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How to Finance a Business

How to Finance a Business.

When it's time to finance a business, there can be substantial work involved to facilitate this step. Every small business is different, and businesses in different industries and sectors have different ways of going about getting credit. There are various costs which widely range over the span of particular sectors. However, for the core process of securing the financial assistance that a business owner needs for a start up, some basic guidelines and principles will help create effective programs and a solvent business model. Estimate the costs of doing business, find out what you need to borrow money, and then research your financing options.

Estimating Costs of Your Business.

Determine the one-time costs of your business. These are costs that will only occur at the very beginning of opening your business. These include mileage (getting to a location), market research, advertising, and training. You will also need to look up any fees which will occur, such as a lawyer or consultant fee.

Calculate the recurring costs of your business. These are costs that you will have to pay over and over again, usually on a weekly, bi-weekly, or monthly basis. These include costs of utilities, insurance, wages, etc. Recurring costs are generally larger than one-time costs, and span a length of 10-30 years depending on your financing options. Calculate not only the total cost over the lifespan of your business, but also that on a yearly, and bi-yearly basis.

Ascertain whether costs are fixed, or variable. Fixed costs are those which will not change. The cost of your utilities, or your administrative costs are all fixed. Variable costs are those which will change over time. This includes wages, insurance, and shipping/packaging costs. The best way to keep all this information organized is to create a spreadsheet (use Excel). That way you can graph out this information, and view it multiple ways(bar graph, line chart, etc.).

Create a balance sheet. If you are just starting a small business, it is important that you write out balance sheets, which include: assets, liabilities, and equity. Each of these three categories will help you keep track of the finances of your business, and make it easier to pay your bills.

Assets = current assets(cash, accounts receivable, notes receivable, inventory) + fixed assets(land, building, machinery, furniture, improvements) + intangibles(research, patents, charity, organizational expense)

Liabilities = current liabilities(accounts payable, accrued expenses, notes payable, current long-term debt) + non-current liabilities(non-current long-term debt, notes payable to shareholders and owners, contingent liabilities)

Equity = Assets - Liabilities

Develop a cash flow analysis. This measures money which goes in and out of your business. This is then broken down into operational activities, investment activities, and financing activities. This analysis will help you determine when you break even, and can start reinvesting/expanding your business. Once more, the best way to do this is to create a spread sheet. Find all of your financial statements and gather them together before you start to analyze.

Operational = net income, loses of business, sales, and business expenditures.

Investment = purchases and sales of property, assets, securities, and equipment.

Financing = cash flows of all your loan borrowing and repayment.

Borrowing Money for Your Business.

Use equity financing to start your business. Equity financing usually comes from a primary investor, or other business. They will provide you a sum of money, in exchange for part-ownership of your company. This is a good option because investors look further down the road than a loan company, and you will have more money on hand. However, the investors will naturally want to interfere, and change aspects of your business model.

There are networks online which can set you up with a primary investor.

You can also check out private equity firms, which contain a vast array of specialized and experienced investors.

Remember, that small business owners generally use very little equity financing. It all depends on your business model, and the potential for growth.

Start your business using debt financing. Debt financing is when you take out a loan, usually from a bank or lending institution. This is a great option because the bank will have no say in how you run your business. The loan is tax deductible, and you can get short-term or long-term loans. However, you must have the loan repaid in a certain amount of time, and if you don't, you could have a hard time getting capital investment.

Talk to your local bank, or lending institution about the qualifications for specific loans. You will probably have to fill out some paperwork to determine whether or not you are qualified.

When using a local bank, you may be able to set up a personal relationship. This way, you can postpone a few payments if you fall on hard times.

Find out about credit scores and ratings. The higher your score is, the less risky you are to investors. In many cases, the initial business loan will be based on the borrower's own personal credit score. However, in some cases where a business is already operational, a business plan and other documents can provide for a different kind of credit specifically for the continued operations of that enterprise.

Use the online company TransUnion or EquiFax to determine your credit score. It is important to get an independent analysis, otherwise your own calculated score could be biased.

The main focus of the score is how long you have maintained a credit line, and how many monthly payments you have made on time.

If you have no prior experience taking out credit, it may be hard to get a loan. It is best to start using a credit card on small things like gas, or grocery store trips. Then gradually build up. Show the creditors you are a responsible client.[12]

Maintain an adequate debt to equity ratio. You want to make sure that the total debt and liabilities of your business is no more than four times the equity in the business. Equity simply means any retained earnings and cash injections by investors. In order to start out with equity, the owner of the business usually has to put in anywhere from 20-40%. This will maintain an adequate debt to equity ratio, and allow you to get a loan.

Put up collateral to start your business. Before you get a loan, the lending institution or bank will ask for collateral. This means you risk some of the items you own. In the case you cannot repay the loan, the bank can seize your property. Collateral usually includes homes, cars, furniture, equipment, stocks, bonds, etc. this is a scary proposition, so you need to be sure that your business will be financially successful beforehand.

