The marketplace is competitive. Prospective customers expect you to extend credit to them. However, is it the right decision for your business? Offering credit to your customers has its pros and cons. If you choose to do it, establishing the right processes will be critical factors for a successful operation. Making the Decision Credit comes in many forms. For example, perhaps you think of checks as cash, but they are a form of credit. Credit cards are, of course, credit. Billing by invoices is a very common credit practice. Accepting these methods of payment comes at a price. You are trusting individuals and businesses to pay you at a certain point for your goods and services, which they are already using or have used. The positive aspects of extending credit include: The drawbacks of extending credit include: Setting Up Credit Practices If you decide to extend credit, you need to have a system in place before you take your first order and send out your first invoice. Here are four points to include in your system.
    1. Determine creditworthiness. Run a credit check on each business before you offer credit. Just because an individual is pleasant and hardworking doesn’t mean they are worthy risks.
    1. Set up guidelines and stick to them. Mark your invoices with the due date. Show at which point it will be considered delinquent. Put the contact information for your accounts receivable staff clearly on each invoice. This encourages customers to call when they have questions or need help.
    1. Set up an accounts receivable department or hire out the work. You want it professionally run, with good communication among customers, accountants, and management.
  1. Create a collection plan and implement it. Get all the pertinent information from your customer before you start doing business. Send out invoices on time. Give each customer a copy of your payment policies, which includes late fees and penalties. Get everything in writing in case the collections go to court later.
Knowing Credit Laws You are required to comply with all consumer credit laws. They dictate how you advertise interest rates, how you handle claims that there was a mistake in billing, and the method you use to collect debts. ScoreInfo, created by FICO, offers an excellent overview of consumer credit laws. There are many aspects of the debt collection process that consumer credit laws and the Federal Trade Commission (FTC), regulate. Be sure you keep on the right side of them. Dealing with Collections Your credit system needs to include a process for dealing with a customer who can’t or won’t pay a bill. Your procedure needs to take into consideration the local consumer protection agency rules for debt collection and well as FTC guidelines. Collecting a debt can be time time-consuming and expensive. In some cases, it is just easier to write it off. For example, if a customer declares bankruptcy, you may or may not be eligible to collect even a small percentage of what they owe. If you get awarded money, you still may need to pursue the customer to collect it. What’s the takeaway? It is easier to prevent the problem in the first place by extending credit wisely. Check out every prospective customer. Be very conservative in your choices. You are not required to extend everyone credit. While most customers come to expect credit, it is essentially a benefit from your business to theirs, and not merely a right.

Extending Credit To Your Customers

View Resource Extending Credit To Your Customers
Depending where they are in their startup phase, new businesses often get several types of investment funding. Though some entrepreneurs can bootstrap, that is fund themselves from savings and continue growing out of first revenues; many need outside sources of capital to hit the ground with products and services ready for market. Here is an overview of what you might encounter when it comes to partners, investors, and funding stages. Do You Need an Investor or Partner? Both partners and investors provide working capital that enable you to pay your employees, suppliers, business taxes, and even yourself. While investors typically provide an infusion of funds in exchange for a future return or ownership share, a partner often offers skills, experience, and know-how to help grow the business. Whether you require an investor or partner depends on your business needs and goals. Pursue an investor if you intend to: Enlist a partner if you intend to: Overall, if you want to maintain control of your business and only need funding, look for lenders or investors. If you are looking for someone to share the responsibilities of running the business and need the help of human capital, then choose a partner. Investments Based on the Stage of Your Company Your company has several stages in its funding cycle. Every company may not go through all these stages, but you should understand who funds businesses at various stages of growth. The amount of money you need and the people who can provide it may change as your business transitions from one stage to the next. Idea stage. You are the one involved at this stage, just you, your idea, your finances, and a dream. Co-Founder stage. Getting it up and running often takes some help in the form of a co-founder. Their enthusiasm, skills, contacts — and maybe even cash — can help get you on a more solid foundation. Because you have nothing of substantive value yet, this person is taking a risk. To compensate for this, you may give them equity. Family and friends stage. Before you get a working product to show real investors, you might very well run out of money. One option is to turn to your parents, siblings, relatives, and friends who might invest what they can afford. Hopefully, it is enough to keep working on your prototype. Angel stage. As time passes, you may have exhausted money received from family and friends, yet you are still not ready for market. Your next step may be to look for an angel investor to put in a more substantial investment. You might also get accepted into a startup incubator or accelerator program. These types of programs can provide you with working space, advice, and possibly even some money. Venture capital stage. By this time, you have a working model of your product and can attract the attention of a venture capital group. This stage might have several levels of investment that occur over time, with either the same or different venture capitalists adding additional funds at the next level. IPO stage. At this point, you are a real working company. You decide to go public to let your early employees, and you, cash in on the success of your business and the stock they’ve been holding. It can also give your company a significant injection of funding to make a major push in marketing, research, and manufacturing. Things To Look for in An Investor If you’ve decided to accept outside investment, make sure the people you are getting money from are a good fit for the long-term financial health and growth of your business. Here are five points to consider when working with venture capitalists and angels.
  1. Look into their background. Investors will check you and your company out thoroughly. Do the same with them. You want no surprises. Ask other startups that they are working with if they are good communicators. Are they reasonable and intelligent? Are they stable and courteous?

