Bank, Schmank: New Rules of Small Business Finance

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Part 1 Where's the Bank Credit?

Why the only businesses getting loans right now are the ones who don't need them.

The point of all that TARP money funneled to banks beginning in late 2008 was to end the credit crunch. And in recent months at least three of the country's biggest lenders have announced ambitious plans to ramp up lending to small businesses this year. Yet, a year-and-a-half after the bailout, as the economy finally seems to be lurching into some sort of recovery, some untold number of America’s millions of small companies are still trying to get their hands on the capital they need.

So are banks back in business … or not? 

Big banks promised to make more small business loans but haven't.
Photo credit: Flickr/TheTruthAbout...

Although Wells Fargo, Bank of America and JPMorgan Chase pledged to make significantly more loans this year, it may be easier said than done. Bank of America, for example, lent $3.4 billion to small businesses in the first quarter of 2010, which is actually down from the $3.9 billion extended during the same period last year.

Part of that decline may be attributed to demand, which at Bank of America has only started to pick up in the last few months, according to spokesman Jefferson George. “When businesses are struggling, they’re not necessarily looking to extend themselves further,” he says. 

But what about those who do? “There is ample credit availability right now,” says loan consultant Ed Freiermuth. “For any business that’s qualified. What’s a ‘qualifiedbusiness’? That’s the meat of it.”

Now's the Time to Get Creative

Banks have been given money to shore up their balance sheets and reserves, but even while they’ve been pressured to lend, they’ve also been warned not to make bad loans.

“Regulators are looking over their shoulders saying, ‘Fine, lend money, but if you screw up, you’re going to be in trouble,'” explains Freiermuth. In his experience, underwriters are being much more exacting in their evaluations, and the effect is a contraction of lending parameters. From his perspective, it’s a throwback to “old school” banking, in which bankers gather reams of data and go strictly by the numbers to winnow down applicants to those that have little probability of going south.

From the bank’s perspective, according to Bank of America's spokesman, it’s not so much that the criteria has changed, but the fact that what borrowers bring to the table doesn’t hold up like it once did — cash reserves might be depleted, collateral may have lost value.

However you look at it, the upshot is largely the same. “In essence, the only people who can get credit are small businesses that don’t need it,” says small-business advisor Chuck Blakeman. “Profitable for the last two years, perfect financial shape? No problem.”

Anyone falling outside those bounds is going to have to embrace an economy with new, tougher rules — and become just as creative about finding credit as they were about their entrepreneurial vision in the first place.

_____________________________

Eric Hagerman is a New York-based freelance writer and editor and former senior editor at Popular Science and Outside magazines.

To Lease or Not to Lease

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Last year, Valarie Moody needed two costly photo printers for Fodeo, her photo and video preservation shop in Countryside, Ill., but she didn’t want to deplete her cash reserves in the middle of an economic downturn. She was unsure about getting credit or a traditional bank loan, as two of her business credit cards were cancelled out of the blue, one due to a bank closure. In the absence of other good options, Moody decided to lease the printers and found she got lower payments and more buyer protection than she would have expected with traditional bank financing.

"I particularly liked the lease experience because we had a problem with one of the printers, and if we had purchased the printer outright, we probably wouldn't have been able to return the printer as easily," Moody says. "Since the leasing company withheld payment until we were satisfied with the product, we were able to get the seller's attention and return [the printer] after several different software trials failed. The lease was much easier to obtain than a traditional loan, and they guaranteed the equipment."

While bank financing remains elusive for many small businesses, lease financing is a viable, but little understood, alternative. "So many business owners think they have to go to a local bank [to get a loan], and they’re surprised to find there are all these leasing companies out there, financing $500 billion-plus in business equipment each year," says Ralph Petta, interim president of the Equipment Leasing and Finance Association.

In fact, small businesses use computers, trucks, furniture, factory machinery, airplanes and other types of equipment that were purchased through lease financing. For many of these companies, leasing is not just an alternative to a bank loan or credit card debt; it’s a deliberate financing strategy.