Shop around for different lenders. There are a variety of lenders who may or may not be willing to issue new business loans, and all of these potential lenders have their own terms and conditions. Talk to various lenders and ask them about what kinds of loans are available. Evaluate loans by timeline. Lenders will offer various short-term, long-term or revolving-credit loans to business owners. Look at which ones suit the needs of a startup the best.

Look at secured and unsecured business loans. Secured loans actually use existing assets as collateral. For example, the person trying to start a business can use his or her home, or other property, as collateral and get lower interest rates for the loan. However, this leaves the assets vulnerable to seizure in cases of nonpayment. Unsecured loans rest solely on the borrower's credit score. See which of these types of loans best matches desired risk.

Select the best deals. You want a loan that has the lowest interest rates and most favorable terms for repayment.

Financing Your Business.

Get a bank loan. Small, local banks have received more strict standards after the financial crash of 2008. However, large investment banks such as JP Morgan Chase and Bank of America have received a set of moneys from the Federal Reserve to lend out to small businesses. This is your best option to go with, although it takes the long to pay off. Local banks will set you up with a contract, and a monthly payment. The other benefit is that you can get this loan postponed if you are having trouble paying it off.

Place your home up as collateral. Banks will generally allow you to borrow up to 75-80% of your home's worth, as long as you have at least 10-15% already down on your home. This is great because the loan will have a much lower interest rate than a credit card. Talk with your financier, or local mortgage company for more detailed information.

Use your credit card. This is a very dangerous game to be played. You need to stay on top of your monthly payments. If you fall behind, you get trapped in a death spiral. However, when carefully managed, credit cards can be great to get out of an emergency. Only use a credit card occasionally, when you are experiencing a hole you know that you can get out of.

Tap into your 401(k) plan. You will need a financial expert who can start up a C Corporation which you can then roll your retirement assets into. This is also a risky business, because you are tapping into your nest egg. This should only be done if you have more money put away in a savings account, or if you are independently wealthy.

Try loaning money from your friends and family. Ask who would be willing to make a contribution, or purchase a percentage of the company. Go about asking members of your church for donations. Let local businesses to partner with you. You might make some acquaintances, and make some deals (you make cheese, they make wine, a chance to exchange).

Pledge your future earnings. Some companies, or peoples, are willing to gamble and put money upfront, if you are willing to commit a certain percentage of future profits. This is a gamble because they, and you, are betting that you will be able to earn enough in the future. There is usually a contract involved, guaranteeing that they will at least get some money back, so keep that in mind.

Kickstart your business. Crowd funding, in the age of the internet, has become a very popular way to finance businesses. Write a description of your business idea online, at sites like Kickstarter, and convince people to donate to your business. You will want to be really descriptive, and excited in your word choice. The downside of this is that it could take months or years before you raise enough money.

Secure an SBA loan. SBA (Small Business Administration) is a branch of the Federal Government that supplies loans to businesses struggling to get off the ground. However, there are a number of qualifications. You had to have been denied a loan from another bank before. You have to meet the government's definition of a small business. You will also have to meet other restrictions, depending on the type of SBA loan. Go to the SBA's website, and fill out a form if you think you might meet these qualifications.

Attract an angel investor. These are wealthy individuals who like to bet on the financial success of start-up businesses. Angel investors are usually found at private-equity, and venture capital firms. You will want to bring someone older, who looks like he has had experience in business before. Be passionate about your idea when you present, and know all of the financial details before you walk in the room. Keep in contact with the investor days and weeks after your initial meeting.

Tips.

Talk to numerous lending institutions before you pick a loan. Some will have better interest rates, while others will have better repayments.

Consult with family members first. Getting a small loan from them can avoid dealing with greedy credit lenders.

Get some experience in the business before you start your own. If you want to start a restaurant, make sure you have worked in a restaurant before. If not, you will wind up purchasing outside help which will cost you astronomical amounts of money.

Warnings.

Talk to a lawyer and a financial advisor to avoid colossal mistakes. The biggest regret of many first-time small business owners is not consulting with a professional before they begin the process.

If you are a person living paycheck-to-paycheck, it is best to wait to start a small business. If the business goes down hill quickly, you could lose your assets, and your life savings.

Take a year to save up money and make a detailed plan. You do not want to go into small business owning head first.

November 13, 2019

how to finance a business well

How to Finance a Business.

November 12, 2019

How to Use the Rule of 72

How to Use the Rule of 72.

The Rule of 72 is a handy tool used in finance to estimate the number of years it would take to double a sum of money through interest payments, given a particular interest rate. The rule can also estimate the annual interest rate required to double a sum of money in a specified number of years. The rule states that the interest rate multiplied by the time period required to double an amount of money is approximately equal to 72.
The Rule of 72 is applicable in cases of exponential growth, (as in compound interest) or in exponential "decay," as in the loss of purchasing power caused by monetary inflation.

