Tips to Direct Public Offerings

Ever since the Jumpstart Our Business Startups Act (JOBS Act) was signed into law in 2012, there’s been a great deal of buzz about Title III, the final provision of the law to be implemented. This so-called “equity crowdfunding” measure would open new pathways for small businesses to raise capital from nonaccredited investors. On Oct. 30, the U.S. Securities and Exchange Commission (SEC) approved the final rules for Title III, signaling that the long wait for equity crowdfunding would soon be over.

But the public’s anticipation of Title III belies the reality that it is already possible to raise capital from nonaccredited investors. By using certain federal securities exemptions — referred to generally as direct public offerings (DPOs) — businesses (and, in some cases, nonprofits and cooperatives) can employ a number of cost-effective strategies that allow them to directly appeal to potential investors, all the while tailoring the terms of the offering to their specific desires.

A direct public offering is the process of using a federal securities exemption to directly sell equity to virtually anyone. These offerings are approved by state regulators, so the rules vary a bit depending on each state’s relevant statutes.

“It’s a very flexible strategy,” Brian Beckon, vice president of Cutting Edge Capital, told Business News Daily. “[The terms of the offering] are really up to the entrepreneur. This is what’s great about a DPO; you don’t have a negotiated investment. What the regulators approve is the offering, which is non-negotiable and exactly what the entrepreneur wants.”

Investors can choose to buy in or opt out based on those established terms, but the issuer remains in the driver’s seat every step of the way. Beckon’s firm advises clients on the steps involved in undergoing a DPO, from reviewing financials and preparing documentation to attaining approval from regulators. Once regulators in the state where the offering will take place grant a permit, all that’s left to do is pitch to potential investors, with the aim of accumulating capital.

Know More About Business Lenders

When consumers apply for credit cards or loans, their credit scores are often the single most important factors in deciding whether their applications are approved. But what about when you’re applying for a business loan?

While business lenders will certainly take your personal credit into consideration, it’s far from the only factor they will consider. Ted Peters, chairman and CEO of the Bluestone Financial Institutions Fund, outlined what is known as the five “C’s of credit” that commercial lenders look at to make a credit decision.

Cash flow. Lenders look at your historical and projected cash flow, as well as your sales numbers, to determine your ability to pay them back in a timely manner.

Collateral. Depending on the strength of your cash flow, banks may look at your current assets — mortgage, working capital, inventory, etc. — to see if anything can be used as collateral to secure your loan, should you have trouble paying it back. [First Small Business Loan? 7 Things to Consider]

(Business) Credit. In addition to your personal credit and payment history, lenders will check if your business entity has established any past credit, including on-time bill payment for any B2B services. Many lenders use reports from business data company Dun & Bradstreet to access this information, Peters said.

Character. Your overall character and reputation in the community matter to the people taking responsibility for funding your business. This is part of the reason lenders will set up an in-person meeting to discuss your application and credit needs.

“Lenders meet with people [to] look them in the eye [and determine], ‘Is this someone we trust and want to do business with?'” Peters said.

Capacity. Peters noted that this is typically the least important factor in a credit decision, but lenders still want to know the capacity your business has to grow. A local ice cream franchise, for instance, has a limited capacity to boost sales, but a global e-commerce or tech business could grow exponentially in just a few short years.

Choose The Right Service

Choosing a factoring service doesn’t have to be complicated. Here are three things to consider when selecting one for your business:

  1. What type of factoring does your business need?
  2. How much of your outstanding invoices do you need funded and when do you need it?
  3. How much are you willing to pay?

We will help you answer these questions below, but if you already know what you need and just want to see our recommendations for the best factoring service, visit our best picks page.

The first step to choosing the right factoring service for your business is figuring out which type of factoring you actually need. For instance, do you need a factoring service that covers all of your outstanding invoices upfront, or will a partial payment suffice? Do you prefer to keep receiving payments from customers, or will you hand collections over to the factoring company? And do you want to be held responsible to the factoring company if customers don’t pay? These are just some of the considerations we’ll cover below.

