Entrepreneur would like to pass along management to next generation.

5: Entrepreneur would like to share some equity with management staff and/or employees.

6: Entrepreneur would like help with selling the company to a strategic buyer at a good profit so s/he can retire.

Mezzanine Recapitalization: Conclusion

Entrepreneurs should consider mezzanine lenders a strategic financial resource. They many not always be your first choice, but they just might be your best choice. They have a higher cost of capital than banks. But, for the money, they provide a lot of strategic options to the entrepreneur that commercial banks could not be party to.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

mezzanine financing
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Preparing a Loan Package

See Also:
Can Factoring Be Better Than A Bank Loan?
Loan Term
Prepare an Investor Package
Good Budgeting Processes
What the Banker Wants You to Know
Does Your Management Team Understand the Financials?

Preparing a Loan Package

Knowing the process of preparing a loan package can be one of the most resourceful tools for business owners. Many feel loan package preparation is overwhelming and even frustrating if you are unsure of what to include in the loan package. Knowing the right time to apply for a loan to help grow or sustain your business is very important when planning your financial future; however it is only a part of the whole. The other piece of this puzzle is familiarizing oneself with the loan package requirements in order to secure the loan.

In the Lender’s Shoes

Before we consider the details of organizing a loan package, let’s put ourselves in the lender’s shoes. What would be some of the risk factors needing to be addressed before lending money to this particular borrower? This person will ultimately have to sell you on the idea that their business is worth investing in and the return on their investment is worth those risks.

After they have sold you on this idea, now it’s time to discuss the terms and conditions of the loan they are requesting. This is where the question of “how much” is answered and the repayment plan is offered.

Lastly, being that we are all so busy, time would probably be of the essence. Therefore, it would be very important for them to cut to the chase when convincing you that this investment you are making into their business is a win-win relationship for both parties. In short, in order to prepare a loan request, it is important to have a thorough presentation, but in the same manner getting to the point of the matter is essential.

Thus far, we have covered a general overview of preparing for a business loan. Now let’s get into some of the details of the documentation contained in the loan package.

Loan Package Template

1. Loan Request
2. Description of Company
3. Product and Services
4. Marketing Plan
5. Operational Plan
6. Management and Organization
7. Financial Plan
8. Appendixes

This template is the skeleton for the body of content needed when it comes to knowing how to organize a business loan package. It is an excellent guide regardless of the reason for the request. It does not matter where you are in the development of your company, be it start up, looking to expand, or wanting to improve on the sales and services. Seeking outside funding is a key part of that process. Answering the questions of “where do I go to get the money needed” or “when is the right time to apply for a loan” serves as a non-issue with most owners or CEO’s. However, the answer to the question of “how do I prepare a loan package” is not as obvious.

Loan Request Outline

The loan request outline included in this article will definitely get you started and moving forward on the right track. However, keep in mind the three main points:

1. Sell your Company
2. Discuss the Payback Plan
3. Time is of the Essence

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

Preparing a Loan Package
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Preparing a Loan Package

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