Interest rates sure to rise this year

With interest rates sure to rise this year, is now the right time to borrow? If you’re going to need that money, you’d better think seriously about it.

 

You don’t need a crystal ball to conclude that interest rates will rise significantly in 2017. If you think your business will need money in the next 24 months, the time to borrow is now.

The price of money is going up. Way up. Since late 2008, our economy has lived in an “interest-rate fantasy world” where the cost of borrowing money was extremely cheap. Everyone from Joe Smith looking for a mortgage to Uncle Sam financing a deficit has been able to borrow money at historically low rates.

The price of money is going up. Way up.

It’s no coincidence that rates have been so low. A confluence of factors has led to this:

  • Over the past eight years, the Federal Reserve has maintained a policy to keep the target federal funds rate (FFR) at between 0.0 percent and 0.25 percent, the lowest ever. This interest rate sets the benchmark for all other interest rates in our economy. The lower the FFR, the cheaper the interest you’ll pay on your loan.
  • The Federal Reserve also implemented several rounds of quantitative easing, which means it purchased debt securities from banks for cash. This added trillions of dollars in available lending money. With the “supply” of money available to lend increasing, the price of lending that money went down.
  • Foreign investors have had limited options for parking trillions of dollars in cash in safe places. The European economic crisis that started with Greece in late 2009 spread to other countries in the region. Suddenly, lending money to European governments—or even having money in euros—was seen as risky. This led to hundreds of billions of dollars being transferred to the U.S., creating an even greater supply of money here.
  • The havoc caused by the housing and financial crises devastated consumer finances, cutting off people’s ability to qualify for loans and making businesses think twice about borrowing to expand. This led to a precipitous decline in the demand for money just as the supply was increasing tremendously.

A Change Of Pace

This year, however, has been marked by significant changes in the global economy and in U.S. economic policy, which started reversing its history of low interest rates.

Earlier this year, the Federal Reserve announced that it would begin tapering off and eventually cease its quantitative easing program. This will drastically reduce the amount of new capital available for lending. But as the supply of money goes down, lenders will be able to charge more.

Conditions in Europe have also improved significantly. As of the second quarter of 2016, Germany’s economy, the largest in the region, has been growing and is no longer in a recession. Surveys taken of business owners and executives across the region indicate they’re feeling optimistic about the future and plan to increase investments and hiring. These positive signs point to an overall stabilization of the European economy, making it a viable investment alternative to the U.S. once again. As a result, foreign investors have already begun taking money out of the U.S. and investing it in Europe, thus impacting the supply of money available for lending here.

China and Japan are dumping U.S. Treasury securities. Earlier last year, the two countries sold a net $40.8 billion worth of U.S. Treasuries. The U.S. owes nearly $2.4 trillion to these countries, so the sale is relatively small compared to their overall holdings, but relative to what the U.S. needs to borrow every month to keep paying its bills, it’s significant.

The reason they sold is precisely because they expect U.S. interest rates to go up. The price of a Treasury security goes down as interest rates go up. In order to avoid a drop in the price of their investments, these countries are trying to get out as much as they can as soon as they can. This presents a significant problem for the federal government. In order to make lending attractive to us, they’ll need to raise the interest rates they offer on the money borrowed, which will lead to a general rise in rates.

 

So after all of this is sitting on the sidelines as the cost and availability of money really making sense?

Business Credit Myths That Can Cost You Money

Business Credit Myths That Can Cost You Money

Start building your business credit the right way.

You know the adage: A little bit of knowledge can be a dangerous thing. That’s certainly true when it comes to credit, where a misstep can affect your credit scores for months or years, making it more difficult and expensive to get funding when you need it. And when it comes to business credit, many small business owners have little experience or frame of reference, making it easier to fall for bad advice.

Here are some common business credit myths that can trip up small business owners:

Myth: Building Business Credit is Just like Personal Credit

The overall process of building business credit is similar to that of building personal credit: Establish accounts with companies that report payment information, then pay on time and keep debt low. But there are some differences between the two you should know. One major difference is that payment information for business credit may be much more detailed than that of personal credit. Unlike personal credit, where payment history falls into 30-day buckets, if you pay a business account even a few days late, it may be reported as a late payment.