Method 1 Estimating "Doubling" Time.
1. Let R x T = 72. R is the rate of growth (the annual interest rate), and T is the time (in years) it takes for the amount of money to double.
2. Insert a value for R. For example, how long does it take to turn $100 into $200 at a yearly interest rate of 5%? Letting R = 5, we get 5 x T = 72.
3. Solve for the unknown variable. In this example, divide both sides of the above equation by R (that is, 5) to get T = 72 ÷ 5 = 14.4. So it takes 14.4 years for $100 to double at an interest rate of 5% per annum. (The initial amount of money doesn't matter. It will take the same amount of time to double no matter what the beginning amount is.)
4. Study these additional examples:
How long does it take to double an amount of money at a rate of 10% per annum? 10 x T = 72. Divide both sides of the equation by 10, so that T = 7.2 years.
How long does it take to turn $100 into $1600 at a rate of 7.2% per annum? Recognize that 100 must double four times to reach 1600 ($100 → $200, $200 → $400, $400 → $800, $800 → $1600). For each doubling, 7.2 x T = 72, so T = 10. So, as each doubling takes ten years, the total time required (to change $100 into $1,600) is 40 years.

Method 2 Estimating the Growth Rate.
1. Let R x T = 72. R is the rate of growth (the interest rate), and T is the time (in years) it takes to double any amount of money.
2. Enter the value of T. For example, let's say you want to double your money in ten years. What interest rate would you need in order to do that? Enter 10 for T in the equation. R x 10 = 72.
3. Solve for R. Divide both sides by 10 to get R = 72 ÷ 10 = 7.2. So you will need an annual interest rate of 7.2% in order to double your money in ten years.

Method 3 Estimating Exponential "Decay" (Loss).
1. Estimate the time it would take to lose half of your money (or its purchasing power in the wake of inflation). Let T = 72 ÷ R. This is the same equation as above, just slightly rearranged. Now enter a value for R. An example.
How long will it take for $100 to assume the purchasing power of $50, given an inflation rate of 5% per year?
Let 5 x T = 72, so that T = 72 ÷ 5 = 14.4. That's how many years it would take for money to lose half its buying power in a period of 5% inflation. (If the inflation rate were to change from year to year, you would have to use the average inflation rate that existed over the full time period.)
2. Estimate the rate of decay (R) over a given time span: R = 72 ÷ T. Enter a value for T, and solve for R. For example.
If the buying power of $100 becomes $50 in ten years, what is the inflation rate during that time?
R x 10 = 72, where T = 10. Then R = 72 ÷ 10 = 7.2%.
3. Ignore any unusual data. If you can detect a general trend, don't worry about temporary numbers that are wildly out of range. Drop them from consideration.

Method 4 Derivation.
1. Understand how the derivation works for periodic compounding.
For periodic compounding, FV = PV (1 + r)^T, where FV = future value, PV = present value, r = growth rate, T = time.
If money has doubled, FV = 2*PV, so 2PV = PV (1 + r)^T, or 2 = (1 + r)^T, assuming the present value is not zero.
Solve for T by taking the natural logs on both sides, and rearranging, to get T = ln(2) / ln(1 + r).
The Taylor series for ln(1 + r) around 0 is r - r2/2 + r3/3 - ... For low values of r, the contributions from the higher power terms are small, and the expression approximates r, so that t = ln(2) / r.
Note that ln(2) ~ 0.693, so that T ~ 0.693 / r (or T = 69.3 / R, expressing the interest rate as a percentage R from 0-100%), which is the rule of 69.3. Other numbers such as 69, 70, and 72 are used for easier calculations.
2. Understand how the derivation works for continuous compounding. For periodic compounding with multiple compounding per year, the future value is given by FV = PV (1 + r/n)^nT, where FV = future value, PV = present value, r = growth rate, T = time, and n = number of compounding periods per year. For continuous compounding, n approaches infinity. Using the definition of e = lim (1 + 1/n)^n as n approaches infinity, the expression becomes FV = PV e^(rT).
If money has doubled, FV = 2*PV, so 2PV = PV e^(rT), or 2 = e^(rT), assuming the present value is not zero.
Solve for T by taking natural logs on both sides, and rearranging, to get T = ln(2)/r = 69.3/R (where R = 100r to express the growth rate as a percentage). This is the rule of 69.3.
For continuous compounding, 69.3 (or approximately 69) gives more accurate results, since ln(2) is approximately 69.3%, and R * T = ln(2), where R = growth (or decay) rate, T = the doubling (or halving) time, and ln(2) is the natural log of 2. 70 may also be used as an approximation for continuous or daily (which is close to continuous) compounding, for ease of calculation. These variations are known as rule of 69.3, rule of 69, or rule of 70.
A similar accuracy adjustment for the rule of 69.3 is used for high rates with daily compounding: T = (69.3 + R/3) / R.
The Eckart-McHale second order rule, or E-M rule, gives a multiplicative correction to the Rule of 69.3 or 70 (but not 72), for better accuracy for higher interest rate ranges. To compute the E-M approximation, multiply the Rule of 69.3 (or 70) result by 200/(200-R), i.e., T = (69.3/R) * (200/(200-R)). For example, if the interest rate is 18%, the Rule of 69.3 says t = 3.85 years. The E-M Rule multiplies this by 200/(200-18), giving a doubling time of 4.23 years, which better approximates the actual doubling time 4.19 years at this rate.
The third-order Padé approximant gives even better approximation, using the correction factor (600 + 4R) / (600 + R), i.e., T = (69.3/R) * ((600 + 4R) / (600 + R)). If the interest rate is 18%, the third-order Padé approximant gives T = 4.19 years.
To estimate doubling time for higher rates, adjust 72 by adding 1 for every 3 percentages greater than 8%. That is, T = [72 + (R - 8%)/3] / R. For example, if the interest rate is 32%, the time it takes to double a given amount of money is T = [72 + (32 - 8)/3] / 32 = 2.5 years. Note that 80 is used here instead of 72, which would have given 2.25 years for the doubling time.

