how to finance a franchise

How to Finance a Franchise.

A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.

Part 1 Arranging Financing with the Franchisor.

1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.

Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.

Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.

This information may be available online or in other documents provided with your franchise application, or you may need to request it.

2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.

McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.

3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.

The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.

Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.

Part 2 Securing Outside Financing.

1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.

Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.

These loans usually require you to have already established a relationship with a banker.

2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.

SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.

You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.

The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.

3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.

Two of the biggest online loan portals are Boefly and Franchise America Finance.

Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.

4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.

Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.

Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).

However, equity does not have to be repaid (unlike a loan).

You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.

Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.

Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.

If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.

Part 3 Using Your Own Assets.

1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.

Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.

2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.

You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.

You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.

Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.

3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.

If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.

Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.

So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.

Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.

Be warned, however, that if your new business fails, your retirement funds will be wiped out.

Part 4 Refinancing Your Franchise.

1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.

You can get a loan at a better interest rate.

You want to consolidate multiple loans into a single payment.

You want to change from and adjustable to fixed rate of interest, or vice versa.

You need more capital to update equipment, make improvements, or open an additional location.

2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.

Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.

Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.

3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.

There may be other penalties as well, based on the details of your old loan.

The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.

4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.

Strengths and weaknesses of your business.

Major milestones or accomplishments.

Expertise you have developed in running the franchise.

Goals for the next two to five years.

Two years of tax returns.

The payment schedule of your current loan.

5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.

Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.

You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.

Tips.

Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.

Warnings.

It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.

Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.

December 02, 2019

How to Finance a Franchise

How to Finance a Franchise.

A franchise is a business for which a person is licensed by a large company to operate under its name. As a franchise licensee, you operate a business and, in some cases, a brick-and-mortar location. Even without a physical storefront, starting a franchise requires a fair amount of money. There are several ways to finance a franchise. In addition to using your savings and leveraging your existing assets, there are loans and grants available from many sources. You may need to utilize more than one of the following methods to raise enough capital to start your business.

Part 1 Arranging Financing with the Franchisor.

1. Find out what financing your franchisor offers. The place most franchise licensees will start looking for financing is with the franchisor company itself. Many offer loans through their own finance companies or third party financiers they have business relationships with. This will often cover a significant portion of your startup costs.

Franchisors may also have agreements already set up with companies that can lease you some of the equipment you need to get the franchise up and running.

Each franchise has it's own package in terms of what it will offer new franchise licensees. Check into what your company offers.

This information may be available online or in other documents provided with your franchise application, or you may need to request it.

2. Look into down-payment and collateral requirements. Franchisors will require you to demonstrate that you have some collateral that will allow them to recoup their money, should your franchise fail. Many also require that you put up a down-payment of money that you have NOT borrowed from other sources.

McDonalds, for example, typically requires new franchise licensees to pay 25% of the costs of a franchise out of pocket, in cash. This ensures that franchises only go to people who have the necessary resources to make payments.

3. Apply for financing. Complete the necessary forms to apply for financing from the franchisor. Again, these will vary based on the company. Information about how to apply for financing may be included in the Franchise Disclosure Statement, or you may need to request it from the company.

The Franchise Disclosure Statement is a document you will receive from the company if your franchise application is approved. It spells out in minute detail the specifics of the franchise agreement. It is mandated by the Federal Trade Commission that all franchisors provide this document to licensees.

Like any other loan application, you will be expected to provide information about your assets, financial history, and net worth.

Part 2 Securing Outside Financing.

1. Apply for a bank loan. Another option consider for financing your new franchise is a standard small business loan from a bank. Especially if you have a good credit rating and are opening a franchise with a positive reputation, banks may be willing to offer you some starting capital.

Typically bank loans of this sort will require you to put up some kind of collateral, such as your home or any stocks or bonds you might own. They will also often want you to pay for as much as 20% of the cost of starting the franchise from your own money, to be certain you are capable of covering major business costs.

These loans usually require you to have already established a relationship with a banker.

2. Apply for an SBA loan. If your bank won't provide you with a loan, you may be able to secure a loan through the US Small Business Administration. These loans are disbursed by banks and credit unions, but are guaranteed against default by the federal government.

SBA loan 7(a) is available to franchise licensees opening any business on the SBA's franchise registry.

You can borrow between a couple hundred thousand and a few million dollars through the SBA. These loans typically have a five-year maturity period, so they work well for startup costs, but not longer-term expenses.

The International Franchise Association provides a directory on their website of vendors that administer SBA loans. The process of applying for an SBA loan, however, is a highly complicated one. Thus, it is usually recommended that applicants secure assistance from an accountant. If you don't have an accountant, your franchisor may be able to suggest someone.

3. Apply for a finance company loan. A recent development in the world of franchise financing is the online loan portal. These are websites that match franchise licensees with private creditors.

Two of the biggest online loan portals are Boefly and Franchise America Finance.

Some franchisors have have relationships with these companies. Ask your franchisor if they subscribe to any of these website.

4. Find investors or business partners. Another option for financing is look for a business partner to share the cost (and profits) of your new franchise. Many franchise licensees also turn to friends or family to borrow money or ask them to invest in the business.

Several small loans from friends or family members, to whom you promise to pay some mutually agreeable interest rate or equity in the business, can go far to cover the costs of starting a new franchise.

Equity means that your investors will be entitled to a share of the profits from the business and have a certain measure of control over its operations (depending on your agreement with them).

However, equity does not have to be repaid (unlike a loan).

You can also advertise in the local press seeking an investor or business partner. However, advertising for investors can be tricky, due to securities laws regulating the solicitation of public investors. Hire a financial lawyer to make sure you are staying on the right side of the law.

Be sure to draw up a formal agreement about the terms of the investment (i.e. how much they are investing, what interest rate you will pay, and over what period you will pay back the loan). This is especially important if you have investors who you don't know well.