Myth: My Business Needs to be Two Years Old & Turning a Profit

While it’s true that many banks prefer to lend to successful businesses with at least two years of experience and solid financials, there is nothing stopping you from establishing a commercial credit history as soon as you start your business. And why wait? Similar to personal credit, an older credit history will be considered lower risk than a newer one, so the sooner you start, the better.

One easy way to get the ball rolling is to get a business credit card to use for your business purchases. Most business credit cards report to one or more commercial credit agencies; however, the application is usually evaluated using the owner’s personal credit scores. And personal income can also be used to help qualify. That means that if you have decent personal credit and sufficient income from a variety of sources, you can probably get a business credit card—even if your business is not yet profitable.

Myth: I Pay My Bills on Time So I Have Good Credit

Paying your bills on time is a great habit, but it only helps your credit history if those accounts are reported to business credit bureaus. Some lenders and vendors report to one or more of these agencies, but others do not report.

 

Myth: I Don’t Need to Borrow So I Don’t Need Credit

Your business credit information may be used to evaluate your business for a variety of opportunities beyond loans, such as working with new partner, a major retailer, or landing a government contract. It may be reviewed when you apply for business insurance.

You never know when your business credit reports will be reviewed, or when business credit scores will be used to make a crucial decision about your business. Establishing that credit rating before you need it will give you one less thing to worry about when opportunity comes knocking.

 

Setting all myths aside if you have questions ask your accountant or a lending professional for direction, that’s what they are there for.

Online Lending Means the Bank’s ‘No’ is Not the Last Word Any More

When many think of online lending, they think of loan sharks, payday loans, or scams. They define online lending by early products like MCAs (merchant cash advances) or short-term loans and write the industry off under the assumption that all products found online come with double- or even triple-digit annual percentage rates (APR).

But in recent years, the online lending industry has evolved, opening up lower-cost opportunities to small-business owners. As a business owner who could very well need capital to grow their business, you need to understand that online lending is no longer just MCAs.

In fact, online lending has changed the small-business lending game in a big way — giving more business owners access to credit than ever before. When four out of five small-business owners get denied funding by a bank, they can turn to a faster, more flexible, and more convenient online alternative.

But unlike what many believe, online business loans come in all shapes and sizes. There are loans beyond the expensive short-term loans and merchant cash advances.

Let’s take a look at just four examples of online loan types that are far more affordable than the industry’s pioneering products.

Longer term loans.

Surprised to see a traditional term loan here? You wouldn’t be alone — but in fact, many business owners can and do secure these classic loans online.

If you’re not familiar, a traditional term loan is probably what you think of when you imagine a loan: you’re given a predetermined amount of money and have to pay it back, plus interest, over a fixed period of time.

Traditional term loans found online usually fall between $25,000 and $500,000, with terms of one to five years and interest rates as low as 7 percent or as high as 30 percent. They can come with daily, weekly, or monthly payment schedules — it all depends on your business’s financial strength and your credit history.

Equipment financing and leasing.

The online lending industry helps business owners out with asset-based loans and leases, too. For the business owner in need of new machinery, equipment financing or leasing could be the solution.

A lender will use that piece of equipment you’re buying as collateral for the loan or lease, so your contract amount and term are tied to the price and expected lifetime of the asset. Interest rates fall between 7 percent and 30 percent and typically these loans or leases come with monthly repayments.

While it’s cheaper to buy equipment outright than pay interest on them, equipment financing prevents you from needing to save up — and waste time.

Invoice financing.

Another kind of asset-based loan, invoice financing lets you bridge the time gap between invoicing a customer and them paying you back. Yes, you can get invoice financing from an online lender… And they can even sync up with your accounting software to provide a seamless experience.

Most of the time, an invoice financing lender will upfront you 85 percent of the invoices you select, withholding the other 15 percent until your customer pays — and taking their fees directly from that cash. They’ll usually charge a set fee for the transaction (say, 3 percent) and then a set percent per week outstanding. You’re paying the cost for speed, access to capital, and ease of mind. This isn’t the only way invoice financing works, though: some lenders will upfront you 100 percent of your invoices and charge you fees for 12 weeks and that’s it (regardless if your customer has paid.) You can pay the advance back early without any penalty.

