FBN’s Charles Payne, Heritage Capital President Paul Schatz, Tea Party News Network News Director Scottie Nell Hughes, small business expert Susan Solovic, retail analyst Hitha Herzog and Penn Financial Group founder Matt McCall on the shifting demographics in the job market.
By Meredith Wood
So you want to apply for a small business loan. You go through the application process, and the lender lets you know how much you can qualify for (this tends to be around 8 to 12% of your annual revenues). You may know the loan amount you want or need, but how do you know you can afford it?
Let’s look at the numbers you need to calculate to figure out the safest loan amount for your business.
To start, you need to understand your monthly payment. Then you can compare that monthly payment to your cash flow to determine the affordability of your loan.
How to Calculate Your Monthly Payment
To illustrate how loan payments are calculated, let’s use the following numbers to determine the monthly payment for a hypothetical fixed-rate loan:
- Principal Loan Amount: $10,000
- Term of Loan: 1 year
- Interest Rate: 15%
- Origination Fee: $500
What you owe each month is calculated by including three different components:
Your loan’s principal is simply the initial amount you borrowed from the bank or financial institution. In this example we borrowed $10,000, so that’s the amount of principal we’ll be paying back.
- Number of Payment Periods
The number of payment periods in your loan’s term will determine the amount of your individual principal payments. Typical term loans are repaid on a monthly basis, meaning in our example above, this loan has 12 payment periods, whereas a five year loan would have 60 payment periods, and so on.
For our hypothetical loan, we’ll be paying back our $10,000 principal over 12 periods, meaning our monthly payment on principal is $833.33.
Monthly Principal Payment = $833.33
- Interest Rate
Typically the interest rate provided by the bank will be stated as an annual percentage rate (APR). If your loan is paid on a monthly basis, you’ll need to divide the APR by 12 to determine the percentage of your principal loan amount you’ll be paying in interest each month.
So in our example, we have a $10,000 term loan with a 15% APR—so we divide that 15% by 12 to calculate a monthly interest rate of 1.25%—meaning our monthly payment on interest is $125.
Monthly Interest Payment = $125.00
Putting it all together, we’ll add up our monthly principal payment of $833.33 plus our monthly payment on interest of $125 to find that each month, we would owe the lender $958.33.
Total Monthly Payment = $958.33
What About Fees?
Loan fees vary widely between financial institutions and loan types. Your loan may have a fixed origination fee (like our example above), a fee that is a percentage of the principal, or no fee at all! It’s important to clarify what, if any, fees your loan will hold—and how they’ll affect your monthly payment—directly with your lender before signing the dotted line.
Origination fees are among the most common fees for term loans. Usually, origination fees are taken off the bat from the total loan amount. This means that upon signing our hypothetical loan agreement for $10,000, we would actually receive a check from the lender for $9,500. For this reason, origination fees don’t usually impact the monthly payment.
Calculating the Loan You Can Afford
Now that you understand how monthly loan payments are calculated, let’s determine what size of loan you can afford.
Determining the affordability of your monthly payment is a simple matter of ensuring that at the end of the month, after paying your other business expenses, you still have enough cash on hand to make your loan payment without being completely broke.
Here is a common equation that lenders recommend for calculating what size loan payment you can afford.
To use this equation, start with your typical monthly cash flow. (That’s the amount of cash you have on hand at the end of the month after paying for expenses like rent on your storefront, personnel costs, purchasing inventory, and/or payments on other debt.) Now divide that number by 1.5.
That total is the maximum monthly debt payment lenders would recommend that you take on in order to have enough cash left on hand to put back into your business.
Going back to our example loan above, let’s reverse the equation and see what kind of monthly cash flow we would need in order to afford that loan payment. In this case, we’ll be multiplying instead of dividing to determine our needed cash flow.
$958.33 x 1.5 = $1437.50
What do you think? Could your business afford this hypothetical loan? You’d need to compare this number to your monthly cash flow to be sure.
As Always, Talk to Your Lender
Now you’ve learned how to calculate the monthly payment and affordability of a basic, fixed rate term loan. You can also use a loan calculator like this one to calculate your monthly payment.
Of course, what we used is a hypothetical example, and every loan is different. So it’s important to talk to your lender about the specifics of your monthly payment. Some loan products even have weekly or daily payments. If this is this case, total all your payments in a month to get your “monthly” payment.
As well, your loan could have a variable interest rate, which could change your payments month to month. Merchant cash advances and invoice advances also have different structures for calculating payments and interest rate.
To get the most accurate information for your particular situation, ask your loan provider or a third party advisor to walk you through what you would paying on average each month for your loan and help you determine what you can afford.