First, to help you better understand the many different types of factoring, here is an explanation of how factoring works, followed by a breakdown of the most common factoring services.

How factoring works

Factoring is an alternative method of financing that allows business owners to sell their invoices, or accounts receivable, to a third party, the “factor.” Factoring helps to fuel growth by providing the funds necessary to keep businesses going while waiting for customers to pay for outstanding invoices.

Here’s how factoring works in real life:

EcoNuts, an organic soap nut retailer that appeared on Season 4 of ABC’s “Shark Tank,” was unable to secure an investment deal, but still had a large purchase order from a major retailer on the line. The company opted to work with factoring company BlueVine to successfully fill the order. [See Related Story: BlueVine Review: Best Bad Credit Factoring Service]

“When [EcoNuts] came to us, they were limited by their working capital they had on hand to meet that demand,” said Edward Castaño, vice president of marketing at BlueVine. “They had so many outstanding invoices from TJX [parent company of TJMaxx, Marshalls, HomeGoods and the Sierra Trading Post], that it made it hard for them to fulfill orders.”

According to Castaño, EcoNuts didn’t have the cash to purchase the supplies and cover the salaries to fill the new orders, which put their growth trajectory at risk.

“[EcoNuts] used our invoice financing solution to unlock the cash trapped in their invoices to fulfill new orders and maintain their growth trajectory,” he said.

How the owner increase the financial of business

While small business owners acknowledge that there are some downsides to increasing wages for their entry-level workers, many of these business owners also find positives in doing so, new research finds.

Nearly 60 percent of small business owners said they favor raising the minimum wage, and the same percentage said they would likely vote for a state or national candidate who supports a minimum-wage increase, according to a study from Manta, a provider of products, services and educational resources for small businesses.

The results were released as both California and New York recently approved measures to gradually increase their minimum wages to $15 per hour.

The majority of small businesses surveyed are already paying their employees above what’s required. The research revealed that 40 percent of small business owners pay entry-level employees “far above” the required minimum wages in their areas of operation, while 38 percent pay “slightly above” the minimum wage. Just 14 percent are paying the state or local minimums, and only 9 percent are paying the federal minimum wage of $7.25 per hour.

“Many small business owners feel that paying above minimum wage is vital to staying competitive in their industry,” John Swanciger, CEO of Manta, told Business News Daily. “From a talent-acquisition and employee-retention standpoint, providing attractive compensation packages can help owners hire qualified individuals who will ultimately help grow their business.”

While nearly 30 percent of small business owners said a minimum-wage increase would have no impact on their operation, the requirement to pay employees more would require many businesses to make some changes.

Nearly 40 percent of those surveyed would have to charge more for their goods and services, 33 percent would need to reduce staffing levels, 27 percent would need to cut employee hours, 25 percent would be unable to expand their business or hire more employees, and 9 percent would need to cut their hours of operation.

Despite the negative effects, many small business owners still see the value of paying their employees more than the amount currently mandated.

“In tough markets especially, pay plays a large factor in recruitment and retention — so paying higher than the state or federal minimum is a huge plus, and one of the major pros of an increased minimum wage,” Swanciger said.

Additionally, raising the minimum wage will put more money into the hands of low-income individuals who will then have more expendable income for things like food, gas and housing, according to Swanciger.

“This boost in demand will stimulate the economy and create even more opportunity for small businesses,” he said.

Nonetheless, small business owners that are forced to raise wages will likely feel the pinch while they make the transition.

Tips to Getting Audited

With tax season at an end, many small businesses assume that the worst of their IRS filing worries is over. However, a handful of business owners still have one more battle to fight: the dreaded tax audit.

As stressful and overwhelming as an audit may seem, there’s no need to panic. It does need to be taken seriously, but sometimes, audits deal with simple data or reporting errors that the IRS suspects may have occurred, said Frank Pohl, an attorney at Gunster law firm.

If you do receive an audit notice, here’s what to do to make the process go as smoothly as possible, and to minimize any negative impact on your business.