Obtaining investment in this way will require accepting investments under the Securities and Exchange Commission's (SEC) Regulation D and the creation of official offering documents that detail the investment in a specific format.

If you are using Regulation D, be sure to hire a financial attorney to guide you through the process. Otherwise, you open yourself up to financial and criminal penalties resulting from violations of SEC regulations.

Part 3 Using Your Own Assets.

1. Use savings and other assets. Most franchise licensees end up covering at least a portion of the startup costs from their own resources. An obvious place to start is with your own cash savings.

Don't go overboard on this. A good rule of thumb is not to invest more than 75 percent of your cash reserves. That way, if an unexpected expense comes up, you have some money to cover it.

2. Borrow against your home. Many people starting a new business will borrow money based on the value of their home to get the business started. Money borrowed on the value of your home is tax-free. There are two ways to do this.

You can get a line of credit based on the value of your home. This is known as a home equity line of credit (HELOC) and is best for when you are unsure of how much money you will need, as the line of credit structure allows you to borrow as needed.

You can take out a second mortgage on the house. This will provide you with a set amount of money that must be repaid as a regular mortgage would.

Be warned that with either of these options, if you find yourself unable to make payments on the money borrowed, you could lose your home.

3. Use your retirement fund. Another common approach to self-financing is to use funds in your retirement account.[16] IRAs and 401(k) plans can be withdrawn from to finance all or part of a franchise business. However, there may be significant fees and taxes involved, depending on the plan type.

If you withdraw these funds as cash, you'll lose a significant chunk in taxes. There may be ways to avoid doing so, but you should seek professional legal and tax help when attempting them due to the complexity and possible negative consequences.

Taking funds out a traditional IRA or 401(k) before the age of 59.5 will result in a 10 percent penalty being assess on the withdrawal. This is in addition to the income taxes assessed on the withdrawal.

So, if you withdraw $100,000 and you are in the 25 percent marginal tax bracket, you would pay a total of 35 percent ($35,000) on your withdrawal, leaving you with only $65,000 for your business.

Withdrawals from a Roth IRA, however, are tax and penalty-free, provided they consist of contributions that have been in the account longer than five years.

Be warned, however, that if your new business fails, your retirement funds will be wiped out.

Part 4 Refinancing Your Franchise.

1.Decide when to refinance. Refinancing is taking on a new loan which pays off any old loans you already have. Most commonly, this is done to reduce interest payments, but could also be an opportunity to borrow additional funds and consolidate that loan with existing ones. You should consider refinancing if.

You can get a loan at a better interest rate.

You want to consolidate multiple loans into a single payment.

You want to change from and adjustable to fixed rate of interest, or vice versa.

You need more capital to update equipment, make improvements, or open an additional location.

2. Look into refinancing options. It is a good idea to frequently look for loans that will offer more favorable terms than the one(s) you already have. This can significantly reduce your interest payments and free up capital for other uses.

Once you've been in business for a while, you may become a more attractive customer to banks and other financiers. This is because over time, you demonstrate your ability to successfully run your franchise. This makes you a less risky investment. That, in turn, can lead to offers with better rates.

Check with your bank, and re-examine the option of an SBA loan, as this is often the least costly option for people who can get one.

3. Weigh the fees against the savings. Refinancing isn't free. There are usually fees, such as closing costs, involved in refinancing any loan.

There may be other penalties as well, based on the details of your old loan.

The question to ask is whether the savings outweigh the fees, time, and effort that go into refinancing. You may find that you can refinance and save a thousand dollars over the life of the loan. You'll need to decide if that's worth the time and effort. Your answer might be very different if you could save ten thousand dollars.

4. Update your business plan. Before applying for a new loan, update your business plan to reflect the current state of your business and your goals for the future. Your new business plan should include.

Strengths and weaknesses of your business.

Major milestones or accomplishments.

Expertise you have developed in running the franchise.

Goals for the next two to five years.

Two years of tax returns.

The payment schedule of your current loan.

5. Apply for a new a loan and pay off the old one. Fill out an application for the new loan. When you receive the funds, pay off the old loan.

Typically, the bank will handle the payoff for you. They will pay off your old loan, and billing will come from the new loan company from then on.

You may be able to refinance with a lender you already have loans from. This can save time and effort and sometimes mean less fees.

Tips.

Be sure to have any investment agreements reviewed by a legal professional prior to accepting money from investors, especially if they are people you don't know well.

Warnings.

It is not advisable to invest money set aside for specific important purposes (such as your children's college fund) in your franchise. As confident as you may be in its success, businesses fail every day. If that happens, there will be no way to recover your money.

Never use money from new investors to pay previous investors. Doing so could inadvertently turn your legitimate attempt to finance a franchise into an illegal investment scheme.

December 03, 2019

How to Finance a Business Purchase

How to Finance a Business Purchase.

Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.





Taking Out a Loan



Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.

Own or seek to own a small business as defined by the SBA. This information can be found on their website.

Plan to operate for profit.

Plan to operate within the United States or its possessions.

Have your own assets invested in the business.

Show a need for the loan.

Not owe the US government any money.



Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.

If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.



Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:

Equity in your own home.

Assets owned by the business, like accounts receivable and inventory.

A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.

Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.



Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.

Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.

You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.



Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:

Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.

Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.







Financing the Purchase With Your Own Assets.



Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.



Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.



Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.



Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.







Bringing On Investors or Partners.



Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.

In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.



Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.



Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.

Angel Investors can be located by visiting the Angel Capital Association's website.



Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.







Getting Seller Financing



Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.

Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.

Obtaining seller financing may give you more power in negotiating down the price of the business.

Doing so also gives the seller reason to help you out more in running and managing the business.[



Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.

If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.



Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.

You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.

Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.



Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.

The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.



Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.

November 14, 2019

how to finance a business purchase

How to Finance a Business Purchase.

Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.





Taking Out a Loan



Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.

Own or seek to own a small business as defined by the SBA. This information can be found on their website.

Plan to operate for profit.

Plan to operate within the United States or its possessions.

Have your own assets invested in the business.

Show a need for the loan.

Not owe the US government any money.



Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.

If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.



Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:

Equity in your own home.

Assets owned by the business, like accounts receivable and inventory.

A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.

Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.



Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.

Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.

You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.



Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:

Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.

Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.







Financing the Purchase With Your Own Assets.



Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.



Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.



Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.



Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.







Bringing On Investors or Partners.



Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.

In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.



Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.



Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.

Angel Investors can be located by visiting the Angel Capital Association's website.



Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.







Getting Seller Financing



Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.

Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.

Obtaining seller financing may give you more power in negotiating down the price of the business.

Doing so also gives the seller reason to help you out more in running and managing the business.[



Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.

If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.



Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.

You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.

Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.



Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.

The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.



Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.

November 13, 2019

how to finance a business purchase

How to Finance a Business Purchase.

Buying an existing business can be convenient in a number of ways. You're buying into a proven business model with existing customers, marketing, and products. With this framework in place, you can also begin repaying your purchase expenses immediately with the profits earned by the business. However, financing that business purchase in the first place can be just as expensive as starting a business yourself. Consider the following methods for coming up with the capital to purchase a business and choose those that best suit your needs.



Method 1 Taking Out a Loan.



1. Investigate SBA loans. The Small Business Administration (SBA) guarantees loans to small business to help them get started and expand their operations. To get started on the road towards acquiring SBA financing, visit a local bank or financial institution that provides SBA loans. The SBA loan makes it easier for you to acquire financing, as part of the loan is repaid by the SBA if you fail to make payments. Specifically, the loan program you will be looking for is the SBA Basic 7(a) loan program, which is used for acquiring or starting new businesses. To qualify for this type of loan, you must.

Own or seek to own a small business as defined by the SBA. This information can be found on their website.

Plan to operate for profit.

Plan to operate within the United States or its possessions.

Have your own assets invested in the business.

Show a need for the loan.

Not owe the US government any money.



2. Meet with financial institutions. Financing is also available through local lending institutions, like banks and credit unions. However, this type of lending can be very difficult to secure, particularly if you have less-than-stellar credit or if there are not significant personal or business assets that can be used as collateral. To qualify for a traditional bank loan, you will need demonstrable management experience, strong existing cash flows, experience in the industry, and a high personal credit score. It may also be easier for you to obtain a loan if you have an existing, strong relationship with the bank providing the loan.

If you are a woman, veteran, or minority, banks may have special lending programs that you can qualify for.



3. Assess the collateral you can provide. Your collateral is the assets, either yours or the business's, that you can provide as insurance in case you default on your loan. For some business loans, these may need to be worth as much as 50 to 70 percent of the loan value. When providing collateral for the banks to use, you can include any of the following:

Equity in your own home.

Assets owned by the business, like accounts receivable and inventory.

A personal guarantee. This essentially means that, in the event of a default, you are personally liable to repay a certain amount of the loan value.

Most lenders, including the SBA, require a personal guarantee for a loan in addition to any collateral pledged. This is because they would prefer avoiding have to take possession of the collateral and go through the subsequent sale.



4. Get pre-qualified for several loans. Before finalizing the purchase of the business, you will need one or several letters of pre-qualification for loans. This means going through the loan process with each lender and getting the go-ahead from them to purchase the business. You can then show the letters to the seller and finalize the purchase, at which point you will need to actually take out one of the loans that you are pre-qualified for.

Getting pre-qualified for several loans is advantageous in case the lending requirements change between your pre-qualification and the close of the sale.

You will need to be pre-qualified for more than the purchase price of the business. You should also include about 90 days of working capital (money used to keep the business functioning, like utilities and inventory purchasing money). You can work with the current owner to assess how much is needed.



5. Consider alternative loan options. There are many other sources of loans available to finance the initial purchase of a business. For some people, there may be an opportunity to borrow money from friends or family. However, bear in mind that this may damage your relationship with that person if things go south. Some other options you can consider include:

Peer-to-peer (P2P) financing. Online lending markets like LendingClub.com and Prosper.com allow you to borrow small amounts (generally less than $25,000) from other people. However, rates on these sites are typically higher than what a bank or the SBA could offer you.

Microloans. Microloans are for smaller amounts that traditional business loans (usually less than $50,000) and have shorter durations (under six years). Check with the SBA or a microlending specialist to investigate your options.



Method 2 Financing the Purchase With Your Own Assets.



1. Use your own savings. The easiest and cheapest way to finance your own business is with your own personal savings. This includes any savings accounts, CDs, investment accounts, or other liquid accounts you hold. By using the money from these accounts to finance your personal, you can avoid having to work with partners, investors, or lenders when running your business. However, it is rare that an individual has enough money in these accounts to purchase a business.



2. Sell any valuable assets you currently own. Another way to raise money is to sell off valuable assets that you own. Parcels of land, non-essential vehicles, and boats can all be sold to raise this type of money.



3. Borrow against your home equity. You can borrow against the value of your home using a second mortgage or a home equity line of credit (HELOC). However, this requires having enough equity in your home in the first place. More importantly, it also introduces the risk that, in the event of the business's default, your house may be foreclosed upon by the lender. Consider the risks and try every other options available to you before pursuing this type of financing.



4. Avoid purchasing the business with your retirement savings. While it is possible to roll your IRA or 401(k) savings balances into a business venture without taking a tax hit, doing so is incredibly risky. If your business fails to perform as expected, you could lose all of the money you have saved for retirement. Personal finance experts recommend against using this as a method of business financing.



Method 3 Bringing On Investors or Partners.