  2. Competition is good. Let them know that other investors are strongly considering investing in your startup. Much like a resume, a little creativity is helpful. Negotiate to get the best deal.

  3. Don’t be emotional. Yes, it is your dream. However, you are talking money now, so detachment and pragmatism are the watchwords.

  4. Understand everything. Ask questions. Have a lawyer and an accountant look over everything. Read each word before you sign.

  5. Get your own lawyer. Moreover, particularly one who has experience with startups. You need someone on your side who can not only explain the deal terms and conditions to you, but negotiate terms to make them more favorable to you and your business.
The bottom line: funding is out there, but it often comes with strings attached. Make sure being attached to those strings is something with which you are comfortable.

Working With Outside Investors

View Resource Working With Outside Investors
To lease or buy equipment: It can be a puzzling question for a startup or existing business. The answer, primarily, depends on your current and long-term needs and financial situation. It is not just about the monthly payment. You need to factor in maintenance, flexibility, tax deductions, and other issues. Here’s a breakdown of the pros and cons of both leasing equipment and purchasing equipment. Pros and Cons of Leasing Equipment Equipment Leasing Pros
Equipment Leasing Cons Pros and Cons of Buying Pros of Buying Equipment Cons of Buying Equipment Investing in major equipment for your business keeps it relevant in the marketplace. However, the costs can be formidable. Be sure to research what equipment you need and the most cost-effective way to get it, whether that is leasing or purchasing. Take into account maintenance and taxes, as well as the cash involved.

Lease or Buy Equipment

View Resource Lease or Buy Equipment
Every accountant will tell you the same thing: always keep your business and personal expenses separate. Also, each small business owner or one-person operation will nod her head and agree wholeheartedly. Meanwhile, back to business as usual. It can be hard to do. As sensible and logical as it sounds, and as highly recommended as it is, it is not easy for the entrepreneur to carry out. They often have a very rough and tumble life in the marketplace. It can be difficult deciding where your personal day ends and your business life starts. Moreover, when cash is hard to come by, it makes sense to rob Peter to pay Paul and vice versa. However, there are consequences to this mingling of moneys. The tax people do not like it. Your accountant gets mad. Your business suffers. Keep them happy and your business prospering. Here are five ways to ensure that your business money stays separate from your personal money. Best Practices
  1. Keep two bank accounts: a business account and a personal account. This is the basic way you can make sure the money from your life does not get mixed up with your business operations. If you put money into the correct account and take it out of the proper account, you are home free. One of the first things the IRS looks for is a separate business checking account.
  2. Have two sets of financial record keeping, one for business, and one for personal. Most small businesses use a system like Quicken, Microsoft Money, or QuickBooks for their accounting. So do many households. Be sure that you keep the record keeping entirely separate. This is essential for tax reporting purposes and also improves your financial organization. If you do not know where the money is going in your business, you cannot tell if you are making a profit. With a complete record from your financial reporting system, everything is in one place, listed by date and category. It makes filling out tax forms easy. If you leave the separating out of expenses, from personal to business, until March or April, you stand a good chance of making mistakes. It also requires major amounts of time that could better be spent running your business.
  3. Get a business credit card. Small companies and one-person operations often have trouble qualifying for a business credit card, but keep trying. It is a help for record keeping, gives you proof of expenses when the IRS comes calling, and also builds your business credit history. You can also get a deduction on your taxes with a business credit card from any interest charges.
  4. Incorporate. This is the complete way to ensure that your personal and business expenses do not mingle. As a separate legal entity, your business will have its documented life. Two of the most popular and useful incorporation structures for a small business are the LLC and the S corporation. It is best not to do this as a do-it-yourself project. Get a team composed of lawyer, accountant and financial planner to help you decide which form makes the most sense for you business needs.
  5. Pay yourself a salary. This is easy if you have incorporated, but is advisable even if you are a sole proprietorship. Pay yourself a wage. Don’t go over that amount with your personal expenses. Exceeding it just encourages you to dip into business funds to pay your current grocery or rent bills. When tax season rolls around, each of these five practices will make filling out forms easy and headache-free. Your company’s finances will be well-organized, enabling you to have a clear view of how it is doing, where the weak spots are, and where it is excelling.