1. Review the audit letter carefully.

Open the letter promptly, and understand what information the IRS needs from you, Pohl said. If you don’t have a designated financial adviser, hire an accountant or tax attorney to help you go through the audit letter and identify the issues the IRS has flagged. Pohl also warned not to delay action or ignore the letter.

“The IRS will not go away, and not acting promptly may only make the auditor suspicious or antagonistic,” he said.

For security purposes, if you are being audited, you will receive a mailed letter, Pohl said. Scammers will often masquerade as the IRS by sending emails or leaving phone messages in an attempt to get your personal data, but the real IRS does not communicate with taxpayers in these ways, Pohl said.

2. Get your records organized.

Before you and/or your tax professional meet with an IRS auditor, take the time to dig up and organize all of your business records from the past tax year, said Kimberly Foss, a certified financial planner (CFP); founder and president of Empyrion Wealth Management; and author of “Wealthy by Design” (Greenleaf Book Group Press, 2013). This includes receipts and invoices for income and expenses, bank statements and canceled checks, accounting books and ledgers, hard copies of tax-prep data, and leases or titles for business property, she said. If the IRS has requested specific documents to review, be sure you have those readily accessible as well.

3. Answer the auditor’s questions (and that’s it).

When you sit down with the auditor, you’ll be asked numerous questions about the information reported on your tax return. Our expert sources agreed that you should not volunteer any information you are not required to give.

“Just respond with the information [that is] requested,” Pohl told Business News Daily. “Providing unneeded or unasked-for information may lead to more questions … and additional issues.”

“Be straightforward in responding to questions, but don’t manufacture excuses,” Foss added.

Unsure of what you should and shouldn’t say? Sandy Gohlke, a CPA, chartered global management accountant and principal at Rehmann financial services company, advised giving the IRS a signed power-of-attorney agreement that will allow the IRS to deal directly with your tax professional.

“That takes you out of the loop and puts them in,” she said.

Pohl agreed, and said that even if your tax professional doesn’t have power of attorney, you should still have him or her present when you meet with an IRS auditor. He also advised business owners not to get defensive or hostile during the interview.

Do you need small loan for your business

If you’re looking for cash to fund business growth, odds are you’ll do it with a bank loan or a line of credit. But, especially for smaller businesses, merchant cash advances are another popular source of funds.

A 2015 Federal Reserve Bank of New York study found that, although loans and lines of credit are the most popular financing method among small businesses (57 and 52 percent, respectively), 7 percent had used merchant cash advances in the previous year. Smaller businesses were more likely to do this: 10 percent of microbusinesses (revenues below $100,000) took out merchant cash advances last year.

Either a loan or a cash advance may be a good choice, depending on how proceeds of the loan will be used.

“Loan purpose should drive the whole conversation,” said Ty Kiisel, head of financial education for OnDeck, an online provider of business loans. “That is going to tell you how much money you need and how much you can afford to spend for it.”

The mechanics of merchant cash advances

Although both financing methods involve receiving and repaying a sum of money, merchant cash advances are not the same as loans. Rather, the business receives an advance against its future credit card sales, and the provider draws money from the business’s future credit card transactions as repayment. Payments are made daily or sometimes weekly.

The repayment amount is based on a percentage of daily credit card sales called the holdback, which may range from 5 percent to 20 percent. For example, if a business does $10,000 in credit card sales, and the holdback is 10 percent, the repayment amount would be $1,000. The holdback percentage doesn’t change. However, the payment amount may vary depending on the volume of credit card transactions.

The cost of an advance, called the factor rate, is also a preset figure. Also called the buy rate, it is usually expressed as a figure such as 1.2 or 1.4. An advance with a factor rate of 1.3 means the business will repay $13,000 for every $10,000 advanced for a period of a year.

Comparing costs

The way merchant cash advances are priced can make it difficult to compare their cost with business loans. An advance charges all interest on the full amount up front, while a loan charges interest on a smaller amount each month as the principal is paid off. So a $30,000 charge for a $10,000 advance is not equal to a 30 percent annual percentage rate (APR) business loan. Instead it is closer to a 50 percent APR. With additional fees, the effective rate can go much higher.