FAQ.
Question : When would I need to use the rule of 72?
Answer : It's a handy shortcut when considering compounded, monetary gains or losses. For example, you might want to know how long it would take for invested money to double in value, given a specific rate of interest.
Question : How do I calculate compound interest?
Answer : The formula for annual compound interest (A) is: P [1 + (r / n)]^(nt), where P=principal amount, r = the annual interest rate as a decimal, n = the number of times the interest is compounded per year, and t = the number of years of the loan or investment.
Question : What is APY for an APR of 3.5% compounded?
Answer : It depends on how often the interest compounds: annually, semi-annually, quarterly, monthly or daily.

Tips.

Let the Rule of 72 work for you by starting to save now. At a growth rate of 8% a year (the approximate rate of return in the stock market), you would double your money in nine years (72 ÷ 8 = 9), quadruple your money in 18 years, and have 16 times your money in 36 years.
The value of 72 was chosen as a convenient numerator in the above equation. 72 is easily divisible by several small numbers: 1,2,3,4,6,8,9, and 12. It provides a good approximation for annual compounding at typical rates (from 6% to 10%). The approximations are less exact at higher interest rates.
You can use Felix's Corollary to the Rule of 72 to calculate the "future value" of an annuity (that is, what the annuity's face value will be at a specified future time). You can read about the corollary on various financial and investing websites.

Warnings.
Let the rule of 72 convince you not to take on high-interest debt (as is typical with credit cards). At an average interest rate of 18%, semiretired credit card debt doubles in just four years (72 ÷ 18 = 4), quadruples in eight years, and becomes completely unmanageable after that.

April 10, 2020

How to Start a Finance Company

How to Start a Finance Company.

Finance companies provide loans to individual and commercial customers for a variety of reasons. Commercial customers can include retail stores, small businesses or large firms. Commercial loans can help established businesses construct a new office or retail space, or they can help new business get up and running. Personal loans for individual customers can include home equity loans, student loans and auto loans. Starting a finance company requires not only a thorough understanding of your target customer's needs and a comprehensive product line, but also a solid business plan that outlines how you will make your company successful. In addition,any new finance company must comply with strict state and federal regulations and meet initial funding requirements.

Part 1 Identifying the Finance Company Business Model

1. Select a finance company specialty. Finance companies tend to specialize in the types of loans they make as well as the customers they serve. The financial, marketing, and operational requirements vary from one specialty to another. Focusing on a single business model is critical to the successful creation and operation of a new company. Private finance companies range from the local mortgage broker who specializes in refinancing or making new loans to homeowners to the factoring companies (factors) that acquire or finance account receivables for small businesses. The decision to pursue a specific finance company specialty should be based upon your interest, your experiences, and the likelihood of success.

Many finance companies are founded by former employees of existing companies. For example, former loan officers, underwriters, and broker associates create new mortgage brokerage firms specializing in a specific type of loan (commercial or residential) or working with a single lender.

Consider the business specialty that attracted you initially. Why were you attracted to the business? Does the business require substantial start-up and operating capital?

Is there an opportunity to create the same business in a new area? Will you be competing with other similar, existing businesses?

2. Confirm the business opportunity. A new finance company must be able to attract clients and produce a profit. As a consequence, it is important to research the expected market space where the business will compete. How big is the market? Who presently serves potential clients? Are prices stable? Is the market limited to a specific geographic area? How do existing companies attract and serve their customers? How do competitors differ in their approach to marketing and service features?

Identify your target market, or the specific customers you intend to serve. Explain their needs and how you intend to meet them.}}

Describe your area of specialization. For example, if your market research indicates a growing number of small start-up companies needing loans, describe how the financial products and services you offer are strong enough to gain a significant share of that market.

Consider the companies already in the competitive space. Are they similar in size or dominated by a single company? Similar market shares may indicate a slow-growing market or the companies’ inability to distinguish themselves from their competitors.

Tip: Identifying your target market will require you to identify key demographics that are currently underserved and how you plan to draw these customers away from your competitors. You should list who these customers are and how your financial products will appeal to them. Include any advantages you have over competitors.