    6. Keeping Your Business & Personal Finances Separate

    View Resource Keeping Your Business & Personal Finances Separate
    Cash flow is the lifeblood of most businesses. In the ideal world, it circulates smoothly. Customers pay their bills regularly which builds positive cash balances in your books. This cash is the money used to pay your suppliers, employees, and to fund your growth. That in turn, keeps your customers buying and paying. However, there are many twists and turns with the cash flow process. That is why it is important to know how to utilize it best to keep your business solvent and thriving. Basics of Cash Flow and Definitions It is helpful to understand the terms used when accountants, bankers, and business owners talk about the cash flow process. Comparison of Cash Flow to Profit Profit is different from cash flow. You may realize a healthy profit at year end, yet face an unhealthy cash flow at various times of the year. Understanding your business finances is not as simple as just looking at a profit and loss statement. Fundamentally, profit is simply your revenues minus your expenses. However, cash flow depends on a broad range of factors including: In essence, profit refers to income and expenses at a point in time. It is static in this regard. On the other hand, cash flow is dynamic. It involves the timing of the movement of money in and out of the business. Tips to Improve Cash Flow A healthy cash flow is an integral part of any successful business. Implement these suggestions as applicable to help you manage and improve the cash flow of your business. Remember, cash flow is the heartbeat of any business, large or small. Monitor it regularly, and do what it takes to keep a smooth flow of money circulating through your company.

    Managing Cash Flow

    View Resource Managing Cash Flow
    Developing and managing budgets can be a tiresome task for both individuals and companies. Without them, however, you do not know how your business is doing. Nor are you able to optimally plan for your business’s future. If you are budgeting by memory rather than pencil and paper, or worrying about payroll from week to week, you may be putting your company in danger. Budgets are a living, breathing part of a successful business if you plan them precisely and revisit them frequently. Use them as a map for the future, as well as a financial journal describing in detail where you have been. Budget Components There are three essential components of any budget:
    1. Sales and other revenues

    2. Total costs and expenses

    3. Profits
    Here’s a look at each in more detail.
    1. Sales and other revenues
      The more accurate you are with your revenue estimates, the easier your next year’s finances will be. Be conservative as you check over last year’s revenue, evaluate the current economy and the situation of your business.
      If you are a startup, look at the financial health and growth of others in your industry, use your experience, and conduct market research. If you are an established business, use the prior year as a base but adjust for current projections and marketplace conditions.

    2. Total costs and expenses
      Next, calculate your total costs of doing business, which includes identifying fixed, variable, and semi-variable expenses.
      Fixed: This includes fixed costs, such as rent, leased items like electronics, heavy equipment, furniture, and insurance.
      Variable costs: These expenses change based on sales. These include raw materials for manufacturing, freight costs and inventory.
      Semi-variable: Salaries, advertising, and telecommunications are typical examples.

    3. Profits
      This is why you are in business. Use either of these two formulas to determine if you made a profit:
      Sales = total cost + profit
      Sales – total cost = profit
      If you are a startup, benchmark your profit levels against others in your industry by checking with peers in your field and conducting market research.
      Without a good handle on what your profits will be from year to year, it will be next to impossible to plan for future years. New equipment purchases, a move to a larger location, and the raises and bonuses due your employees will all be dependent on understanding the profit position of your company.
    Budget Outlines The goal of identifying a budget outline is twofold. It helps you to find and organize information. A framework that is appropriate for your business will enable you to develop a budget with precise costs and income. Use the same outline from year to year to understand your prior years and help you plan for the next ones. Incorporate these tips when preparing the budget outline for your business. Budgeting Basics and Best Practices There are a number of budgeting best practices you should follow: Every company needs to spend time developing and updating their budget throughout the year. Your investors and lenders will want to review it if you are looking for an infusion of capital. Your budget helps you to manage cash flow and keep up with payments to employees, vendors, and suppliers. Most importantly, it can help you plan — and realize — future growth and profits.