Jared Hecht, co-founder and CEO of New York City-based Fundera, an online platform for matching businesses with loans and advances, says users of advances often don’t realize the true cost.

“We’ve seen customers who have taken out merchant cash advances and are paying an APR north of 150 percent and not even knowing it,” Hecht said.

Advances are short-term financing, and so are best suited for short-term for needs such as acquiring inventory. Most are designed to be repaid in six to 24 months. And unlike most loans, paying off a merchant cash advance early will not produce any savings. The factor rate is the same whether it takes the full intended term to pay back the advance or a shorter or longer time.

Because an advance does not require set monthly payments, a business will pay more when sales are good and less when sales are down. This can help to avoid cash crunches that might be more frequent with set monthly payments.

How to check the business tax for right

It is never too early to start thinking about your annual business taxes. Day-to-day decisions can have a significant impact on your overall tax obligations. Instead of being surprised at tax time, you should be planning throughout the year to make sure you’re ready.

“When a small business owner plans for tax season strategically and consistently throughout the year, they can create a much better financial outcome for their company,” Jamal Ayyad, vice president of service delivery for SurePayroll, said in a statement.

Regardless of the time of year, here are six “checkups” you can do to make sure you’re ready for your next tax deadline.

1. Ensure that ownership records and hiring/employment practices are up-to-date

In order to guarantee that your business is complying with guidelines that are constantly changing, plan regular reviews of documents and applicable rules, said Scott Augustine, a shareholder with Chamberlain Hrdlicka law firm.

2. Calculate your projected payroll taxes

Small businesses that are having trouble paying their payroll taxes may be able to take advantage of an IRS installment plan, Ayyad said. If you owe less than $25,000 in combined tax, penalties and interest, and filed all required returns, you may be eligible. Visit the IRS website for more details.

3. Do a compliance checkup

The Affordable Care Act, the IRS and the U.S. Department of Labor have rules regarding independent contractors or 1099 employees. Make sure your firm or organization operations are in compliance to avoid costly penalties and fees, Augustine said.

4. Keep up with your home state’s tax issues

Some states take loans from the federal government to meet unemployment benefits liabilities. Ayyad noted that if your state has taken, but not repaid those loans, there will be a reduction in the credit against the Federal Unemployment Tax Act tax rate. This means employers in those states will have to pay more. A number of states may be affected, including Arizona, Arkansas, California, Connecticut, Delaware, Indiana, Kentucky, New York, North Carolina, Ohio, Rhode Island and South Carolina, as well as the U.S. Virgin Islands.

5. Review non-competes and confidentiality agreements

This is especially important for those that have been written by attorneys outside your state of operation to avoid possible theft of important assets, Augustine said. As part of this, he also advised reassessing document-retention policies to make sure they balance exposure with business needs. This will help you avoid issues in tax matter and litigation, he said.

How to retirement for small business

unduhan-25Planning for retirement can be overwhelming and complicated. But because the average American will spend about two decades in retirement, it makes sense for small business owners to learn the basics about the various retirement plan options available to them.

Offering a company-sponsored retirement savings plan has benefits that extend beyond your own well-being. Considering that only 14 percent of small businesses offer any sort of retirement plan for their employees, you can distinguish your business and attract top talent by providing this incentive. Though certain types of plans do not require you to contribute to your employees’ retirement plans, if you choose to, you also will enjoy a range of tax benefits.

Whether you’re managing multiple employees or just work for yourself, there’s an affordable option out there that’s right for you. Here are the most common types of retirement plans available to small business owners and self-employed individuals.

While the IRS website tells you exactly what you need to know about the plans, your employees might not have any idea what it actually means. Meadows advised employers to “talk in regular words [and] take the complication out of it” when explaining the plan to your employees.

Don’t understand the plan yourself, or have questions about your contributions as an employer? Consider hiring a financial adviser with plenty of experience in the industry, Meadows said.

“The best financial advisers are the people who have already done it,” he added.