3. Identify the business requirements. What are the likely fixed costs to operate the business - office space, equipment, utilities, salaries and wages? What business processes are necessary for day-to-day operations - marketing, loan officers, underwriters, clerks and accountants? Will potential clients visit a physical office, communicate online, or both? Will you need a financial partner such as mortgage lender or a bank?

Mortgage brokers act as intermediaries between borrowers and lenders, sometimes with discretion up to a dollar limit. Factors typically leverage their own capital by borrowing from larger financial institutions.

4. Crunch the numbers. How much capital is required to open the business? What is the expected revenue per client or transaction? What is break-even sales volume? Before risking your own and other people’s capital, you need to ensure that profitability is possible and reasonable, if not likely.{{greenbox: Tip: Develop financial projections (pro formas) for the first three years of operation to understand how the business is likely to fare in the real world. The projections should include month to month Income Statements for the first year, and quarterly statements thereafter, as well as 'projected Balance Sheets and Cash Flow Statements.

Part 2 Making a Self Assessment.

1. Identify your skills. Before starting your new company and, possibly, a new career, it is important to objectively evaluate your skills and personality to determine what steps you need to take to successfully start and manage a finance company. Do you have special training in the finance specialty? Do you understand finance and accounting? Do you work well with people? Are you a leader, who inspires others to follow them, or a manager, who can assess a problem, discern its cause, direct resources to implement a solution? Are you a good salesperson? Do you have any special abilities specifically suited to the finance industry?

2. Assess your emotional strengths and interests. Do you work best alone or with others? Do you find it easy to compromise? Are you patient or demanding with others? Do you make quick, intuitive decisions or do you prefer detailed information and careful analysis before acting? How comfortable are you with risk? Are an optimist or a pessimist? When you make a mistake, do you beat yourself up or regard it as a learning opportunity and move on?

3. Consider your experience. Have you worked in the finance industry previously? Are you monetarily and professionally successful in your present position? Do you understand marketing, accounting, legal matters, or banking? Have you been responsible for creating new markets or leading sales teams?

4. Determine your financial capacity. Do you have sufficient capital to open the finance company you envision? Do you have assets that can cover your living expenses during a start-up phase? Will your family or friends contribute to the financing of your business? Do you have access to other financial sources - personal loans, venture capital, investment funds, or financial sponsors?

Part 3 Creating a Business Plan.

1. Set up your business plan. The Business Plan serves a number of functions. It is a blueprint for building your company in the future, a guide to ensure you remain focused in your efforts, and a detailed description of your company for potential lenders and investors. Begin writing your business plan by including all of the required sections and leaving room to fill them in. The steps in this part should serve as your sections, starting with the business description.

2. Write a business description. Your business plan will layout a blueprint for your company. The first part of your business, the description, is a summary of the organization and goals of your business. Begin by justifying the need for a new financial company in the industry or target location. You should briefly identify your target market, how you plan to reach them, descriptions of your products and services, and how your company will be organized.

Tip: You should also briefly explain how there is room in the current market for your company (how it will compete against competitors). You should already have this information from your initial market research.

3. Describe the organization and management of your company. Clarify who owns the company. Specify the qualifications of your management team. Create an organizational chart. A comprehensive, well-developed organizational structure can help a financial institution be more successful.

The Chief Executive Office leads the "executive suite" of other company officers.

The Chief Operating Officer manages the activities of the lending, servicing and insurance and investment units of the company.

The Chief Administrative Officer’s responsibilities include marketing, human resources, employee training, facilities, technology and the legal department.

The Chief Financial Officer ensures that the company operates within regulatory parameters. This person also monitors the company’s financial performance.

In smaller companies, executives may fill more than one of these roles simultaneously.

4. Describe your product line. Explain the types of financial products and loans you provide. Emphasize the benefits your products offer to your target customers. Specify the need your product fills in the market.

For example, if your target customers are small business owners, describe how the financial products and investments you offer to help them run their businesses.

5. Explain how your business is financed. Determine how much money you need to start your finance company. Specify how much equity you own. State what percentage other investors own in the company. Indicate how you plan to finance your company with leverage (loans),where these loans are coming from, and how the loans will be used in the business.

In most cases, equity in the company is used primarily for the company's operations, rather than the source of loans to customers. Secondary lenders provide funds to the finance company that is subsequently loaned to customers; the customers' loans collateralize the lenders' loans to the finance company. This is because profit is made in the spread, or the difference between your cost of acquiring capital and profit from lending it out.

Any funding request should indicate how much you need, how you intend to use the money, and the terms of the loan or investment.

6. Document your marketing and sales management strategies. Your marketing strategy should explain how you plan to attract and communicate with both customers and lenders/depositors. It should also show how you plan to grow your company. The sales strategy defines how you will sell your product.

Promotional strategies include advertising, public relations and printed materials.

Business growth opportunities not only include building your staff, but also acquiring new businesses or beginning to offer different kinds of products.

The sales strategy should include information about the size of your sales force, procedures for sales calls and sales goals.