1. Consider finding a partner or several of them. A partner is someone who provides some initial purchase money for the business in exchange for an ownership share. Your partner will likely want to be involved in the business in some way, so make sure to only take on a partner that you can work well with. And being personally close with someone doesn't make them a good partner; sometimes a trusted or knowledgable co-worker or acquaintance can make a better partner than a friend or family member.

In addition, make sure to draw up a legal contract that clarifies the terms of the partnership. This agreement should list how disputes are settled, how major decisions are made, and exactly how profits are divided.



2. Work with a silent partner. A silent partner is one that contributes capital to the business, but has no say in its operations. However, many silent partners eventually want to have a say in how the business is run. Again, to ensure that this relationship works as planned, draw up a partnership agreement that specifies the terms of your partnership in detail.



3. Bring on angel investors. An angel investor is a wealthy private investor who gives start-up capital to new businesses and new business owners in exchange for equity in that business. Businesses with angel investors benefits from the angel investor's industry expertise, business contacts, and financial resources. Locating angel investors, however, can be difficult. You'll have to locate a high net worth individual who shares your passion for the business you are buying and its industry. Then, you'll have to convince them of your own management skill and your ability to give them a good return on their money.

Angel Investors can be located by visiting the Angel Capital Association's website.



4. Engage in equity crowdfunding. Equity crowdfunding, which involves selling small stakes in your business to a large number of small investors, is a relative newcomer in the world of business financing. While equity crowdfunding has been around for years, operating through sites like SeedInvest, it has recently become tightly regulated by the Securities and Exchange Commission (SEC). Equity crowdfunding can be an effective way to raise money, but only with the proper guidance, as following SEC guidelines can be complicated.



Method 4 Getting Seller Financing.



1. Consider the benefits and drawbacks of seller financing. Seller financing, also called owner financing, is a purchase arrangement in which you repay the sale price of the business directly to its previous owner over several years. For the buyer, this provides some flexibility in repaying the loan, such as negotiating a longer repayment period, a temporary reprieve from payments, or reducing the price in exchange for letting the owner keep some equity in the business. However, this type of arrangement is typically more expensive, with the owner charging a higher interest rate than the bank would charge.

Ideally, the buyer should negotiate an arrangement where all or a portion of the loan financed by the seller may be contingent upon the profits reached and payable over a limited term. This protects the buyer in case profits are not as high as expected.

Obtaining seller financing may give you more power in negotiating down the price of the business.

Doing so also gives the seller reason to help you out more in running and managing the business.



2. Ask the seller if they would consider seller financing. Start by asking the seller directly if they would consider seller financing. It may help if you explain to them that this will result in their getting more money over time, as they get to keep the interest on your loan (rather than the bank keeping it). If they agree, you can begin negotiating a contract.

If possible, avoid securing the seller with assets purchased. This gives you a cushion if additional financing is needed to get the business is running smoothly.



3. Negotiate a contract. Work with the seller to form the terms of sale. Start by offering to make a down payment with what you can gather on your own, say 10 to 20 percent of the sale price. Try to offer as large of a down payment as you can afford; this will only help you and save you money in the long run. Then discuss a repayment period and interest rate. Try to negotiate a longer repayment period and lower interest rate to make sure that you can afford the payments.

You may be able to agree on a large, balloon payment in a number of years. This will reduce your monthly payments. Then, you can get a bank loan or use your savings to cover the balloon payment.

Alternately, where a C corporation is involved in the purchase, issuing preferred stock may be a better option than debt for the buyer when repaying the balloon payment.



4. Have a lawyer review the contract. Ideally, you should have an attorney that specializes in business contracts draw up the contract. However, you can also have one review the contract to ensure that your interests are represented and that there are no surprises waiting for you in the wording of the contract. You may also want to have an accountant review the financials of the deal to make sure everything checks out.

The lawyer, and possibly an accountant, should confirm the validity of the financial statements, specifically the identity, value and location of assets and liabilities.



5. Finalize the deal. Once you've been assured that the contract is right for both you and the seller, close the deal and take control of the business. With seller financing, you'll likely be able to convince the previous owner to help you out with getting started as the manager of your new business.

November 22, 2019

How to Stop Being Broke

How to Stop Being Broke.

If you're sick of being broke, it's time to take control of your finances! Whether you need to work on your spending habits, learn how to save, or find ways to earn more money, you can find a way to stop being broke. Follow these steps to start working towards financial freedom and better peace of mind.

Part 1 Getting into the Right Mindset.
1. Set goals. If you want to change your financial situation, you need to get specific about want you want to accomplish. Think about exactly what you want your finances to look like and what you can do to achieve those goals.
Setting short-term goals in addition to long-term goals can help keep you motivated by providing you with a sense of accomplishment.
Create a budget for non-essential items and hold yourself accountable for it each month. If you go over-budget one month, tell yourself that your budget for the next month is reduced as a result.
2. Stop comparing yourself to others. If you're spending beyond your means because you feel that you need to keep up with your friends or show others that you can afford a certain lifestyle, you're not doing yourself any favors. Stop worrying about what others can afford and think about how you can live within your means.
Stop equating your self-worth with your ability to buy things. This kind of thinking will make you extremely unhappy in the long run and will probably get you stuck in debt forever.
3. Track your expenses. To understand exactly where all your money is going, keep careful track of every dollar you spend. You can do this with a pen and paper or electronically if you use a card for everything, but make sure to account for everything. This simple habit will help you spend more wisely.
Try categorizing your expenses and adding them up on a monthly basis. For example, you could create categories for food, housing, transportation, utilities, insurance, entertainment, and clothing. Then calculate what percentage of your income you are spending on each category. You might realize that your expenses in some of these categories are way too high.
To understand how much you can afford to spend each day, subtract your fixed expenses from your monthly income and divide the remaining amount by 31.
4. Make a plan for getting out of debt. If you are broke because you have credit card debt, a car payment, or student loans, think about what you can do to pay off these debts faster.
Making even a few extra payments each year can help you pay off your debts much faster.
5. Start saving. This may seem impossible if you are always broke, but planning for the future will help you get out of this cycle. Start small by just putting $50 in an emergency fund each month.
Don't forget to save for retirement! Take advantage of the 401k offerings at your company or open an IRA account.