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Sometimes small business owners can feel besieged. Big businesses have advertising and marketing budgets that dwarf their total yearly receipts. The corporate honchos and their high-salaried lobbyists have the ear of our lawmakers. Politicians only seem to care about small businesses during election cycles.
But despite swimming upstream against these insanely strong currents, small business owners remain an upbeat and optimistic bunch, and a recent study by OnDeck captures these great qualities. Here’s what they say in their quarterly Main Street Pulse Report.
Living the American Dream. 81 percent of those surveyed by OnDeck reported that they left a 9-to-5 corporate gig to start and build their own businesses. They kicked the corporate habit for three basic reasons:
- More money,
- Greater flexibility, and
- Ability to pursue their passions.
Some small business owners may assume that there’s more money to be made by climbing up the corporate leadership ladder. I think that those who leave the corporate world to join the entrepreneurship crowd understand that real money comes with ownership. If they create a good company, they are creating value far beyond what they are able to take out in terms of a monthly salary. When they sell at retirement or after they have their startup pointed in the right direction, the payout can be significant.
Getting ’er done. It’s tempting to think that the American work ethic is an endangered species. This study proves that it’s alive and well among small business owners. More than two-thirds work over 50 hours a week. Nine out of 10 put in time on weekends and 80 percent aren’t finished with work when they leave the office.
Are small business owners workaholics? Yes, sometimes. But when you’re pursuing a passion and know the value you’re creating, it’s not the same as feeling you’re merely a cog in a big, impersonal corporate wheel. By the way, small business owners work this hard because their top priority is to grow their businesses.
Further, eight out of 10 small business owners are committed to helping their communities. This shows that they are “connected” and that’s something humans need to experience true happiness and fulfillment. Let me put it this way: small business ownership is personal.
The money follows. I’ve touched on the fact that small business owners are creating value and that’s reflected in the survey. Some 65 percent say that they are in a better financial situation than if they were working for someone else. They say that the hard work and sacrifices are worth it and they have no regrets.
And while we know that a good number of Americans believe that their work-life balance is out of whack, at least half of all small business owners say they’re doing just fine in that department.
We get a lot of bad news, it’s nice to see that the qualities that made The United States great are still alive and healthy among small business owners. Small business owners know something that the rest of the country needs to learn: You can shape your own future if you have a dream and are willing to work hard enough to make it a reality.
By Brian Hamilton
Shark Tank can be a tough show to watch if you’re an entrepreneur. I often find it difficult to enjoy, since I empathize so much with the people coming on the show to pitch their businesses. I get nervous for these contestants because, like most entrepreneurs, I’ve been in similar situations.
Believe me, business owners know their businesses better than anybody. Most of them can speak with tremendous ease about the product or service that they offer. However, on the show, the “sharks” often take the presentation in another direction by asking questions that have little to do with the specific idea being pitched. This usually leaves the business owner looking confused, and, to the audience, the line of questioning may seem a little bit off base or irrelevant.
The truth is that the sharks on the show are poking and prodding with a very specific purpose; they are trying to find the answers to some key questions about financial metrics. With these questions, the judges are truly hitting on some good points when it comes to evaluating these enterprises, diving into metrics and KPIs that are crucial to evaluating any company’s financial stability–whether the company is a private company, an initial public offering, or a publicly traded business.
Through this fairly consistent line of questioning from the sharks, each episode ofShark Tank tends to highlight the major points of running a business. These are points that every business owner should understand and pay attention to, but many owners get so busy running their companies that they might overlook their importance.
Here are the questions that the sharks are trying to answer for each prospect. They’re the same questions that you should be asking yourself about your business:
- How much revenue do you have? Notice that a lot of times, the sharks ask questions about actual sales, even if the business owner is trying to focus the conversation on orders. These sharks know that there’s a big difference between having revenue and almost having it.
- What is your sales growth rate? Healthy businesses are growing businesses. When revenues are up, things are often going well. Even if your sales are increasing, however, it’s important to keep your eyes on the actual rate of growth. Slowing sales growth can be a sign of trouble to come.
- Are you profitable? You could have decent sales, but if you aren’t making a profit on those sales, your business won’t last long without having to seek additional capital. This seems obvious, but it is a really important point that gets lost on some very smart business owners, especially during times when it’s easy to raise money. It’s always better if a business is keeping some of the money it brings in, rather than having it all going out the door on expenses.