    The Basics of Budgeting

    View Resource The Basics of Budgeting
    It is a truism for consumers and startups: it is much easier to get credit when you do not need it. Having access to extra money at critical times can be what keeps you afloat in the difficult early days of your startup. That is why it makes sense to find out how to establish credit for your new business and how to keep it strong. Steps To Establishing Your Credit Worthiness Businesses and consumers both need to look like excellent credit risks to banks, credit unions, credit reporting agencies, and credit card companies if they want to establish and keep their credit. Here is a look at four steps to take towards building a creditworthy reputation.
    1. Keep an eye on you own credit rating, as well as the one for your business. Many banks look at a businessperson’s credit rating first. If it is in the mid-600s or higher, you are considered a good risk. One of the best ways to keep that rating high is to have a low ratio of debt to credit on your credit cards and any credit lines you have available. Keep balances less than 30% of your credit card limit. Inquire about the personal credit rating of investors you are considering for your business. Lenders will likely look at those too.

    2. Get credit before you are desperate. Apply for any credit, even small amounts, as soon as you get into business. Most startups need a two-year track record before a bank will lend a substantial sum. However, smaller amounts, in the form of a business credit card, credit line from a credit union, or small bank loan, are entirely feasible early in the life of your business.

    3. Use your credit regularly and wisely. Your goal is to build an admirable credit history. You can accomplish that by using your credit often and paying it off quickly. In addition, even if you need to pay a fee, look into setting up a Dun & Bradstreet profile.

    4. Do business with one lender. Business and money are all about relationships. Get to know the lenders and managers at your bank and credit union. Keep them in the loop. Let them get a chance to see you in action and watch you new company grow.
    Identify Lenders and Sources Banks and credit unions are the most prominent places to get credit. Don’t automatically apply to the closest one. Look for one with a reputation for being friendly to small businesses. Ask other startups where they obtain credit. If a creditor gives credit to one startup, there is a good chance it will give it to you. Ask other startups about which credit cards are the easiest to get. Apply for a business card as soon as possible. Don’t worry about the limit, the goal is simply to get the card. Use it often and pay off the balance in full each month. Unique and Creative Ways To Get Credit Don’t let a turndown from one lender stop your efforts to get credit for your startup. There are many ways available. Using alternative credit sources does not harm your chances of eventually getting credit from a bank or credit union. In fact, it can improve it when they see you handle your money well and pay back balances on time. Here is a short list of other sources of credit. It pays to spend time working on your personal and business credit. Having strong business credit can position your startup more favorably for payment terms with suppliers and vendors, and let you enjoy better interest rates and terms from banks, credit unions, and other lenders. Remember, once you have established good personal and business credit, be sure to monitor and safeguard it.

    Establishing Credit

    View Resource Establishing Credit
    Keeping track of the money in your business is essential if you want to prosper. However, most small business owners have skills or a specialty that inspired them to start a company—and it was not number crunching. Understanding finances and basic accounting is a critical skill, as important as making and marketing your product. To stay informed on your business finances without the help of an accountant or financial planner, you need a solid grounding in basic accounting statements. Here is an overview of the four most important. Balance Sheet The point of the balance sheet is to provide a detailed look at your business financial situation on a given date. It is made up of three main components: assets, liabilities, and equity. Assets There are two primary categories of assets. The first are called current or liquid assets. These all have the ability to be easily and quickly converted to cash. These are typically cash, marketable securities, accounts receivable, inventory, notes receivable, and items like prepaid insurance. The second type are called fixed assets, like land, equipment, and buildings. Fixed assets get listed on your books at their historical cost, which is often less than what you could sell them for on the market. Liabilities Liabilities are what the business owes others, your creditors. There are also two types of these. Current liabilities, also called short-term, include the wages you owe, accounts payable, notes payable, and interest payable. Long-term liabilities are debt that are due in more than a year from the balance sheet date. These include items such as your mortgage or bonds payable. Equity Equity is what the business owes its owners. After the assets are used to pay all your creditors and outstanding liabilities, what remains belongs to you. A simple formula is: Equity = Assets – Liabilities Income Statement Often called the Profit and Loss or P&L, this gives a look at your company in terms of net profit or loss for a particular period. The two parts are: Income: what you earned, such as revenue from sales or income from dividends. Expenses: what your business paid out for items such as wages, rent and other costs of doing business. Depreciation expenses are also included here, which are typically accounting adjustments to asset values. The simple formula for this is: Income – Expenses = Net Profit Statement of Owner’s Equity Also called a Statement of Retained Earnings, this accountant report lists in detail the change or movement of an owner’s equity over a given period. It has five parts:
    1. Net profit or loss, which gets reported in the income statement
    2. Share capital, which is the portion of a company’s equity that has been obtained by trading stock for shareholder cash
    3. Dividend payments
    4. Gains and losses in equity
    5. Results attributable to a change in accounting policy or a correction of a previous accounting error
    Cash Flow Statement The Cash Flow Statement documents the changes and movement of your cash and bank balances during a specified period. It has three parts: Operating activities: these include the flow of cash from the main activities of your business Investing activities: these include cash flow involved in the sale and buying of assets unrelated to inventory. An example would be buying a new factory. Financing activities: these include money made or spent on raising share capital, issuing or repaying debt, as well as paying interest and dividends All four financial statements are closely inter-related. While the intricacies may be confusing, a fundamental understanding of the essential accounting statements and the information included in them is beneficial for the small businessperson to master. Making a skilled accountant part of your team is the best way to stay on top of the arcane, confusing world of numbers that tell the story of how your company is doing.