Part 2 Avoiding Money Traps.
1. Avoid lending to others. While you may want to help out your loved ones who are in need, you really shouldn't be lending money if you can't afford to pay your own bills.
2. Avoid payday loans. While they may seem like a good solution if you're strapped for cash, the interest rates are ridiculously high, so they will only get you further into debt.
3. Understand how much it will really cost. Before you take out any kind of loan or finance any purchase, be sure to calculate what your monthly payments will be, how long it will take you to repay the debt, and how much you will be paying in interest.
In some cases, paying interest may be worth it. For example, most people cannot afford to purchase a house without taking out a mortgage, but depending on the price of the house and the average cost of rent in your area, you might still be saving a significant amount of money by choosing to buy with a mortgage instead of renting.
Be especially wary of high interest rates for depreciating assets like vehicles. If you decide to sell your vehicle after you have owned it for several years, it may be worth less than what you owe on it. This can also happen with real estate when the market conditions are poor.
4. Avoid impulse buys. If you always have a plan for what you will buy, you will have a much easier time managing your finances.
If you have a hard time controlling your purchases when you go to the mall, try to avoid going to the mall at all.
Write out a list when you go shopping so you will always know exactly what you need to buy.
5. Use credit cards wisely. If you have a harder time keeping track of your expenses and sticking to your budget when you use a credit card, stop using it.
Paying with cash instead of a credit card will allow you to visualize how much of your available funds you are spending on a given purchase.
If you are able to stick to your budget when using a credit card, look for one that has no annual fee and will reward you with cash back or other incentives. Just make sure you always pay your bill on time or these incentives will not be worth the price you are paying in interest.

Part 3 Spending Less.
1. Assess your daily or weekly spending habits. Once you have a solid grasp on what you are spending your money on, you can start cutting out expensive habits.
2. Buy used items. You can save on everything from your next car to furnishings for your home by buying gently used items.
You can sometimes find really great clothes that have barely been worn at thrift shops for a fraction of the price.
3. Look for monthly expenses that can be cut. If you pay for monthly memberships or subscriptions, carefully assess how much they cost, how much you use them, and whether you could give them up.
Make sure you're not paying for services that you never use. For example, if you have premium cable channels that you never watch, you can cancel them without feeling like you are making any sacrifices. The same goes for your cell phone bill if you are paying for more data than you ever use.
4. Compare items or brands when shopping. If you're on a tight budget, you want to make sure you're always getting the best deal on absolutely everything. Take some time to compare prices for items you purchase regularly and for large purchases.
If you've had the same auto insurance carrier or cable company for a long time, there might be better deals out there, so be sure to comparison shop regularly.
Shopping for necessities online can be cheaper in some instances, but make sure you take shipping charges into account.
Use coupons to save some extra cash. Keep in mind that many retailers accept competitors' coupons.
5. Ask for a better deal. You can always ask your service providers for better deals, especially if you've been a loyal customer. The worst they can say is no.
Try this with your cable and internet providers, insurance companies, and cell phone carriers.
6. Spend less on entertainment or at restaurants. Whether it's dining out or going to amusement parks, entertainment can eat up a big chunk of your budget. Look for less expensive ways to have fun.
Learn to cook at home and keep the fridge well stocked with ingredients for things that you know you can cook from scratch when you come home late and don't have much time to whip up a grand meal.
Instead of going out to eat with friends, invite them over for a potluck.
7. Do more yourself. It may be convenient to use a laundry service or to have someone else shovel your driveway, but if you're physically capable of doing these things yourself. Think about the money you can save.
If you're not very handy, try to teach yourself to do more around the house. If you need a simple repair done, you may be able to watch a video online or take a class at a local home improvement store to learn how to do it yourself.
8. Save money on energy. Go green around the house to save money on your utility bills each month.
Sealing up air gaps can reduce your heating and cooling bills. If you own your home, investing in a properly insulated attic can make a huge difference.
Turning your heat down just a few degrees in the winter can make a big difference in your energy bills as well. A programmable thermostat will let you automate the temperature of your house so you won't spend money on heating the place to a comfortable level when you're not at home.
9. Avoid bank and credit card fees. Choose your bank and credit card providers wisely in order to avoid unnecessary fees.
Make sure to only use the ATM at your bank if you will get charged for using outside ATMs.
10. Aim to have a few no-spend days a month. After a while, it becomes a game: "How can I run my life today without writing anything down in my little blue book?" "How ingenious can I be to make do with the things, food, and resources I already have at my disposal?" See how often you can turn this into a habit.

Part 4 Earning More.
1. Get a better job. If spending less is just not enough, it may be time to get a better job that will allow you to make more money. Start by updating your resume, searching for listings online, and networking with other professionals in your field.
Don't forget to look for advancement opportunities within your company.
2. Do something else on the side. Using your skills to provide freelance or consulting services is a great way to earn additional income. If this won't work with your profession, get a part-time job or find creative ways to make some extra cash on the side.
You can make some extra money by performing jobs like mowing lawns, cleaning houses, or even walking dogs for people in your neighborhood.
3. Sell stuff you don't need. You probably have at least a few possessions that you no longer need or want, and you can turn those items into extra cash by selling them to people who do want them.
If you have lots of unwanted items, try having a yard sale.

Community Q&A.

Question : My family barely has any money. My dad has his own company, but it hasn't gotten any business in a long time. I have some money saved up, and I was think of leaving a little in my dad's wallet. What do you think?
Answer : Definitely do. Work as much as you can and give and much as you can. Also putting your family's money in a good, interest-bearing account can help a lot.