- What kind of valuation are you placing on the business? Often times on the show, after the business owner reveals the stake they’re offering (and the amount of capital they’re seeking for that stake), you’ll notice the sharks writing something down. Next, you’ll likely hear the sharks express their views on how much the business is worth, as compared to the valuation that the contestant is seeking. There is often a big gap between the two numbers. Sometimes this discrepancy is due to the fact that the owner values the business based on what he or she thinks it can be worth, based on revenue projections or prospects for orders. The sharks know that they must have an accurate idea of the value of the business before they can agree to risk their own money, and that value is usually based on the cold hard cash the business is already generating.
Each of these questions is very important to answer before a shark or a business owner can really figure out whether a business is a solid one. That’s why, if you watch enough of these episodes, you’ll see that the questions nearly always generate answers related to something about revenue, revenue growth, profitability, and valuation. These are questions you should be asking of your own business as well.
(Background for this article draws on Sageworks Bank Information, a web-based data platform that includes data on all U.S. banks and credit unions. For more information on Sageworks Bank Information or to sign up for a free trial, visit bankinfo.sageworks.com.)
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Brian Hamilton is the chairman and co-founder of Sageworks. He is the original architect of an artificial intelligence technology platform that is used by thousands of financial institutions and accounting firms across North America. This technology converts financial statements into plain language narratives, reflecting Brian’s professional mission – that is, to demystify complex financial information for business owners, financial professionals, academics, and the general public. Through articles, interviews, discussions and presentations, Brian regularly works with the media, bringing clarity and expertise to topics ranging from the health of private companies, to the financial strength of high profile initial public offerings, as well as issues facing entrepreneurs. Brian currently serves on the Board of Trustees for Sacred Heart University. He is also the founder of Inmates to Entrepreneurs, a community outreach organization focused on teaching ex-offenders to start low capital businesses, and he established the Sageworks Institute, a not for profit organization dedicated to providing journalists with a strong foundation in financial and economic analysis.
Karen Fisher, CPA is the President and founder of KBF Consulting, LLC, which provides a broad range of financial, accounting, tax, auditing and advisory services to small and medium sized companies.
Karen has close to 20 years of experience in accounting and finance. Her career began in Public Accounting working as an auditor for one of the top 4 accounting firms in the country. Her strong accounting and auditing skills combined with her experience working with many Fortune 500 companies helps her to easily pinpoint where there are opportunities to improve the financial aspects of your business.
After a successful career working in Corporate America for many years, Karen decided to fulfill her vision of leading an accounting firm that empowers the small and medium sized business owners. Specifically her goal is to provide the big company advice and strategy to smaller companies that usually do not have access to this type of advice.
Karen holds an undergraduate degree in Accounting from Rutgers University and a Masters degree in Business Administration from Adelphi University in Long Island, New York. She is a Certified Public Accountant in New Jersey. Her firms website is: http://www.kbfconsultingllc.com
Financial Engineer Discusses Ways to Troubleshoot
Unnecessary Financial Burdens
Taxes account for the most expensive burden you’ll experience in your lifetime, says engineer-turned-independent financial planning coach Rao K. Garuda.
In addition to federal, state, city and death taxes, there are 59 other varieties. Relatively few taxes, however, account for the bulk of the burden on citizens, says Garuda, whose clients include retirees, people planning for retirement, physicians, business owners and other professionals.
He thinks his fellow Americans deserve a shot at keeping more of their money.
“When I came to the United States, I had less than $10 in my pocket, but I had an excellent education as an engineer. When I married a physician, I realized how expensive it is to make a good living here,” says Garuda, (www.aca-incorp.com), who quickly applied his analytical engineering mind to understanding the complicated tax system.
“Since this country has given me so much, I wanted to repay my fellow Americans with strategies for keeping more of their own money.”
Garuda identifies some of the most expensive and common tax hurdles affecting Americans and offers advice on troubleshooting our tax system.
• Problem: The IRA tax: great on the front end, terrible down the road.
Solution: An IRA is tax-deferred, which means it will accumulate value over time. But when you withdraw from it, you will be heavily penalized with high taxes. That’s why you should convert this asset to a Roth IRA, which allows your money to grow tax-free. Since the money put in was already taxed you don’t have to pay any taxes when you take it out, and, overall, you’ll save a significant amount of money.
• Problem: Too many people don’t take advantage of creating tax-free income via insurance products.
Solution: From a financial perspective, retirees and professional planners run into a significant issue: seniors, blessed with good health, who outlive their money. But with certain insurance products, retirees can create tax-free income while covering the later years of retirement – and protect their wealth if they become severely ill. There are certain insurance products tied to the stock market that can help people accumulate assets in the long run. Many of these products offer a tremendous upside for potential without the downside of increased risk.