"Businesses that can retain or expand their cash and bank lines have the best chance of surviving in this business climate," says Joel Ronan of Atlantic Business Credit, a lease financing firm in Stuart, Fla. "Any credit lines you can establish or expand--be it with vendors, banks or equipment lessors--will allow you more breathing room." Ronan adds that there are many businesses that are failing because of cash flow problems. Some of those businesses may even be profitable, but their cash is tied up in inventory or receivables. Equipment is an alternative line of credit that allows for greater liquidity.

Bank Loan Reject? No Problem
Moody says her equipment lease was much easier to obtain than a bank loan, and leasing industry professionals say that’s no accident. Banks and leasing finance companies are set up differently and are often looking at different criteria when it comes to loaning money. "Generally, equipment finance specialty companies will give greater consideration to the collateral value of the equipment than a bank because they have more specific experience with the equipment and may be better equipped to recover a loss if their customer defaults," says Robert Boyer, president of Susquehanna Commercial Finance, Inc., and chairman of ELFA’s Small Business Steering Committee. "There are some advantages a lessor has on a lease that a lender does not have with a loan in the event of a bankruptcy, so there may be structures that an equipment finance company can use to get a higher level of comfort on a transaction."

In other words, even if your company has been turned down for a bank loan, that doesn’t mean you won’t be approved for lease financing. "Particularly for equipment leases under $15,000, transactions flow freely, even for startups or [companies with] credit scores in the low 600s," Ronan says. "Leasing can serve as a reasonable alternative for bank declines."

In fact, some banks have equipment finance divisions or subsidiaries that offer leasing services to their clients, Boyer says. And currently, as federal regulators have tightened their position on how much commercial real estate lending banks can carry, "they want banks to increase their percentage of commercial and industrial lending," says Erik Dickinson, vice president of equipment finance and leasing at Red Mountain Bank in Birmingham, Ala. "This would be lines of credit and equipment financing." 

Beyond Paying Rent
Unlike leasing an apartment, some business leases are more like loans, so the business actually owns the equipment and can receive tax benefits through its depreciation. (A new legislative proposal under consideration by Congress would allow companies to expense these assets and write them off more quickly than is currently allowed.)

But in some cases, a true lease, in which a business pays rent on the equipment until the life of the lease expires, can make more sense than purchasing. At Women’s Health Specialists in Jensen Beach, Fla., administrator Bill Hughes, CPA, prefers to lease equipment that becomes outdated quickly, such as diagnostic equipment and personal computers.

"Advances in technology usually make the equipment obsolete by the end of the financing term," Hughes says. "Not owning the obsolete equipment at the end of financing does not put you in the bind of having to store or dispose of the old equipment."

Benefits to Enjoy
For companies in a cash-flow crunch, the most valuable advantage to leasing is the ability to hold onto their cash. In most cases, a company can get the equipment it needs with little or no down payment, allowing it to preserve working capital and lines of credit for other uses, Dickinson says.

And unlike the lengthy approval process for most loans, lease transactions can happen fast; many lease transactions under a certain threshold can be approved within 24 hours. "Most equipment finance companies will review credit based on a simple, one-page application if the transaction is less than $50,000," Boyer says. "There are many companies that have higher thresholds, maybe even as high as $250,000 for certain industries. Anything over this application-only threshold will generally require the applicant to submit tax returns or accountant-prepared financial statements."

Even those transactions that require a complete credit package are often processed within 10 days, Ronan says. "Of course the rates are higher, but many times the lease payment is not material when you consider the income the new leased equipment generates or efficiencies it creates in the business," he says.

Finally, leasing can offer tax benefits. For Women’s Health Specialists, the ability to immediately include the total payment as a business expense, rather than writing off only the interest and eventual depreciation of the equipment, is one of the most important reasons to lease, according to Hughes. For instance, "Car leases allow you to write off the entire payment versus interest expense and depreciation," he says.

Pitfalls to Avoid
While scores of business owners successfully lease equipment and enjoy the accompanying tax and cash-flow benefits, many others have had negative leasing experiences. For instance, the credit card machine industry is notorious for problematic leases, Ronan says. "In many cases, a low-cost item, say $500, is leased on a continuous basis at something like $35 per month," he says. "Historically, these leases go on for years with tremendous yields to the lessor. Resentments grow when the lessee understands years later he has paid for the thing several times over. Beware of any company that will not sell but only leases. You are probably going for a long ride."

