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.

Benefits of Financing

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Did you know 7 out of 10 companies finance business equipment? Plus, the number one reason companies finance is to enhance cash flow.

Benefits of Financing

·   100% financing. With financing, there are very little upfront costs. Zero to two month's payments may be due at the start of the finance contract. And, you can cover soft costs such as installation and shipping. Conversely, a typical bank loan does not cover soft costs and may require as much as 10 - 20% down.

·   Tax and accounting benefits. The IRS does not consider Tax Leases (FMV, 10% Option, TRAC) to be a purchase, but rather a tax-deductible overhead expense. Therefore, you can lower your taxable income by deducting the lease payments. Non-tax ($1.00 Buyout, 10% PUT, SD=BO, EFA) are attractive to business owners who want the tax benefits of ownership - use of IRC 179, accelerated depreciation. Consult a tax advisor on the specific impact.

·   Balance sheet management. Because a Tax Lease is not considered a long-term debt or liability, it does not appear as debt on your financial statement - making you more attractive to banks by improving ROA due to a lower asset base.

·   Flexibility. Unlike loans, you can structure payments to meet your cash flow including deferred and seasonal payments. Convenient end of financing options exist too: purchase equipment, return equipment or renew the contract. If you need to terminate the finance contract, a buyout can be figured.

·   Upgrade technology. If your industry demands that you have the latest technology, financing can lower obsolescence risk because you can upgrade or add equipment to meet your ever-changing needs. And, it’s simple with a Master Agreement!

·   Speed. Respond quickly to new opportunities with minimal red tape – less than a loan. Your application can be approved promptly and you can have your equipment quickly.

·   Improved cash flow and forecasting.  Lease payments are historically lower than loan payments, conserving cash for other uses. With leasing, you know the amount and number of lease payments over the life of the lease, so you can accurately forecast cash requirements.

·   Conserve credit lines.  A loan immediately reduces your credit line. A lease doesn’t affect your credit line.

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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Enhanced Section 179 - Businesses can now write-off up to $250,000

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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.