7. Include financial statements in your business plan. Reviewing the pro forma financial statements you created during your business planning, be sure that your projections are reasonable and conservative. You may also want to cautiously estimate performance over the next two years after that. Include a ratio analysis to document your understanding of financial trends over time and predict future financial performance.

Prospective financial data should provide monthly statements for the first year and annual statements for the next two years.

Standard financial ratios include Gross profit margin, ROE, Current ratio, Debt to Equity.

Ratio and trend analysis data helps you document whether you will be able to continue to serve your customers over time, how well you utilize your assets and manage your liabilities, and whether you have enough cash to meet your obligations.

Tip: Add graphs to your analysis to illustrate positive trends.

Part 4 Determining Your Business Structure.

1. Consider forming a Limited Liability Company. A Limited Liability Company (LLC) is similar to a corporation in that it protects its owners from personal liability for debts or actions incurred by the business. However, they have the tax advantages of a sole proprietorship or partnership. A corporation typically files taxes separately from the shareholders.

Be aware that corporations pay double federal income tax, meaning taxes are assessed when profit is earned, and then again when it is distributed to shareholders.

You should seek legal advice to determine the best structure for your business.

2. Name and register your business. Choose a name that represents your brand and is unique enough to obtain a website address or URL. When choosing a name, check with the U.S. Patent and Trademark Office to make sure you are not infringing on any trademarks. Also, check with you state to see if the name is already in use by another corporation.

You will have to register with your state as a corporation. The exact registration process varies by state and type of corporation you decide to form.

Since your business name is one of your most important assets, protect it by applying for trademark protection with the U.S. Patent and Trademark Office.

3. Obtain a require operational licenses and permits. Financial institutions acquire these from the state in which they operate. Consult with your State Business License Office to identify the specific license and permit you need. Each state has different requirements for licensing financial institutions. You will need to specify exactly what type of financial institution you are opening, such as an investment company or a licensed lender. You will then furnish the requisite documents and pay any fees.

Due to the incredibly complex and constantly-evolving nature of the financial services industry, it is advised that finance companies hire and retain expert legal counsel to guide them through these regulations.

Note: You will also need to comply with any permit requirements surrounding your office space, like public and workplace safety regulations and operating permits.

4. Learn about regulations. The two categories of financial regulations in the United States are safety-and-soundness regulation and compliance. Safety-and-soundness regulations protect creditors from losses arising from the insolvency of financial institutions. Compliance regulations aim to protect individuals from unfair dealings or crime from the financial institutions. Financial regulations are carried out by both federal and state agencies.

Federal financial regulation agencies include the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Administration and the Securities and Exchange Commission (SEC).

State regulatory agencies may have additional requirements that are even more stringent than those set by the SEC.

With the help of your legal counsel, investigate reserve and initial funding requirements for your company. This will determine how much startup money you need.

5. Protect yourself from risk and liabilities with indemnity insurance. Indemnity insurance protects you and your employees should someone sue you. Financial institutions should purchase a specific kind of indemnity insurance called Errors and Omissions (E&O) insurance. This protects the financial company from claims made by clients for inadequate or negligent work. It is often required by government regulatory bodies. Remember, however, that staying in compliance with all regulatory requirements is still your responsibility.

Part 5 Setting Up Shop.

1. Obtain financing. You will need to finance your company according to your business plan, using a combination of equity and debt financing. Initial startup costs will be used for meeting reserve requirements and the building or rental of office spaces. From there, much of the company's operating capital will be lent out to customers.

Be aware of Federal and State laws regulating the private solicitation of investors. Adherence to securities laws regarding the information provided to potential investors and the qualifications of the investor will apply in most circumstances.

Sources of debt financing include loans from the government and commercial lending institutions. Money borrowed with debt financing must be paid back over a period of time, usually with interest.

The Small Business Administration (SBA) partners with banks to offer government loans to business owners. However, these loans can only be used for the purchase of equipment, not lent out to others. The SBA helps lending institutions make long-term loans by guaranteeing a portion of the loan should the business default.

Finance companies face the problem of having to raise large amounts of initial funding to be successful. They also often have to deal with a slew of other challenges before they become profitable. Without accounting properly for issues like fraud, it's very easy for a finance company to go out of business.

Note: Investors may want to provide financing in exchange for equity in the company. This is called equity financing, and it makes the investors shareholders in the company. You don’t have to repay these investors, but you do have to share profits with them.

2. Choose your location. A finance company should make a positive impression on customers. Customers looking for a loan will want to do business in a place that projects a trustworthy and sound image. Take into account the reputation of the neighborhood or of a particular building and how it will appear to customers. Also consider how customers will reach you and the proximity of your competitors. If your target customers are small local businesses, for example, they may not want to drive to a remote location or deal with heavy city traffic to meet with you.

If you are not sure, contact your local planning agency to find out if your desired location is zoned for commercial use, especially if you plan to operate out of your home.

Leasing commercial office space is expensive. Consider your finances, not only what you can afford, but also other expenses such as renovations and property taxes.