To avoid similar problems, keep these tips in mind: 

• If you’re unfamiliar with the finance company, conduct a background check. Boyer recommends using Dun & Bradstreet reports or the Better Business Bureau. 
• Before signing anything, find out what happens at the end of the original lease term. For instance, you may have an option to purchase the equipment at a deep discount. Whatever the terms are, make sure they are explicitly determined and in writing. 
• Find out the fees associated with the lease transaction," Ronan says. Some common fees include documentation fees and late fees. "Many quotes with low rates are rich with fees," he says.
• If a down payment or deposit is required with your application, "make sure there are specific terms that spell out the offering being made and what will happen to the down payment if the company is unable to approve the transaction," Boyer says.
  

Seven Steps to Sales Recovery

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Is your sales strategy no longer producing the revenue results you want? Then it's time to inspire your sales team to do more. Here are eight ways to secure new orders and get the most out of your team.

1. Rank the sales team: Keep a transparent monthly and long-term ranking of each sales member. What if the bottom 20 percent of your team was gone in two weeks? Think of something more productive you can do with the money you save, such as hiring a sales trainer, holding a contest, or recruiting better talent.
   
2. Upgrade your marketing tools: Check your sales presentation kits. Are the brochures vibrant, current and accurate? Is your company's competitive advantage well expressed? Is your website current? Do you have a video of what you do that is professional or fun?
   
3. Go in the field: As a business owner or manager, you should commit to making at least one sales call per month with each of your sales team. The consequences of failing to maintain your presence in front of current and future customers is simple: Out of sight must be out of business. Additionally, you'll be able to assess your sales talent pool when you make calls with them.
   
4. Start a sales contest: Create a contest to stimulate quarterly sales. The prize can be an HD television, a vacation to the Caribbean, one hundred $100 bills in a glass case—make it big, visible and public. Fire up the team and see what they'll do.
   
5. Provide sales training now: Provide a sales training session that focuses on how to sell in a fear-based economy. Hire a trainer who has a current approach to jumpstart your team. The $2000-$4000 you spend on the trainer might bring back ten times the investment in new sales.
   
6. Measure sales activities: Start measuring activities that generate sales. These activities can include sales visits, outbound phone calls, text messages, letters, proposals, purchase orders, emails, or attending association functions. Create simple templates to measure every activity of all salespeople to see who is effective.
   
7. Set new quotas: Meet with each salesperson and re-establish sales quotas.

There are two simple, but tough truths about increasing sales. You've got to hold people accountable to do their job better, and measure their activities. It starts with you making the commitment and staying the course.

Make Sure Your Dun & Bradstreet Report (D&B) Profile is up to date and accurate

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Out of the 1000’s of lease applications we review, the number one thing our customers can do to improve their credit profile is update their Dun & Bradstreet Report. Blue Street’s team of credit professionals will guide you through the simple reviewing and updating process.

As you may know, D&B is a publicly traded company that provides information on businesses and corporations. Often referred to as just "D&B" the company is best known for its "D-U-N-S Number" identifier that is assigned to over 100 million companies worldwide.

It is critical that before you begin the process of leasing or financing equipment that you are confident you have a positive D&B profile on record. The first thing a bank checks when reviewing applications is your company’s D&B profile. Your profile gives the lender a snapshot of both your business and credit history.

How do I know if my D&B profile is up to date and accurate?

Call us. Blue Street Capital will pull your D&B (while you are on the phone) and explain to you how your report looks from a lender's perspective, describing all of the positive and negative aspects of the report and what you can do to remedy any potential problems. We do this free of charge. Unlike a credit report, looking at your D&B report has no affect on your business or personal credit.

Call us at (714) 316-1180 and ask to speak with an account representative.

What if my D&B contains mistakes?

If there are any "negatives" regarding your credit history, don't worry - remember that Blue Street Capital has options for all types of credit. Even the most responsible businesses have credit blemishes that we can work around.

If D&B reflects something negative about your business that you know to be inaccurate, we will explain to you how it can be fixed. Again, Blue Street Capital provides this service free of charge.

What if I don't have a D-U-N-S number?

If you do not have a D&B profile, it's not a show-stopper. But having a favorable credit history listed in D&B will go a long way for you in getting the lowest rates on your equipment leasing or financing. If you are new to D&B we can help you understand how to setup a profile and why this is an important tool for your business.