What the government can do to help small business.

Access to Capital for Small Businesses

The driver of capitalism is, of course, capital. So, it makes sense to make it easier for small businesses to obtain capital to aid in business expansion.

It is important that lenders behave responsibly and it helps to have some level of protection in place. But at the same time we need to make sure the loans that grease the engine of small business are still obtainable.

Step one would be taking an objective look at current regulations to ensure a balance and access to small business loans.

Consistent, Simplified Tax Codes

Business tax rates in the U.S. are among the highest in the world. The effective rate – taking into account various deductions – is 27.9%. We would foster a more competitive business climate with a lower rate.

But, perhaps more important than the actual rate is consistency from the government in how taxes and regulations are applied from one year to the next.

Investment is needed in capital equipment and R&D across a broad spectrum of businesses. But Schedule 179 and other depreciation rules seem to be moving targets from year-to-year.

The same holds true for R&D credits. Accountants don’t know from one year to the next how rules for depreciation will be applied. What is a deduction last year might not be a deduction today.

This is a challenge for any business that invests heavily in capital equipment and R&D. The fear of the unknown can deter investing in new technology or equipment. This hurts the business and suppliers who miss out on a sale.

The current tax code is riddled with similar examples. Consistency from one year to the next allows businesses to better plan their resources, make capital acquisitions and understand the tax implications.

A simplified longer-term commitment from taxing authorities would go a long way toward creating stability in capital equipment and R&D investments.

 

Workers Need Re-Training

President Trump’s announcement that Carrier was keeping 1,000 jobs here was a nice win for the U.S., Indiana and affected workers.

But this is more the exception than the rule. I like President Trump’s promises to bring back manufacturing jobs, however some of them simply aren’t coming back.

While the exodus of many manufacturing jobs can be traced to international trade deals, and of course cheap labor beyond our borders, many simply vanished because of robots, automated material handling systems and overall greater efficiencies in manufacturing

Frankly, Americans are manufacturing more than ever before, we’re simply more efficient and consequently can do more with less manpower.

Workers who have been displaced need retraining in burgeoning industries such as the high-tech, health-care sectors, and even the trades where job opportunities often go unfilled.

Providing federally funded job re-training programs for displaced employees and tax credits for companies that hire them is a win-win-win for people, companies and communities.

More Students Need STEM Training

My advice to college students: science, technology, engineering and math. Repeat over and over again. Then pick one and study hard. The majority of high paying jobs in the coming generation will predominantly revolve around STEM and we need to point as many people in this direction as possible.

We also need to recognize technology is advancing rapidly. It is difficult to keep pace. Imagine the changes a class of 2007 information-technology graduate has seen in the past 10 years.

Now, imagine as an employer keeping your team up to speed and investing in their continuing education, only to see the best and the brightest cherry-picked away. In essence, you just paid for your competitor’s talent pool. Kind of discouraging.

I would support a program where businesses receive tax credits for workers’ continuing education. That way, more companies will invest in ongoing education, as a society we will have a much more educated workforce and risk of training investment will be mitigated.

I know these aren’t all of the answers, but it would be a start.

Your Business Credit Score Can Impact Funding Terms

Good business credit can help you qualify for more credit at lower rates and have a positive effect on your repayment terms.

Lenders consider a number of factors before deciding whether to help fund your business needs. Amongst these factors, they may consider how well your business repays its debts. This is where a business credit score comes into play.

As a general rule, a higher business credit score indicates to lenders that your business is a more trustworthy borrower. If your business has solid scores, it will have a higher likelihood of getting approved for financing, it can help you access more credit at lower rates and have a positive effect on your repayment terms. Here are five ways having a good credit score can help you when applying for financing.

Higher Likelihood of Approval

Business owners with solid business credit scores have a greater chance of getting approved for financing. You might not know about this because, unlike personal credit, lenders aren’t required to notify you that they have made an inquiry into your business credit when you apply.