In today's connected world, it's also possible to run a finance company online, without a location for physical interaction with customers. While you'll likely still need an office for your employees, not having a retail location can save you some regulatory hassle expense.

3. Hire and retain employees. Write effective job descriptions so employees and applicants understand their role in the company and what your expectations of them are. Compile a compensation package, including required and optional fringe benefits. Compose an employee handbook that communicates company policies, compensation, schedules and standards of conduct.

Perform pre-employment background checks to make informed decisions about whom you hire. Financial planners and advisors require a specific educational background and are subject to rigorous certification requirements. Consider obtaining credit reports to show how financially responsible a candidate is.

4. Pay your taxes. Obtain an Employee Identification Number (EIN) from the IRS. This is also known as your Federal Tax Identification Number. Determine your federal and state tax obligations. State tax obligations include income taxes and employment taxes. All states also require payment of workers' compensation insurance and unemployment insurance taxes, and some also require payment of disability insurance.

5. Create loan packages for your clients. Decide if you are going to offer revolving or fixed-amount types of credit. Think about your target customers and what kinds of loans they would need. Homeowners and individuals may seek mortgages, auto loans, student loans or personal loans. Entrepreneurs may seek small business loans. Consolidated loans may help customers who are struggling to manage their finances.

Recognize that your loan offerings, rates, and terms will need to be constantly reworked with the changing loan market. Some of these items may also be subject to various regulations, so consult your legal counsel before finalizing your offerings.

6. Market your new finance company. Target your marketing efforts towards your chosen niche of clients. Marketing includes networking and advertising, but there are also other ways of letting potential customers know you have set up shop. Become a familiar face in your local business community by attending and speaking at events sponsored by the local chamber of commerce. Publish communications such as a newsletter or e-zine. Participate in social networking on sites like Facebook, LinkedIn and Twitter.

Note: In order to become successful, you'll have to attract both depositors and loan customers, so be sure to offer deals on both ends. Without attracting depositor, you will have no capital to lend out to customers.

December 03, 2019

how to start a finance company

How to Start a Finance Company.

December 01, 2019

how to protect your finances when your spouse files for bankruptcy

How to Protect Your Finances when Your Spouse Files for Bankruptcy.

When your spouse files for bankruptcy, the bankruptcy should not affect your credit score. However, you may still be affected in other ways. For example, you will still have to pay off joint debts. Also, the bankruptcy trustee can seize any property your spouse owns, even if you are a joint owner. Accordingly, you and your spouse should carefully consider which bankruptcy is best for the family or whether you should pursue a non-bankruptcy option.

Part 1 Identifying Joint and Separate Property.

1. Identify all property you and your spouse own. When your spouse files for bankruptcy, they will have to list all of their property on a schedule and report it. The trustee uses this information to determine the size of the bankruptcy estate. This information is important because the trustee may be able to force your spouse to sell property in order to pay their creditors. The less property your spouse owns, the better off they will be.

Go through your possessions and estimate how much the property is worth. Also figure out who owns it.

As a spouse, you want to be on the lookout for property you jointly own with your spouse. Unless this property is exempt, it goes into your spouse's estate, which means you might lose it depending on the bankruptcy your spouse files.

2. Check if you live in a community property state. The ownership of certain property may depend on the state where you are living. Some states are “community property” states, and this means that any property you or your spouse acquired during the marriage is owned equally by both of you.

For example, you might have bought a car. In a community property state, the car is generally considered the property of both you and your spouse—regardless of whether your spouse is on the title.

The following are community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Community property laws also apply in some situations in Alaska.

Because community property laws differ, you should work closely with a lawyer in your state to identify all property that will be counted as part of the bankruptcy estate.

3. Determine ownership in a common law state. If you don't live in a community property state, then you live in a common law state. In common law states, the owner is generally the person whose name is on the title. If your name alone appears on the title, then the asset probably will not be included in the bankruptcy estate.

If both names are on the title, then you and your spouse both own half of the asset and the asset will have to be listed as part of the bankruptcy estate.

The trustee might be able to force a sale of the asset if they can convince the judge that the benefit of selling the asset outweighs any detriment you will face. However, the trustee will still have to pay you the full-value of your half of the asset. The trustee can only use the portion your bankrupt spouse owned to pay their creditors.

4. Check if you own your home in “tenancy by the entirety.” This is a form of ownership in which the asset is owned by the marriage. Many couples own their home in tenancy by the entirety. Depending on your state, assets owned in this manner are exempted from the bankruptcy estate.

5. Identify bankruptcy exemptions. You can exempt property from being counted as part of your spouse's estate. Each state has bankruptcy exemptions which you can use. The federal government also has a list of exemptions. In some states, you can choose between the state or federal exemptions, whereas other states will require that you use the state exemptions.

In Missouri, for example, you can exempt up to $15,000 in a home that you live in or up to $5,000 in a mobile home. You can also exempt up to $3,000 in a motor vehicle.