Contact us today for your FREE D&B Consultation!

Economy Jumps 5.6% in Q4/09 as 2009 Ends on a Record Low

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Congress extends the amount that small businesses may write-off for capital expenditures: $134,000!

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Business owners who acquire equipment for their business: machinery, computers, and other tangible goods, usually prefer to deduct the cost in a single tax year, rather than a little at a time over a number of years. This deduction is known by its section in the tax code, a Section 179 deduction.

Under Section 179, businesses that spend less than $530,000 a year on qualified equipment, may write-off up to $134,000 in 2010. The rules are designed for small companies, so the $134,000 deduction phases out when a business purchases more than $530,000 in one year. (Companies cannot write off more than their taxable income).

Benefits of a Non-Tax/Capital Lease

The benefit of a Non-Tax/Capital Lease is that it can take advantage of Section 179: expense up to $134,000 if the equipment is put in use in 2010. In addition, you may depreciate any excess on the depreciation schedule for that asset. Examples of Non-Tax/Capital Leases include a $1.00 Buyout Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. Example: Assume you finance business equipment, put it in use in 2010, and take advantage of Section 179. Your tax savings could be significant:

                Tax Savings Example - Section 179 Deduction     

                Cost of Equipment:                                                                         $250,000.00

                Section 179 Deduction if Purchases are $530,000+             $                    - 

                (Dollar for dollar phase out if over $530,000)                       $134,000.00

                Section 179 Write-Off Amount:                                                  $134,000.00

                Regular First Year Depreciation Deduction:                          $23,200.00

                Total First Year Deduction:                                                           $157,200.00

                Cash Savings on your Equipment Purchase:                         $55,020.00

                (Assuming a 35% Tax Bracket, Depreciation 5 years)       

                Lowered Cost of Equipment after Tax Savings:                    $194,980.00

Tax Code Section 179 & Election to Expense Detail

The election, which is made on Form 4562, is for the tax year the property was placed in service or an amended return filed within the time prescribed by law. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. Section 179 property is property that you acquire by purchase for use in the active conduct of your business. To ensure property qualifies, reference Publication 946.

This expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifying property as an expense rather than a capital expenditure. Under Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by December 31st. Non-Tax leases qualify for this deduction in their year of inception. Any excess above the expensed amount can be depreciated depending on the equipment type. Not all states follow federal law. Contact your tax advisor for further detail or visit www.irs.gov for specific detail.

Tax/True Lease Benefits

If a lease is a Tax Lease/True Lease, the lessor retains ownership and you, as the lessee, may be allowed to claim the entire amount of the monthly investment as a tax deduction. Many rental contracts qualify as a true lease including a 10% Option and a Fair Market Value Lease.

Example Calculation: Assume that you have a Tax/True Lease with a $1,000 monthly payment, the below tax savings that may be available:

To take advantage of the incentives and the substantial tax savings, your business equipment must be put in use by year-end. Please contact your tax advisor to learn about the specific impact to your business.

Interested in learning more? We’ll provide you with a free consultation and extend finance solutions so you can acquire the business equipment you need.  Contact us today!

Analysts: Tech Sector to Recover in 2010

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Analysts: Tech Sector to Recover in 2010

(NEW YORK) — The tech downturn is over and a recovery is on the way after a "dismal" 2009, as companies resume spending on computers and software, according to a new analysis.

Forrester Research Inc. was set to report Tuesday that it expects global spending on technology products and services to grow 8.1 percent in 2010, to more than $1.6 trillion. U.S. spending is expected to rise 6.6 percent, to $568 billion. Get the latest tech news at Techland.com.

The projected increases follow sharp declines in 2009, when businesses and governments slashed their purchases of PCs, computer peripherals and communications equipment in response to the economic turmoil and credit crisis. Many large tech companies, such as Microsoft Corp., remained profitable and increased their stock prices in 2009, but often they relied on layoffs and other expense reductions to do it. See TIME's tech buyer's guide of 2009.

Even with the expected rebound, "the level of computer equipment purchases in 2010 will still be lower than in 2008 or even 2007," said Forrester analyst Andrew Bartels.