Businesses applying to the Small Business Administration’s (SBA) most popular loan, the 7(a) loan program, are required to go through a business credit pre-screen if applying for a loan of up to $350,000. This involves checking the business’s FICO, LiquidCredit, Small Business Scoring Service score, or FICO SBSS score. The FICO SBSS score ranges from 0 to 300, and the minimum score to pass the SBA’s pre-screen is currently 140. Most banks and 7(a) lenders, however, require a 160 or higher.

Lower Rates

Even a slightly lower annual percentage rate (APR) can make a huge difference in the cost of a business loan or line of credit, so having a good business credit score can help even if the effect on your loan interest rate is marginal.

Imagine a business with low credit scores qualifies for a $200,000 business loan with a 12-month repayment period at 20% APR. If that business had a credit score high enough to help shave just 2% off that APR, they’d save over $2,000 on the total cost of the loan.

 

Better Repayment Terms

Obtaining a good business credit score before applying for business financing is particularly important for businesses that struggle to maintain a consistent monthly cash flow, because some lenders will offer longer repayment periods to businesses that can show they successfully repay their debts.

Let’s take our $200,000, 12-month term loan example from above. If the credit score of the business in question was good enough to help it qualify for a longer repayment term on that loan, say an 18-month term instead of a 12-month term, they would be responsible for paying back less than $13,000 per month rather than over $18,000 per month.

Higher Amounts

If you’re looking to finance a big purchase or large project, you’ll want to get your business credit in shape before applying for financing. Businesses with solid credit scores may be able to qualify for higher lines of credit or loan amounts—if lenders see that your business successfully pays back debts already, they’re more likely to lend you more cash.

Wider Variety of Financing Options

Having a solid score can help businesses qualify for another, less talked about type of financing that many businesses don’t realize are available to them: trade credit.

If you work with vendors or suppliers and have maintained solid relationships with them, they may be willing to extend you “terms.” For example, net-30 terms give you 30 days after the invoice to pay, while net-90 terms give you 90 days. This is actually the most common type of financing used by businesses and it can improve your business’s cash management should you qualify. Vendors and suppliers may look into your D&B PAYDEX score before extending this form of credit.

Not all lenders are going to look at your business credit scores, but because you may not know when your scores will come into question, it’s a good idea to keep them in good shape. Different lenders look at different scores, so it helps to know how multiple scores rate your credit before you start searching for financing.

 

Equipment financing at the end of the year

The fourth quarter is the perfect time to begin planning for the coming year. In addition to profits, losses and sales projections, business owners should consider acquiring new or updated equipment before the end of the year to take advantage of legislation that both expands deductions and extends depreciation benefits for qualifying equipment purchases. In fact, tax benefits make the fourth quarter of the year a really good time for businesses to finance new or new to you equipment.
Equipment financing enables your business to conserve cash and lines of credit while providing maximum flexibility, and entering into a finance agreement at the end of the year is also a smart way for companies to use any remaining capital budget while preparing for the new year.

Consider this when determining whether investing in equipment during the fourth quarter of the year.

The IRS Code Section 179 is an incentive created to encourage businesses to invest in equipment. It covers accelerated write-offs for equipment purchases and is beneficial to smaller businesses with limited budgets.

Effective Jan. 1, 2016, businesses purchasing $2 million or less in capital equipment can deduct up to $500,000 of that expense immediately on their 2016 tax return. Financing can further enhance the bottom line by eliminating the upfront cash outlay typical of an equipment purchase while still preserving the Section 179 deduction. However, equipment must be financed and in place by midnight Dec. 31, 2016, in order to qualify for the 2016 tax year.

Bonus depreciation, under the same legislation for 2016, businesses of all sizes can depreciate 50 percent of the cost to acquire eligible equipment on their 2016 tax returns. This tax break has been extended through 2019, although it will phase down to 40 percent in 2018 and 30 percent in 2019.

For many businesses, asset depreciation plays an important role in fiscal management. Most equipment acquisitions offer depreciation benefits, but determining whether a company can effectively use all of that depreciation may require you accountants assistance.