Tips.

To always have money in the bank to pay regular bills, add them up for the past year and divide by 52. Round up to the next 25, 50, or 100 dollars. Remember to add in quarterly or annual bills, too.
Buy clothes that can be used for several different occasions instead of only one-time events.
Use coupons on items whenever you can.
Start a Christmas Club account, but put in more than you expect to spend on gifts. The excess is great for a mini-vacation or special purchase.
Get a jar to collect your spare change. When it's full, take it to the bank. (Don't take it to one of those coin counters, as they charge for counting your change.)
Take it a day at a time. Start small, set goals, reward yourself (not with any type of shopping, of course) and enjoy playing the game.

July 02, 2020

How to Build a Diversified Portfolio

How to Create a Profitable Property Portfolio.

You've been thinking about investing in property. Although investing in real estate can be an overwhelming thought for some people, it can also bring great rewards. You may want to consider investing as a way to create cash flow or build a nice nest egg. Becoming profitable in investing requires a certain degree of skill and know-how, but once you stick your toe in the water, you may become hooked.

Method 1 Planning and Researching.
1. Know why you’re buying. Before you buy an investment property, you need to consider your investment strategy. Put some thought into what type of investment interests you and meets your needs. Perhaps you would like to diversify your holdings besides stocks and bonds. Maybe you would just like to build your wealth or improve your cash flow. Whatever your reasons are for wanting to invest, it is good to be clear on them before you start. A few common reasons for investing in real estate include the following:
You want to increase your current income. Getting a monthly rent check, for example, can give your income a boost.
You're interested in capital gain — buying a property and later profiting from its sale.
You want to take advantage of the tax write-offs that come with real estate investments.
2. Learn about the various types of real estate investments. Ask yourself how much time you are willing to invest in managing the property, and whether you have the necessary skills to manage the property. Different types of investments have different risks and rewards, so it's important to consider which type of investment best meets your needs. Consider these investment choices:
Raw land investments. Raw land requires little management and has the potential for big appreciation if it's in an area that becomes attractive to developers. However, there is limited cash flow from this investment through leasing to farmers/ranchers short term, mineral royalties if included in purchase, or appreciation. Also, government restrictions on how the land may be used can impact its value.
Residential real estate investments. Fixing up a residence and "flipping" it is a popular type of investment. The profitability of this type of investment is dependent on the state of the local housing market; location is very important.
Commercial real estate investments. Investing in commercial real estate, such as an apartment building, office building, or retail building, can yield a steady flow of cash, since you'll be getting a regular rent check from your tenants. However, the property requires significant upkeep to make sure it's up to code. You also run the risk of getting bad tenants who damage the property or do not pay rent on time.
3. Decide whether to flip or hold the property. "Flipping" generally applies to residential properties that are purchased, improved, and sold for higher price. Most real estate requires long term holding, and is not conducive to short-term trading. When considering what type of investment to make, determine which situation works best for you.
Consider whether you need additional income now or in the future.
Review your short- and long-term financial goals and if bringing in income now makes sense for you.
Factor in your income tax bracket and how that could be adversely affected by bringing in more income.
Consider the real estate market and if it is rising or falling at this time.
Evaluate your financial situation and see if you have other income that you can tap into if your rental properties become vacant.
Think about your available time and capabilities to manage or improve properties. Using third parties for such services may decrease expected return.
4. Obtain statistics on the town in which you are considering investing. Check the local state government website about the area you are targeting to see how it compares to other locations. It is important to have as much information and knowledge as possible on property investing before you dive in.
Find out the local median income.
Research the population growth of the area.
See what the unemployment statistics are in the area.
Check to see if the community is continuing to grow.
Find out what the real estate taxes are compared to nearby towns.
See if there is a supply and demand of rentals in the area.
Check out the schools to see how good they are.
5. Research online or take a course. A lot of research can be done online, but you may also check your local directory and sign up for a reputable real estate investment course or seminar. Make sure you bring some paper and a pen so you can jot down notes as you listen to the experts speak.
6. Work with a local realtor, property investor, or developer who also invests in real estate. Someone who has been investing on his own will know the pitfalls from his own first hand experience. A realtor with substantial knowledge in investing can teach you as you go along and help make you feel more comfortable with the process. However, remember the money you are investing is yours, not the realtors, so trust your intuition.

Method 2 Pinpointing your Property Needs.
1. Decide on your location. When you are searching for your investment area, look for a place that has clear signs of growth and economic stability. If you aren’t familiar with the area, take a drive around the town or city and get to know it. Check to see if there is adequate shopping and amenities close by. If you like the area and what it has to offer, chances are your renters will too.
2. Pick the right property. See if the properties you are interested in have desirable features, like a great view or ample parking. If so, take that into consideration. There are other issues to consider when picking your property, as well.
If you're deciding between investing in a house or an apartment, keep in mind that houses seem to have a better capital growth rate and apartments tend to have a better rental yield.
Also, the quality of the neighborhood in which you buy will most likely influence the type of tenants you attract. For example, if you buy near a college, you may be renting to students. There is a possibility of vacancies in the summer when the students return home.
Make sure you find out what the property taxes are. Take into consideration that high property taxes may not be such a bad thing if the property is in an excellent area and suited for long-term tenants.
Check to see if the area has any criminal activity. Go to the local police department to learn about the specific area you are interested in. Things to ask about might include vandalism, gang activity or any recent serious crimes. You have a better chance of finding out the facts from the police department, than from the person selling you the property.
Make sure the property isn't in a natural disaster zone. The insurance on the property can get pricey if you are in a questionable area so it is worth checking into. Many property owners are underinsured for natural disasters which can lead to devastating property loss in the event of a major storm or earthquake.
3. Have your property inspected by a professional inspector. You want to make sure the property is in good shape and has up-to-date repairs. You are looking for a property that, with a few minor repairs, will attract tenants who are willing to pay higher rents. In addition, find a contractor who you trust to give you the right advice on any repairs that may be required, especially for older properties. There are some things that you can check yourself, however.
Check the drains to make sure there are no problems with flooding.
Open and close all the windows to make sure they are in working order.
Turn on all the faucets to make sure they are working.
Light a fire in the fireplace to see if it's working.
Flush the toilets to make sure they flush properly.
Open the electrical panel and make sure there are no loose wires.
Turn on the heat and air conditioning to see if they work.
Make sure there is no basement moisture as this can be a sign that there is a more serious problem.
Pull the carpet back to see if there are hardwood floors underneath.
4. Know your target tenant. If you're investing in commercial real estate, your choice of tenant should influence the type of property you buy and where you decide to buy it. For example, families with children will potentially be interested in different amenities than young, single people.
See if the property is near any schools.
Check to see if there are any parks in the neighborhood.
See if the shops and cafes are within walking distance.
Find out how close the transportation options are.