Say you and your spouse jointly own a car in Missouri. If the car is worth $16,000, then your spouse has $8,000 in the car. Only $3,000 is exempt. Accordingly, the trustee might want to sell the car and use the $5,000 to pay off creditors. If the trustee sells the car, they must pay the spouse who didn't file for bankruptcy $8,000.

In some states, you can double an exemption if you file a joint bankruptcy petition so long as you both own the property. For example, if the state allows you to exempt $3,000 in a car, then you can exempt $6,000 if you and your spouse own it together.

6. Avoid transferring property. You might think you can protect your assets by having your spouse transfer them before filing for bankruptcy. If you live in a common law state, you might think you can make the transfer into your name so that you hold title to all of the family property and your spouse holds only the debts individually. Unfortunately, this tactic won't work.

Instead, your spouse must report all transfers. If your spouse transferred the property during the two years before they filed for bankruptcy, then the trustee can get the property back.

Your spouse will also get in trouble if they try to hide the transfer. Everyone files a bankruptcy petition under penalty of perjury. If caught lying, your spouse could be prosecuted and have the entire bankruptcy cancelled.

Part 2 Handling Joint Debts.

1. Identify your joint debts. You and your spouse might have joint debts. This means that you both have agreed to be 100% responsible for the full debt. Accordingly, if your spouse files for bankruptcy, you are not relieved of your responsibility for the debt. Although your spouse will have their obligation discharged, your obligation will not be. You will still remain responsible for the entire amount. Joint debts can be formed in the following ways.

You and your spouse took out the debt together.

You cosigned on a loan for your spouse.

You live in a community property state and you or your spouse took out a debt during the marriage.

2. Continue to make payments on your joint debts. If you have a joint debt—say, for your car—then you must continue to make payments on it, even if you are the spouse who didn't file for bankruptcy. If you stop, then your credit score will take a hit because your missed payments will be reported to the credit reporting agencies.

3. Consider filing a joint bankruptcy petition. You have the option of filing for bankruptcy along with your spouse. By doing so, you can discharge joint debts.[12] After a discharge, neither you nor your spouse is responsible for the joint debt.

Of course, a bankruptcy stays on your credit report for several years, and neither you nor your spouse will probably be able to secure new credit in the near future.

Nevertheless, a joint bankruptcy can be an excellent option if you have high joint debts which you have no way of paying off in the future. A joint bankruptcy can free you and your spouse of these crushing joint debts.

Part 3 Choosing the Right Bankruptcy.

1. Identify the different types of bankruptcy. U.S. law provides many different types of bankruptcies, but the two most common for individuals are Chapter 7 and Chapter 13. You should analyze which is best for you, depending on your circumstances.

Chapter 7. This is called a “liquidation” bankruptcy. In a Chapter 7, your spouse can wipe out all of their debts. However, in order to get that benefit, they generally must sell non-exempt property and use the proceeds to pay their creditors.

Chapter 13. In a Chapter 13, the debtor gets to keep their property. Instead of selling it, they will pay back creditors for three to five years. At the end of the repayment period, any remaining unsecured debts (like credit cards) will be forgiven. Chapter 13 is a good option if you have a lot of non-exempt property that is jointly owned.

Joint bankruptcy petition. A joint bankruptcy petition may be the best option if you and your spouse have large joint debts. You can file both Chapter 7 and 13 jointly.

2. Meet with an attorney. Only a qualified bankruptcy attorney can analyze your situation and identify the best course of action. You should get a referral to a bankruptcy attorney by contacting your local or state bar association. Once you have a referral, call up the attorney and schedule a consultation. Ask how much the fee will be.

Your attorney can help you think through which bankruptcy to file—or whether a different alternative would be best.

3. Consider alternatives to bankruptcy. Your spouse should consider other options. These options might be better because they will impact your spouse's credit score less severely. Also, you don't jeopardize losing property. Common alternatives include.

Get a debt consolidation loan. Sometimes you can get a low-interest loan which you use to pay off all debts. You then have one payment to make.

Transfer debts to low interest credit cards. Many credit cards give 12-month grace periods for balance transfers. Interest doesn't accrue until the grace period ends.

Create a repayment plan with your creditors. They might be willing to work with you, especially if you mention that you are thinking of filing for bankruptcy. In bankruptcy, unsecured creditors rarely get paid back 100% of what they are owed. For this reason, they may be willing to reduce the interest rate or extend payments over a long period of time so that you don't file for bankruptcy.

Use a credit counselor. Credit counseling services can help you negotiate with creditors and then consolidate debt. These counselors also help you come up with repayment plans you can afford.

Question : If my wife files bankruptcy, what happens to our jointly-owned house? How does this affect my loan on the house?

Answer : In a bankruptcy, all your debts are listed against all your assets. If your wife does not have sufficient assets to pay for her debts, then her half of the house can be seized. It can either be transferred as an asset to a creditor, or (forcibly) liquidated. But if the bank sells your house, you have to get your share. I.e. only her share can be seized. For a detailed calculation, contact an accountant.

February 17, 2020