This is especially true for equipment-intensive businesses. Taxpayers in need of the sheltering effect of equipment depreciation will typically benefit from tax ownership of equipment. This can be accomplished with a loan, installment payment agreement and some leases. All of these options allow the user to deduct depreciation and interest charges from taxable income.

Companies with a more complex tax situation may want to consider a tax lease. Tax leases effectively trade tax depreciation for lower payments. Plus, tax leases allow the entire lease payment to be deducted as an operating expense.

Leasing, allows a company the freedom to obtain the equipment it needs when it is needed.

There are many reasons to finance equipment at any time of the year, but companies interested in taking advantage of expanded tax benefits for 2016 and getting a head start on next year should consider financing new or updated equipment before Dec. 31. It may be the best decision you make all year.

Consumers in, Businesses out.

A new survey from the Federal Reserve System has found that during the fourth quarter of 2015, a number of banks moderately eased lending standards for some consumer loans while tightening standards for a number of business loans.

According to the Fed’s January 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices, banks largely tightened lending standards for commercial and industrial and commercial real estate loans during 4Q 2015, citing a “less favorable or uncertain” economic outlook this year.

Many small business bankers I’ve spoken with say they feel that we are currently in a contraction of the economy and that they fear a recession may be on the near horizon making them more reluctant to lend even to the most credit worthy.

Why Are Asset-Based Loans for Smaller Businesses So Expensive?

An inside look into the cost structure of asset-based loans compared to commercial bank loans, and whether or not predatory pricing practices are at play.

Many smaller businesses don’t qualify for bank financing, their credit scores are too low,
the business is new, or other circumstances place them outside the strict lending parameters
of a bank. Even if a business does qualify for a bank loan, the process may move too slowly for the company’s liking. Thankfully, alternative lenders can provide accounts receivable financing, machinery and equipment loans, purchase order financing, inventory loans, and much more.This type of financing, known as asset-based lending, or ABL, is on the sharp increase.

But why does ABL sometimes seem so expensive?

  •   Is ABL perceived as riskier than commercial and industrial (C&I) loans?
  •   Is this a case of predatory pricing by alternative lenders?
  •   Is this an issue of scale, where larger allocations become cheaper to administrate?

    Comparing Cost Structures: An Inside Look

    Interestingly, the default rates on ABL and C&I loans are actually similar to each other. In both types of financing for smaller businesses, the risk-adjusted premiums are therefore similar too. However, ABL and C&I loans have very different cost structures. The cost of initial underwriting and of monitoring over time is low for C&I loans, while in ABL these costs are much higher. This is because ABL underwriting is more robust, and there is continuous monitoring over the lifetime of the loan.

    In other words, the risk-adjusted interest component in ABL is really modest, just as in commercial lending. It is underwriting and loan servicing costs that drive up the overall cost in ABL. These underwriting and loan servicing costs are more like fixed costs. They are proportionally higher for smaller credits. For larger companies, these costs are amortized over greater financing amounts.

    Is There Any Predatory Pricing?

    There is a common belief, especially among hedge fund managers and sponsors, that there are inefficiencies and predatory pricing in the small business lending space. But they are wrong. What is driving the cost of ABL is a very different cost structure. Lenders in this space need deep underwriting and collateral monitoring experience, and unlike for C&I loans, the specialized task of monitoring assets extends across the loan cycle.

The ABL market is made up of many “pools” of lenders that have different risk appetites. Within each such pool, there is an efficient, competitive environment. But as a borrower, you need to know which pool to “fish” in. Borrowers need to be cautious which group they approach, given the risk profile of their business. This is difficult for an entrepreneur to know, and lenders may not necessarily reveal that they are in the wrong pool for you.

Great News! Section 179 Signed into Law

Great News! Section 179 Signed into Law
Applies to 2015, if Delivered this Year

Under current legislation, the bonus depreciation is extended through 2019. This allows businesses to apply a 50 percent bonus depreciation to any equipment bought during and delivered this fiscal year.  This applies to capital leases and can also be passed in TRAC and specific operating leases by the lessor.