 

How to success on your business

When it comes to retirement savings, one of the most common and widely used plans is the 401(k). A 401(k) is part of a profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts to save money for retirement. The money is deducted from their paycheck and deposited directly into their 401(k) account. With the exception of a Roth 401(k), these plans are tax-deferred, which means federal or state taxes aren’t paid on earnings until the money is withdrawn.

Because the contributions don’t count toward the employee’s taxable income, the Internal Revenue Service sets limits on how much employees can contribute to a 401(k) plan each year. The limit for 2016 is $18,000, but can be adjusted in the future depending on cost of living.

Employers have the option to match, or make their own contributions to their employees’ 401(k) plans as an enticement for them to participate. The amount will vary with each company, but the company may offer to match between 25 and 100 percent, up to a certain percentage of the employee’s salary. The eligibility to participate also differs with each company, with some allowing employees to start contributing to a plan as soon as they are hired, and others requiring a waiting period of one month to a year.

Since the retirement industry forecasts changes years in advance, the trends in employer contribution and matching to employees’ 401(k) plans should not change in the immediate future, said Andrew Meadows, vice president of brand and culture at Ubiquity Retirement + Savings. He does add, however, that there are upcoming state mandates for small business retirement plans, such as payroll-deduction IRAs.

Types of 401(k) plans

A complete breakdown of 401(k) plans can be found on the IRS website, but the four most common types are:

  1. Traditional 401(k) plan. This is considered the most flexible of the plans and allows employees to make pretax contributions through payroll deductions.
  2. Safe Harbor 401(k) plan. This plan is similar to the traditional plan, except it mandates that employer contributions be vested as soon as they are made.
  3. Simple 401(k) plan. This plan can be offered only by businesses with fewer than 100 employees.
  4. Roth 401(k) plan. This plan is funded with post-tax income, so money saved  is not subject to any federal or state taxes as long as the investor reaches the age of 59 and a half before withdrawal.

 

Is a 401(k) plan right for your business?

You may think your business is too small for a 401(k) plan, but these plans aren’t only for big companies. Meadows noted that this is a common misconception, and said small business owners have a few main reasons for being hesitant about implementing a 401(k):

  • Having a 401(k) plan would affect the success of the business if they already don’t have enough money to run the business.
  • The plans are really complicated and usually involve a lot of jargon.
  • It is expensive. There are fees involved such as managing fees and investment fees that aren’t usually presented at first.

While the IRS website tells you exactly what you need to know about the plans, your employees might not have any idea what it actually means. Meadows advised employers to “talk in regular words [and] take the complication out of it” when explaining the plan to your employees.

Don’t understand the plan yourself, or have questions about your contributions as an employer? Consider hiring a financial adviser with plenty of experience in the industry, Meadows said.

“The best financial advisers are the people who have already done it,” he added.

How to grow up your business

When applying for a small business loan, your credit score is a major factor in determining whether you get approved. So entrepreneurs with bad credit can benefit from taking steps to boost their business’ ratings.

According to Experian, one of the United States’ three credit-reporting agencies, a credit score is a number that lenders use to help decide how likely it is that a loan would be repaid on time. In addition to the role these numbers play in the approval process, credit scores are also used to set the interest rates on the loans that lenders do pass out.

It is important to note that a business’s credit score is different from a personal credit score. According to BusinessLoans.com, a personal credit score is a reflection of how someone repays their mortgage, auto loans, or other personal obligations, while a business credit score reflects how a business owner meets their company’s financial obligations. While the two scores are different, lenders can look at both when deciding whether to approve a loan.

“Having a positive business-credit profile is extremely important because it presents a current, objective picture of how a business manages its financial obligations,” Brian Ward, vice president for Experian’s Business Information Services, told Business News Daily. “A negative credit profile can lead to higher interest rates, difficulty in securing loans and potential problems with suppliers, but a positive business credit profile can help save your business money by enabling the business to secure the best possible rates and terms.”

Recent research shows that most business owners are in the dark when it comes to their credit scores. A study from Manta and Nav revealed that 72 percent of small business owners don’t know what their credit score is and nearly 60 percent don’t know where to find their credit score.