small business Archives - Page 2 of 3

January 26, 2016

Funding Your Small Business – All The Terrible Ways

In a recent post I mentioned that business owners may – among other benefits of entrepreneurship – achieve some tax savings. This week, inspired by my words, you’ve decided to hang a shingle.

However, you need money. But where can you get money for a small business?

Let me tell you all the great ways.

Inherit the money

I can’t recommend this highly enough. Your first $5.45 million of inherited money comes to you tax-free! Up from $5.43 million way back in 2015! And you don’t even have to work for it! Let’s make this happen, people!

Sadly, you need to be born into the right family, which is tricky to make happen on purpose. Also sadly, a beloved family member has to die at the right time. This is impractical for most of us. Let’s review the other great ways.

A bank loan

Naturally, you could simply walk into your bank and tell them about your great skills, customers, and market plan. Your friendly banker pulls your credit report and quickly understands your business plan. You’ll walk out with the money you need to grow and expand your small business. It’s so cool. This is the best way to get money for your small business.

Ha-ha. Just kidding. This is the worst way, because banks don’t actually lend money to new small businesses.

When you try this (Actually I don’t recommend trying this, but feel free to knock yourself out) your friendly banker will ask for two years of financial records and business tax returns. Then you try to tell him about your great skills, customers, and market. He will stubbornly return to your lack of two years’ financial records. Eventually you realize this is a dead end.

A friend or family loan

Let’s pretend your friend or family member (hereafter known as “framily”) has money, understands you, and wants to help. Your framily¹ doesn’t need to pull credit or make you wait for two years worth of business financials. Your framily lends you just the right amount of money, and she only asks for an affordable interest rate in return. Maybe best of all, when your small business succeeds wildly, by taking a loan you keep all the business ownership to yourself, so you can get rich without having to share that wealth with your framily. This is the very best sort of money for your small business.

No, wait, it’s totally not.

First of all, your small business faces very uncertain prospects in its first few years, at best a ‘feast or famine’ type of profitability. A fixed rate loan, with the obligation to make regular payments – every single month – invites disaster. Many months, especially in the beginning, you might find it impossible to pay your loan.

Which of course leads to the second issue of borrowing from your framily. Defaulting, or even asking to restructure a loan from framily will put grave stress on your closest relationships. In sum, never get a business loan from a friend or family member.

Equity investment

Well now, wait a minute, clearly the best way to raise money for your new small business is to approach your framily, and instead of getting a loan, you get a direct equity investment. You sell part ownership in your business. Your framily believes in you and is flexible and, unlike in the case of a loan – which requires fixed monthly and possibly unaffordable payments – you only need to share profits (eventually!) with your new co-owner(s). Clearly this is the very best way to raise money for your small business.

No, sorry, this is a terrible idea. Been there, done that.

In the best case, you’ve given up too much of your future profits to someone else.

In the more probable worst case (Remember, most small businesses fail in the first few years!) you have now lost the money of your closest relationships, in addition to losing your hopes, dreams, and income source.

In my own case, I lost the money of my best friend, mother, and eight-grade English teacher, among others. This isn’t fun. Be sure to budget in money for therapy, which isn’t cheap, either.

How about instead of friends and family, you raise equity from professional angel investors or venture capitalists? This may remove the therapy part of the equation if you fail, because we may feel less remorse after losing the money of professional investors. On the other hand, the professional investors will likely negotiate a better deal for themselves than would your framily. They are the shark at the poker table and you are the fish. So if you do well with your small business you’ve probably given up too much of your future profits.

Crowd-sourcing

I have not yet mentioned new-fangled techniques for raising money, such as crowd-sourcing.

Call me old school, but I have yet to hear of a legitimate for-profit business that effectively crowd-sourced money. I believe in crowd-sourcing as a great marketing tactic, and possibly great for non-profit or charitable projects as a result, but I don’t think it works for most small businesses.

My point

What’s my point in raising and then rejecting all of the available small-business financing options?

Simply this. It’s really, really hard to raise money for a small business. If you know a successful small business owner, give her a hug. She deserves it.

In an upcoming post – just so I don’t leave you bereft of hope – I’ll mention a few small business financing alternatives that you could try.

Please see related posts:

Entrepreneurship – Getting Started is the Hardest Part

Entrepreneurs: Pack Half The Luggage, Bring Twice The Money

Entrepreneurship And Its Discontents

Entrepreneurship Part I – Equity v Fixed Income

Entrepreneurship Part II – Lessons From Finance

Entrepreneurship Part III – The Air, The Taxes, The Retirement

Death (Estate) Taxes and Fairness

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After I wrote this I Googled ‘framily’ and found it’s a phrase used by Verizon to pitch their phone plans. Ugh. Really didn’t mean to be promoting them. ↩

January 18, 2016April 5, 2016

Tax Avoidance – All The Feelings

One thing worse than paying our taxes is the idea that other people avoid paying their fair share of taxes.