For example, 50 percent of any equipment delivered on or before Dec. 31, 2015, can be depreciated on a company’s 2015 taxes, with the rest depreciated over the remaining useful life of the equipment.

The current bill allows the full 50% for property placed in service during 2015, 2016 and 2017, then phases down to 40 percent in 2018 and 30 percent in 2019, according to an analysis by John McClelland with the American Rental Association (ARA).

There’s better news on the Section 179 front. The Section 179 cap, which was reduced to $25,000 for fiscal 2015, not only went back up to the $500,000 cap in effect from 2010 to 2014.

Section 179 will be permanent at the $500,000 level. Businesses exceeding a total of $2 million of purchases in qualifying equipment will have the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years.

This section of the tax code, according to the section179.org website, allows businesses to deduct from its gross income the full purchase price of qualifying equipment bought during a tax year, instead of depreciating it over time. If you exceed a total of $2 million in annual qualifying equipment purchases, there’s a dollar-for-dollar phase out of the depreciation until it’s completely eliminated above the $2.5 million level.

Here is a summary from the Congressional Ways and Means Committee “Protecting Americans from Tax Hikes Act of 2015:”
(See Section 143 on Bonus Depreciation and Section 124.  There
are many other tax incentives in the summary).

http://waysandmeans.house.gov/wp-content/uploads/2015/12/SECTION-BY-SECTION-SUMMARY-OF-THE-PROPOSED-PATH-ACT.pdf

 

As Published in Leasing News 12/21/2015

Construction equipment financing

Should I get equipment financing?

Depending on your industry, you may need to regularly purchase equipment for your business. This can get expensive. And for most of us, dropping a bunch of cash at once isn’t really practical. These days, more small business owners than ever are faced with the question “Should I get equipment financing?”.

Lacking a “war chest” of cash and considering equipment financing and leasing is a dilemma faced by both new business owners and seasoned veterans. That’s why many smart business owners turn to equipment financing and leasing to get the tools and machinery they need.

While this strategy is helpful when your cash flow is tight, it can also have many other not-so-obvious benefits. Just be sure your business credit scores are up to snuff before applying to help your chances of getting approved at the best rates. Approvals are typically based on credit scores, collateral, company financials and equipment value.

Without further ado, let’s review the different ways equipment financing and leasing can help your business grow:

  • You can get full financing. When you get a loan to purchase equipment for your business, most lenders will give you funds to cover the entire price. This means no down payment, so you won’t have to initially pay anything out of pocket.
  • Capital can be preserved. The availability of 100% financing allows your business to preserve more capital. Depending on how long you’ve been operating, you may have a sizeable cash reserve. But that doesn’t mean you should put it all into one investment at once. Because you can pay down the equipment purchase over time, you’ll have more money free to invest in other ways.
  • Testing before purchase. If you lease equipment, not only will you preserve capital, but also get the opportunity to test it out before committing money into equipment that may not provide the return you expect.
  • You get access to cutting-edge equipment. When the latest technologies hit the market, a business may be put in a position to sink or swim. Without the newest devices, your company may not be as competitive, but purchasing innovative equipment each time it becomes available is not a feasible option. With financing and leasing, you can get cutting-edge technology now without straining your business budget.
  • You reduce your obsolescence risk. If the equipment you’re leasing becomes obsolete, your lessor bears this risk. You won’t be responsible for any updates, disposals or replacements. This can be especially beneficial if your business needs equipment that tends to be quickly updated with better capabilities.
  • Helpful for your balance sheet and taxes. When you lease equipment, it is listed as a business expense rather than a long-term debt. This way you’ll have fewer outstanding debts that could impact your ability to obtain additional financing in the future. Plus, the IRS allows for lease payment to be fully deductible as long as your business uses the equipment.
  • Business credit stays healthy. It’s important to keep your business credit healthy…and available. Accessing capital for expansion, staffing and other operational expenses demands solid credit, and having an open business credit line allows you to respond immediately in a time of need. Leasing allows you to keep your business credit line open.

When it comes to answering the question “Should I get equipment financing or lease equipment”, every business will have their own specific considerations, and way of doing things. It’s up to you to decide what makes the most sense for you.