Method 3 Examining the Finances.
1. Check into your credit history. Make a plan to get your credit in better shape if necessary. Having a good credit score will help you secure a loan with better terms. If your credit is compromised, check your local listings for agencies or nonprofit organizations that can help you clean it up.
2. Decide how you will finance your property. There are several ways to begin investing in your property portfolio. You may consider selling an asset or refinancing a property to get the funds. If you're investing in raw land, it's common to get financing from the seller. You may also choose to take out bank loans to finance your property.
If you have the money, you can pay all cash, or you can put down a percentage and get a loan for the remaining amount.
There are different loan requirements depending on the bank and your financial history.
3. Visit with a mortgage broker or your bank. Find out how much money you can afford to borrow responsibly for your investment. The quickest way to find out if you can afford a loan is to ask the bank. If you get a "no" from your bank, then consider trying another one as each bank is different in their approach. You may also consider looking into a credit union or a smaller bank to get your loan through.
4. Find properties that produce positive cash flow. Unless the property has good cash flow, there is really no reason to consider purchasing it. Examine the financials on the property to make sure it is supplying a good source of income. The rent you receive from your tenants should be enough to pay all of your expenses, including your mortgage payment, utilities, property taxes, and insurance.
This excludes raw land investments, which generally yield no income unless leased for farming or another purpose.
5. Examine your investment expenses. A common mistake first time investors make is underestimating their expenses. Rental buildings are always needing touch ups and repairs. There are several areas of expense to factor in when considering your purchase. The amounts will vary depending on the property.
Water and sewer, Garbage, Utilities, Legal fees and accounting, Evictions, Vacancies, Scheduled maintenance.
6. Consider hiring a property manager. You may want to factor in a salary for a property manager if you don’t have the personality, skills, and availability to manage your own property. There are many benefits to hiring a property manager.
The manager advertises and rents for you and will show your property when vacancies arise.
The manager meets with prospective tenants and handles all of your lease agreements.
The manager collects the rent from the tenants and performs the move-in and move-out inspections.
The manager deals with all the tenants complaints.
The manager serves legal notices in the case of a dispute and starts the eviction process if necessary.
The manager usually has a list of reliable contractors that he or she has used before.

FAQ.

Question : How would I stay up to date on pertinent laws, regulations, and real estate terminology?
Answer : Become a member of an apartment owners association. If they are very large, they will send you magazines that have all the new problems that laws are causing for home owners and what they need to do to avoid these problems.

Tips.
Take your time doing the research. Rushing into a property purchase without significant knowledge may bring unwanted results.
If you are considering buying with a partner, make sure you have a proper partnership or joint venture agreement.
Don’t be afraid to walk away if the deal isn't working out.
Stay up to date with pertinent laws, regulations and real estate terminology.
Understand the risk you are taking when becoming a real estate investor. Success is not always guaranteed.
Find a mentor, lawyer or a supportive friend that has experience in investing to bounce your ideas off of.

April 01, 2020

how to owner finance a home

How to Owner Finance a Home.

There are many benefits to an owner financing deal when purchasing a home. Both the buyer and seller can take advantage of the deal. But there is a specific process to owner financing, along with important factors to consider. You should begin by hiring people who can help you, such as an appraiser, Residential Mortgage Loan Originator, and lawyer.

Part 1 Hiring People to Help You.

1. Hire an appraiser. Both the buyer and the seller should hire their own appraiser to determine the value of the house. The seller receives an appraisal in order to select a price for the home, and the buyer gets an appraisal to confirm that the selling price is fair. You can find an appraiser in the following ways:

look in the Yellow Pages, ask for a referral from a mortgage company, bank, or realtor, contact your state’s licensing agency.

2. Hire a real estate attorney. Both parties should work closely with a real estate attorney. A real estate attorney can draft all of the necessary paperwork. The attorney can also protect your interests. For example, the buyer can include a protection clause just in case the property has to be sold in response to a life changing event, job relocation or loss, divorce or death.

You can get a referral to a real estate attorney by contacting your local or state bar association. Bar associations are organizations made up of attorneys, and they often provide referrals to their members or can help you find an attorney.

3. Get advice from a Residential Mortgage Loan Originator (RMLO). A Residential Mortgage Loan Originator can give you advice on how to manage owner financing in a way that is transparent and compliant with regulations. When you owner finance a home, you are essentially providing the buyer a loan until they complete their payments on the home. Since you want your agreement to be clear and binding, it's good to work with a mortgage professional.

Your RMLO can help ensure that your owner financing documents are compliant with the Safe Act and Dodd Frank Act.

Make sure your RMLO is properly licensed by your state. Check with your state’s Department of Business Oversight or equivalent state office to check.