With the recession over, pent-up demand for new computers and updated software programs stands to benefit the companies that make them. The October launch of Microsoft's latest computer operating system, Windows 7, also gives companies a reason to start replacing PCs.

Still, Forrester cautioned that growth will start slowly and pick up later in the year.

The research firm also expects spending on communications equipment to pick up this year, partly because of demand in emerging markets that are building wireless and broadband networks. See 25 websites you can't live without.

Forrester is not alone in predicting a rebound for the year. Last fall Gartner Inc. forecast 3.3 percent growth in global technology spending. Another analyst firm, IDC, said in December that worldwide tech spending would grow 3.2 percent in 2010, returning the industry to 2008 levels of about $1.5 trillion.

More insight into the sector's recovery should come Wednesday, with the release of figures on PC sales in the fourth quarter, and on Thursday, when Intel Corp. reports earnings for the period.

FICO Reveals How Common Credit Mistakes Affect Scores

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provided by

Disclosed for the 1st time, 'damage points' taken off for late payments

Borrowers already knew that late payments hurt their credit scores, but for the first time, they now know the extent of that damage.

Did you max out your credit card? Expect a credit score drop of 10 to 45 points. Declare bankruptcy? Your score will plummet by up to 240 points, and your odds of getting credit will nosedive with it.

The "damage points" data, unveiled recently by FICO, are part of the most revealing glimpse into the firm's once-secret -- and still mysterious -- credit scoring model. The new information discloses how many points borrowers' scores will drop when they make the most-common mistakes.

'Help People Understand' Scores

"I hope this information will help people to better understand FICO scores and the value for them of avoiding credit missteps. It illustrates key points such as the higher your score, the farther it can fall if you stumble," says FICO spokesman Craig Watts. "Getting and maintaining a good score isn't complicated. We all just need to pay our bills on time, keep credit card balances low and take on new debt sparingly. "

The greater transparency about FICO scores is important because American consumers' ability to get credit rises and falls with the number. FICO, the company that pioneered credit scoring, assigns consumers a three-digit number from 300 to 850, depending on how well they handle credit. Other companies also offer scores, but FICO's version is the most widely used by lenders in determining whether a consumer can borrow, and at what rate.

FICO's credit score has been around for decades, but only within the past decade have consumers gradually gained access to theirs. Though the raw numbers can be purchased, how they're figured remains a FICO secret, as closely guarded as the formula for Coca-Cola. Until Thursday, FICO revealed only broad categories of factors influencing the score, but not the number of points at stake for consumers who fail to pay as agreed. The "damage points" information, revealed in a report by personal finance writer Liz Pulliam Weston, will be made available through its myFICO.com Web site starting this weekend.

FICO's information shows that bankruptcy does the most serious damage to a credit score (up to 240 points), followed by foreclosure (up to 160 points) while maxing out a credit card has the least numerical impact (as few as 10 points).

Those with good or excellent credit -- so-called prime borrowers -- put more points at risk with each mistake. For example, someone with an average credit score of 680 who pays a bill 30 days late will see a drop of 60 to 80 points. But for someone with an excellent credit score -- 780 -- that same delinquency can send a FICO score tumbling by 90 to 100 points.

The Cost in Dollars

In order to show just how badly a drop in your FICO score can hurt your wallet, we spoke with members of the home mortgage, auto and credit card lending industries. We presented hypothetical scenarios of a consumer who decided to apply for a $200,000, 30-year mortgage; a $20,000, five-year auto loan and a credit card. While all the industry insiders stressed that a FICO score isn't the only factor in determining who gets credit and at what cost (other factors they cited include the borrower's debt-to-income ratio and whether they have already established a relationship with the lender), they were able to provide an idea of what a borrower who had the following credit scores could expect.

For a Consumer Who Started With a FICO Score of 780:

• Following a 30-day late payment, the consumer's car loan rate would jump nearly 3 percent, costing the borrower $26 more each month.
• Following a debt settlement, the consumer would pay as much as $109 more each month on a home mortgage.

For a Consumer Who Started With a FICO Score of 680:

• Following a 30-day late payment, the consumer would pay $41 more each month for a car loan.
• Following a 30-day late payment, the consumer would pay as much as $95 more each month on a home mortgage.
• Following a debt settlement, the consumer would no longer qualify for a credit card.