• Problem: Missed opportunities – people who don’t take advantage of free money in a 401k.
Solution: Perhaps the company you work for is, like many others, bureaucratic to the point of being impractical. Your employer may not have done the best job communicating details about benefits such as matching 401k contributions, or you may not have taken the time to learn them. Now’s the time; this is free money! If your employer is offering a 50 percent match on your first 6 percent of contributions to the 401k, you should be contributing at least 6 percent. Educate yourself on your company’s plan so you can take full advantage.
About Rao K. Garuda
Rao K. Garuda, CLU, ChFC, is president and CEO of Associated Concepts Agency, Inc. – “The Missing Piece” of financial planning — founded in 1978, and a popular speaker at seminars and conferences for financial industry professionals. He came to the United States from India 35 years ago with a degree in engineering and, after marrying a physician, realized he had to learn how to reduce the couple’s taxes. Disappointed in the financial advice he received from professionals, he went to business school and developed expertise in tax reduction, and protecting money from stock market losses. Rao is a founding member of First Financial Resources, a national organization with over 75 partners in the USA; a life member of the Million Dollar Round Table (MDRT), and a life member of MDRT’s Top of the Table for 21 consecutive years.
Although there are signs the economy is slowing recovering, millions of people are under-employed or unemployed. Personal financial stress can take its toll on your emotional and physical well-being. And you don’t leave all of that stress at home when you go to work every day. At work there are the normal business challenges, but in addition, there are economy-related issues that add to stress levels.
With hundreds of thousands of jobs lost during this recession, employees worry about when they’ll get the pink slip. Plus, many workers are expected to accomplish more with less as businesses cut budgets and staff. Customers and clients are encountering all of the same economic woes, and, as the business owner, you’re struggling with cash flow, lack of credit, decreasing profits and decisions about possible staff reductions.
When you add up all this stress, it can result in workplace rage. What’s workplace rage?
Workplace rage is displayed through various behaviors such as hostility, defensiveness, yelling, emotional outbursts, and even in some cases violence.
So what can you do to avoid workplace rage in your business? First, recognize these are stressful times and your responses should be tempered accordingly. Listen to what your employees and customers are saying and how they are saying it. Frequently, their anger or hostility has very little to do with the business situation, but rather is caused by the personal angst they’re experiencing.
Even though you’re stressed yourself, try to manage your emotions and stay in control. Don’t forget to say positive and reinforcing things to employees as well as customers. Financial stress can cause depression and a sincere compliment or expression of appreciation can pay huge dividends.
If things get out of control, don’t be afraid to walk away or postpone the conversation. Nothing can be gained by trying to reason with someone whose emotional state is out of control. If it’s one of your employees, let them go home for the rest of the day to relax and calm down. In fact, take a little mental health break for yourself too.
Have you had to deal with workplace rage in your small business? Share your story.
Small businesses appear to be more optimist about their financial position, but they still aren’t ready to hire, according to a new report. Capital One’s Spark Small Business Barometer for the second quarter found that 45 percent of small businesses across the country are reporting that they believe their financial position will be better in six months. That’s a seven-point increase from the fourth quarter of 2012 (38 percent). Futhermoe, 64 percent of small businesses responding to the survey say they are optimistic about the local economy, but slightly less than half are optimistic about the national economic picture. These numbers are similar to the 2013 Chase Pulse of Small Business Report which found 55 percent of small businesses believe their local economy is stronger than the nationally.
The on-going concern about the national economy may explain why many small businesses remain reluctant to hire. Two-thirds of the small businesses polled do not have plans to hire in the next six months, a one point decrease from Q4 2012 (68 percent). Similarly, the Chase survey found only 23 percent of small businesses expect to increase staff.
Where are you with your business? Are you gaining ground financially? Are you ready to grow?
New research from Kansas State University finds the average worker spends 60 to 80 percent of his or her time on the Internet engaged in activities unrelated to the job. It’s known as cyber-loafing or cyber-slacking and many business owners believe it’s affecting their bottom line due to lost productivity.
You might think it’s younger employees who spend their time surfing the web, but that’s not the case. The researchers found older workers may not spend as much time on social media sites, but they like to manage their finances during work hours. Even if their is an Internet usage policy in place, the survey found it didn’t change employees’ attitudes toward cyber-loafing.
Not everyone agrees, however, that cyber-slacking is necessarily a bad thing. In fact, some experts believe that employees who browse the web may be more productive. They site research that demonstrates employees who take a cyber-loafing break come back to their job refreshed and more engaged.
What do you think? Is cyber-loafing beneficial or destructive? Should there be a reasonableness standard? Let me know your thoughts.