On the subject of tax avoidance by other people, I can think of at least three principal feelings. As the kids say, I feel all the feelings.

Outright tax fraud

People everywhere on the political spectrum can get angry about outright tax fraud, whether it’s hiding income in offshore accounts to avoid income taxes or shielding inheritances from estate taxes.

A new book by Gabriel Zucman The Hidden Wealth of Nations estimates the size of offshore wealth at $7.6 trillion worldwide, or 8 percent of global wealth. In the US, Zucman estimates $35 billion in lost tax revenue per year due to hidden assets. Meanwhile, governments worldwide lose up to $200 billion in annual revenue from hidden tax havens, with a significant burden of this $200 Billion in fraud falling on developing countries’ governments.

Wealthy folks hold financial assets principally in Switzerland, Luxembourg, and known tax havens such as Cyprus or a myriad of islands in the Caribbean.

One exception to my outrage, I suppose, is petty tax fraud such as when my barista fails to report to the IRS each and every dollar she removes from the tip jar at the end of the day. In that sense the minor scale of her tax fraud diminishes my outrage, as well as the fact that the barista isn’t herself wealthy. Also she supplies my drug of choice. Still, fraud is fraud, and it’s never cool.

Clever tax avoidance

My feelings slide from “outrage” over to the milder “envy” when I read about some billionaires’ strategies to legally avoid taxes, such as the strategies explained recently in the New York Times. In an article titled: “For The Wealthiest, A Private Tax System That Saves Them Billions” the authors describe leading hedge fund founders whose investments in Bermuda-based insurance companies reduce their tax bills.

Their ability to guide tax legislation through Congress and to finance presidential campaigns does stick in my craw quite a bit, and should offend those of us who still hold out hope for our democracy. On the other hand, most of the specific clever tax avoidance that the article describes can be described as the benefits of simply owning a business – albeit in their cases, big ones.

Now, of course, you could decide to hate the fat cat hedge fund guys who simultaneously write the rules on creating income tax loopholes and then nimbly leap through those holes to the tune of billions in annual savings. I think generating that outrage is the main point of the New York Times article, and I don’t blame you too much for feeling that way.

Alternatively, you could decide not to hate the player and just to hate the game. By that I mean, understand that a major part of the ‘scandal’ exposed by the article is simply the trick of turning ordinary (high tax-rate) income into long-term (lower-tax rate) capital gains. The other trick – and this is really simple – is to invest in a business that appreciates tremendously in value over a long period of time but that only gets taxed when you sell it. And then don’t ever sell it. Like, to take an example I recently wrote about, buying a stock and holding it for thirty years, or for forever.

Look, I don’t intimately know all their tax tricks, but hedge funders investing in offshore insurance companies mostly just extend this year’s short-term income (a nearly 40 percent tax rate this year) into long-term capital gains (a 20 percent tax rate, eventually). It’s legal. It’s clever. I’m envious, but I’m not particularly angry.

This is basically how Warren Buffett famously pays a lower tax rate than his secretary. When you read about Buffett or Facebook’s Mark Zuckerberg merely claiming the proverbial $1 per year in salary, you really shouldn’t be impressed with their admirable lack of avarice. Rather, you should note their tax savvy. They make their money through (tax-advantaged) business ownership rather than through (tax-disadvantaged) wages.

It’s an open debate – actually it’s not, but maybe should be? – whether labor ought to be taxed at a higher rate than capital, as it is today. But those are the rules. And remember the Golden Rule you learned in Kindergarten, “He who has the gold, rules.” So save your hate for the player and just hate the game.

Imitation: Own a Business

By the way, if you personally want to start to save money on taxes like a baller, you need to own your own business.

I’m not your accountant, and you really shouldn’t take tax advice from some blogger you found online. But you should set up your own business – like today – if you want to reduce your personal tax bill.

Will you use a cellphone and monthly internet service for your business? What about a computer for record-keeping? Or perhaps a car with your business logo on it? If you are in the 25 percent income tax bracket, and those are legitimate business expenses, all of these will cost you 25 percent less, in after-tax terms.

If the business you own happens to pay you annual profits in dividends, you might enjoy favorable income tax treatment, when compared to taxes on ordinary wages.