Some Surprised By the Details

Consumer advocates say it's important for borrowers to know what can damage their FICO scores. "If they know it in advance, they won't go out and step in a pile of doo-doo. They won't go out and do some of these things," says Linda Sherry, director of national priorities with advocacy group Consumer Action. Even experts found some surprises in today's news. "FICO imposes bigger hits than I would have thought for being maxed out or 30-days late just once, reinforcing my view that it is a cruder, blunter instrument than they like to claim. Nevertheless, it is a powerful, widely used crude blunt instrument," says Ed Mierzwinski, consumer program director for the U.S. PIRG consumer advocacy group.

Of course, knowing the impact on a FICO score and actually avoiding these mistakes are two separate things: Amid rising unemployment and other daily financial struggles, paying bills and staying on-track financially becomes a much bigger challenge for many borrowers.

"Some of these things are out of their control," Sherry says of consumers.

Additionally, as Weston points out, consumers with identical FICO scores can have different credit histories. That means the same slip-up -- such as maxing out a credit card -- could have different impacts on consumers who have the same FICO score. In the examples they provided, FICO assumed each borrower had several active major credit cards, a mortgage, car loan and student loans.

Sherry acknowledges the benefit of putting a number to a financial blunder. "I don't think we necessarily knew the numbers that a bankruptcy could apply to a credit score," Sherry says.

Helping You Make Better Decisions

While knowing the numbers may not keep you filing for bankruptcy if given no other choice, the information may help you make the best decision when faced with a bad situation.

FICO scores -- and the access to credit they provide -- are a valuable asset to consumers and supply a safety net when incomes are stretched. It's an asset that needs to be protected, Sherry says, even if job loss or catastrophic illness makes bill paying problematic.

"In that period of time, paying down debt is the last thing on your mind. Paying the minimum payment may also be the last thing on your mind, but you'll be doing yourself a big favor if you do," Sherry says.

ABC's On Credit Rating

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CREDIT CRITERIA

A+ Credit

• Perfect personal and business credit with many lines of credit
• No Bankruptcies
• Low revolving debt
• Few credit inquiries in last 12 months
• No evidence of suits, liens, collections, or judgments
• No foreclosures or repossessions
• Excellent score in credit desk
• No slow pay activity on personal or business credit
• Business should be established over 2 years with strong D&B Report
• Strong Full Financial Package may be requested for lowest rates
• True A+ credit can apply for lowest rates available

A Credit

• Excellent credit with many lines of credit
• No Bankruptcies
• Low revolving debt
• Few credit inquiries in last 12 months
• No evidence of suits, liens, collections, or judgments
• No foreclosures or repossessions
• Excellent score in credit desk
• No slow pay activity on personal or business credit
• Business should be established over 2 years with strong D&B Report
• True A credit may qualify for best "Application Only" rates available

B Credit

• Good overall credit with many lines of credit
• No Bankruptcies
• Lower revolving debt, under $25,000 and under 50% credit utilization
• Few credit inquiries in last 12 months
• Evidence of suits, liens, collections, or judgments that are satisfied or under $1,000 aggregate
• No foreclosures or repossessions
• Good score in credit desk
• No recent slow pay activity on personal or business credit
• New businesses and Business over 2 years old with good business credit

C Credit

• Bankruptcy on credit bureau or business over 7 years old
• Evidence of a few recent slow pays to creditors
• Open suits, liens or judgments (less than $1,000 aggregate)
• No foreclosures or repossessions
• Revolving debt considered high, or high utilization of available credit
• Explainable, high credit inquiries in last 12 months
• Credit bureau scoring not within credit desk standards
• These credits are considered on a case-by-case basis. Higher rates will apply. A Full Financial Package may be required.
• Unfortunately, we cannot lease to businesses under 2 years old with this credit criteria.

D Credit

• Bankruptcy less than 7 years old
• History of slow pay to creditors since bankruptcy
• History of suits, liens, judgments or collections
• Foreclosure or repossession
• High revolving debt on credit cards (without acceptable tax returns)
• High credit inquiries in last 12 months
• Unfortunately, we cannot lease to customers meeting this criteria