Part 2 Preparing for the Sale.

1. Get approval if you still have a mortgage. Owner financed sales work best when the owner has title free and clear or the owner can pay off the mortgage with the buyer’s down payment. However, if the seller still has a large mortgage, they need to get their lender’s approval.

Check whether you can pay off the mortgage with the buyer’s down payment. If not, then contact your mortgage company and discuss that you want to sell the house.

2. Consider performing background checks to control risk. Both the seller and buyer should perform background checks on each other. Many owner financed sales are short-term, for five years or so. At the end of the term, the buyer is expected to refinance and then make a “balloon payment,” paying off the balance of the loan. As a seller, you will want assurance that a buyer can get a traditional loan at the end of the contract term, which means you definitely want to check their credit history and employment.

In fact, sellers should consider having buyers complete a loan application. You can verify references, employment history, and other financial information.

Buyers also benefit from background checks. For example, they might discover that the seller has been financially irresponsible. If the seller still holds a mortgage on the home, there is a risk of default.

3. Determine loan details. One advantage of an owner financed sale is that the seller controls details about the financing. Because the seller is assuming a lot of risk, they should come up with terms that protect them. Talk with your attorney about what the terms of the loan should be. Consider the following.

a substantial down payment (usually 10% or more), an interest rate that is higher than usual (though less than your state’s maximum allowable interest rate), a loan term you are comfortable with.

4. Ask your lawyer draft a purchase and sale agreement. You want to protect yourself legally by making sure that you have all of the necessary legal documents prepared. Your real estate attorney can draft a purchase and sale agreement, which both seller and buyer will sign. This document provides information about the following:

closing date, name of the title insurance company, final sale price, details about a down payment, if any.

contingencies which must be met for the sale to proceed, such as an acceptable inspection and a clear title report.

5. Draft a promissory note. The seller also needs the buyer to sign a promissory note or other financial instrument. Your lawyer can draft this document for you. It should contain the following information.

borrower’s name, property address, amount of the loan, interest rate, repayment schedule, terms for late or missed payments, consequences of default.

6. Have your lawyer draft a mortgage. The mortgage provides security for the loan. Your lawyer should also draft this document for you. The mortgage is what allows you to repossess the house should the buyer default on the loan.

Part 3 Completing the Sale.

1. Agree on an interest rate and term with the buyer. Your RMLO partner will calculate the agreed upon amount based on a specific period of time and if you have agreed on a balloon payment. Remember that not every state allows balloon payments.

For example, you can base monthly payment amount on a hypothetical 30-year mortgage, but schedule payment of the remaining amount in 5 years (balloon). The RMLO will also create required disclosures for the seller/lender.

2. Close the sale. Both the buyer and seller should have independent attorneys who can review all paperwork to make sure that it is complete. You should schedule a closing to sign everything and make copies.

3. Hire a loan servicer to manage payments. The seller should talk to their lawyer about whether they want to hire a loan servicer. If they do, then their lawyer can recommend someone. A loan servicer provides many important services.

collects the mortgage payments, sets up an escrow, handles tax statements and payments, makes insurance payments, processes payment changes, performs collection services, if necessary.

4. Record your mortgage or deed of trust. You can record it in the county land records office. Doing so will allow the buyer and the seller to take advantage of tax deductions. Making the deal official in this manner also proves that the sale took place.

Part 4 Deciding Whether an Owner Financed Sale is Right.

1. Analyze your situation as a seller. Owner financed sales are rare, and you shouldn’t jump into one until you have thoroughly considered your situation. Think about the following.

You usually must own the house free and clear of any mortgage. Otherwise, you will need your lender to give you permission to sell.

Taxes can be complicated and you’ll want to hire a tax professional to help you.

You might have to go through the foreclosure process if the buyer stops making payments. This can be costly and time-consuming.

However, you may make much more money on an owner financed sale than if you sell the traditional way.

2. Determine if an owner financed sale is ideal as a buyer. Buyers usually like owner financed sales because a seller might be less choosy than a bank or mortgage lender. However, you should consider the following.

You might have to come up with a larger down payment than you normally would. The owner-seller is taking a risk by financing your sale, and in return they might want a larger down payment or higher interest.

Owner financed sales often close faster than other sales.

You need to be sure you can make the balloon payment if one is written into the contract. If you break the contract, then you could lose the house and all of the payments you have made up to that point.

3. Talk with professionals if you have questions. In addition to working with a real estate lawyer, you might want to meet with a tax professional, such as a certified public accountant. Ask about the tax benefits of an owner financed sale compared to selling outright.

If you are a buyer, then you should talk about how to raise your credit score so that you qualify for a traditional mortgage when the balloon payment comes due.

4. Make sure your buyer can cover the balloon payment. Owner financing is most often used when the buyer or property does not qualify for a conventional loan. This means the buyer may not have the resources to cover the balloon payment at the end of your term. Discuss your buyer's options before entering into a contract with them.

If you are a buyer, make sure that you have your options for paying the balloon payment lined up before you agree to the seller's terms.

5. Consider a lease-to-own option. This option is often more advantageous for the buyer and less complicated for the seller. You and the person interested in your home will lock in a potential sale price for the home, as well as a lease agreement ranging from 2 to 5 years. During that time, the person will pay you rent on the home, with a portion of that rent going toward a down payment on the house. After the lease ends, the person can choose to proceed with the sale as arranged, or they can opt to walk away.

If they walk away, they don't get a refund on the extra money they paid toward the down payment.

If they do walk away, you'll need to relist your home.

Tips.

The seller should ask that the buyer purchase homeowner's insurance and confirm the seller as mortgagee.

The seller should establish a land contract. With a land contract, title doesn’t pass to the buyer until the final payment has been made. Discuss this option with your attorney and see if such a contract is feasible.

December 03, 2019