If you can control the timing of when you actually get paid by the business you own, you may realize considerable income tax savings through timing your income from one year to the next. If your business makes an expensive investment this year that happens to reduce your annual profit, you may end up paying little to no taxes this year, even as your business grows.

So, my journey from outrage, to envy, to imitation can be summed up as:

Workers of the World, Unite! Start up your business today! You have nothing to lose but your chains (And your top tax rates!)

Unfortunately, as Marx and others discovered with the Communist Revolution, this is easier said then done.

Frankly it’s pretty difficult to find money for starting up your small business.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Startup Finance – All The Terrible Ways

Getting Started – Entrepreneurship

Entrepreneurs: Pack Half the Stuff and Twice the Money

Entrepreneurship Part III – The Air, Taxes, Retirement

Entrepreneurs – Are you a touch funny in the head?

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October 23, 2015

Video – Intro To Business Budgeting

Here’s an introductory video we did for LiftFund, a not-for-profit business microlender, based in San Antonio, TX. ¹ LiftFund targets lending to small business owners who have otherwise not been able to get capital – or have already been turned down – from traditional banks. They offer not just loans but business training, financial education, and coaching. It’s a very cool mission that I feel good about being part of.

We did these videos for a site to be rolled out soon, called “LiftFund.” Everything’s free and meant to just get you as a first-time small business owner started with the basics of tracking your financials.

This video (and related ones to follow) walk you through the initial process of starting a small business budget.

I’ve occasionally posted other videos I’ve done for LiftFund, many of which walk you (as a small business owner) through the basics of building business financials on a spreadsheet. If you’re interested in sample spreadsheets, lots of these videos, and sample spreadsheets, are here.

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Clarification – LiftFund is a not-for-profit organization, the businesses they lend to are for-profit ↩

October 16, 2015October 16, 2015

Video – Instructions on Bank Reconciliation

Sometimes I help produce educational materials for LiftFund, a large business micro-lender based in my hometown.

This video is for small business owners who want to know what ‘Bank Reconciliation’ involves, and why and how you probably need to do it yourself as the business owner. Hint: Bank Reconciliation has nothing to do with confessing your sins to a Catholic priest through the sacrament of reconciliation.

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May 28, 2014May 28, 2014

Square’s Small Business Lending – Innovative?

A friend sent me a link this morning to an article about Square Capital’s small business cash advance business. The credit card processing company Square claims to use credit card receipts data to prompt it to advance money – within as quickly as 24 hours from the request – to existing small business customers, even before they ask.

My first reaction, of course, is that we should beware banks bearing gifts of “easy, fast” money. That’s the style of pay-day lenders and its never a good thing. I have received more than my fair share of business credit card solicitations in the mail, with high interest and hidden fees, to remain skeptical of this kind of innovation.

On the other hand, Square Capital’s money seemingly comes with

1. A 10% fixed fee (high, but a reasonable annual rate when it comes to small businesses);

2. Flexible payment terms. Merchants are expected to pay on their own time frame, out of ongoing credit card receivables;

3. No paperwork or waiting, which is pretty rare in the small business lending space.

For a certain type of high-growth small business customer, I can imagine the appeal of the Square Capital offer.

Although the article in Wired emphasizes the innovative aspect of Square’s use of Big Data to identify potential customers for their cash advance, the core of what they’re doing is really a version of “factoring,” the oldest type of commercial lending in the world. Instead of purchasing future receivables at a discount, Square will simply ‘factor’ the receivables by charging an extra 10% fee on top of the amount of repayment. While traditional factoring, or nouveau factoring like Square Capital isn’t particularly new, it can fill business’ need for fast money at a time of high growth.

Small businesses without deep pockets often have few choices about where to raise capital.

There’s the most expensive way: Selling equity to friends and relatives.

Then there’s the next most expensive way: High-interest credit card debt.

And then there’s the least expensive, but slow way: Apply for, and receive, a traditional bank loan. This rarely works.

I have claimed in the past (and still basically believe) that, despite their rhetoric, the vast majority of banks are not in the small business lending business at all. Banks would prefer to lend against real estate or cars because both types of loans can be offloaded from their balance sheet through securitization. All other types of loans have been effectively replaced by personal or business credit cards.

To the extent Square Capital can update an old lending model – factoring – with a new data-rich approach to get small businesses money quickly, the innovation sounds worth knowing about.

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December 12, 2013January 7, 2014

Excel Basics Introduction Video #6 – Autofill Function

This video, #6 in the series aimed at introducing Excel for small business, shows the autofill function, an extremely useful tool in Excel. Small business owners may find autofill saves a ton of time when tracking costs and revenues, making future business plans, and preparing for a loan.