    Basic Accounting Statements

    View Resource Basic Accounting Statements
    Small Business Administration loans are among the most common ways to fund a startup. Though you still need to prove you are a good risk, these loans are often easier to qualify for than standard bank loans. The Small Business Administration, also known as the SBA, doesn’t lend you the money. Instead, it guarantees a percentage of the loan amount, which makes it more likely a bank, community development organization, or micro-lending institution will approve a loan for your business. There are several benefits of an SBA loan, including: Types of Loans Available The SBA has several types of loans available. The most popular are: Qualifications for Loans Many owners of a small business in trouble think these loans will bail them out. That is not true. You still need to have good credit, personal assets, a business plan, and proof that you are a going concern. This is not a program for companies that are failing. The qualifications you need to meet to get an SBA loan are as follows: Applying for Loans These loans require much documentation. These include statements for: The lender will ask a number of questions about your business to see if he thinks you are a good risk. These might include: The SBA is not a lender of last resort if you are teetering on bankruptcy, but it can lend a substantial financial hand if you need money for growth and to get over a slowdown. If you meet the standard requirements, this is an excellent way to get a low-interest loan with affordable monthly payments. For additional information on Small Business Administration loans, visit the SBA Loan Program website.

    Small Business Administration Loans

    View Resource Small Business Administration Loans

    You need an efficient way to get paid for your product or service in order to stay in business. Cash, checks, credit cards, and online payments are the primary ways to get paid.

    Here is a look at how to set up a professional, easy-to-use payment system for your business.

    Setting Up Your Business to Receive Payments

    There are three important steps for setting up your payment system.

    1. Obtain a business bank account. If you are a single-person business owner, it might seem easier to use your personal bank account and keep track of business income and expenses by listing the business payments and withdrawals separately. This is not a good idea. You can get into trouble when your personal bank account doubles as a business account for these reasons:



      • Mingling the accounts makes it hard to figure out your taxes.
      • It makes it more challenging to determine if you are making a profit.
      • It is hard to set aside money for business expensed and expansion because it is so tempting to spend your company money on personal needs and bills.


    2. Request a Tax ID number. Taxes are a universal part of the business experience. To get started, you need to request a tax ID number from the IRS by completing IRS Form SS-4, which you can get online without charge. With this in hand, get a state tax ID number. You can find the right website by visiting the Tax, Accounting, and Payroll Sites Directory and clicking on State and Local Tax.


    3. Apply for a fictitious name. You need this if you do business under any name other than your personal name. Register it locally and at the state level.

    If your business only accepts cash and checks, this is all you need to do. However, with so many business transactions being done now with credit and debit cards, or other online payment methods, you should consider setting up a merchant account and an online payment system too.

    Both make it convenient for consumers to buy. They also provide the added benefit of getting customers to make impulse purchases. By accepting payments via credit or debit cards, you make it easy to accept payment whether your customer is local or on the other side of the world.

    Accepting Credit Card Payments

    To make use of credit and debit cards, you need to set up a merchant account. This allows you to accept Visa, MasterCard, American Express, Discover, and other types of cards.

    The merchant account service provider is a middleman between your business and your customer. The merchant account service provider will process payments, debit the money from the customer’s card, and deposit it into your business account. The equipment you need varies.

    Merchant account service providers provide these main types of accounts:

    Other Payment Options

    Here are two more ways to accept money that are becoming more prevalent.

    The more ways you can accept payment, the easier you make it for customers to do business with you. In the age of the Internet, it is not uncommon for freelancers and small merchants to conduct business globally. Be open to new ways of accepting payment to make your business and services accessible to the largest number of consumers.

    Experience the Difference of Banking Local

    At Warsaw Federal, we understand your unique needs. Whether you’re looking for personalized banking solutions, competitive loan rates, or expert financial advice, we have what you need!

    Start Banking Local 

    Accepting Payment

    View Resource Accepting Payment