How to Discuss Finances Together in a Marriage

How to Discuss Finances Together in a Marriage.

Finances are a hot topic when it comes to all relationships, especially marriages. Saying “I do” means more than just sharing a life together, it also means sharing financial responsibility for that life. Whether good or bad, each spouse needs to be open and honest about his or her current financial standing. What’s more, the couple must work together to decide on important financial decisions for the future. Learn the basics for discussing money with your spouse.



Part 1 Communicating Effectively

1. Broach the subject casually with your spouse. The time to start talking about merging your finances is before the wedding, but at least 40% of couples avoid doing so.

Start the conversation with your action items first. This could mean starting off by talking to your spouse about your desire to look at your own credit score as you prepare to buy a house and suggest that he or she does the same. Say something like “Have you checked your credit report lately? I’ve been wanting to get a good picture of my financial standing. Maybe we can do it together?”

Things like credit scores for both of you may change how you approach buying a home, for example. You may find if one of you has a higher score than the other, it may be better to buy without both of you on the mortgage. However, things line up, remember you are on the same “team”.

2. Gather data to support your decisions. Print your credit reports and any supporting documentation, such as account balances and credit card debt. Financial choices need to be based on numbers not emotion. Make sure you both have a clear idea of what debts came into the union and how you can work to pay those down.

Early on you are doing this to get on the same page about your individual financial pictures. However, in the future, it may be nice to take time each month to sit down together and look over the numbers. Viewing credit card statements and account balances can be a way to keep you accountable as far as goals and also open the floor for an ongoing discussion with your spouse.

3. Be candid about any bad habits. Before you get started, you must be forthright with your spouse about any habits you happen to have that are not apparent on your credit reports.

An example of a bad habit would include not taking the time to write down purchases made on your debit card so you can balance your check book. When you were single, this may have not seemed like a huge deal, but with two people sharing accounts it can quickly become a problem.

Other bad habits you need to bring to your spouse would include past blemishes on your credit like having too many credit cards open, being in default on student loans or having bills in collection. All of these issues can impact credit, but they can also be addressed and resolved.

4. Refrain from pointing the finger. Placing blame and arguing over money will not make any issues better. If you ask your spouse to be honest about credit challenges and then start the blame game you will probably not get that same level of honesty in the future.

5. Listen to understand, not to reply. This means looking at your spouse as he or she is speaking, listening carefully to fully get his or her point of view, and then taking that one step further by confirming what you have heard.

When you sit down to have a tough conversation with your spouse, you will break the trust if you are not willing to listen. Don’t ask the tough questions unless you are ready to handle any answer.

The exchange of information should be fair and equal.



Part 2 Setting Ground Rules.

1. Decide if you will merge all the money or maintain separate accounts. Even after getting married there are no laws that say you have to merge all your accounts. Having separate accounts does not mean neither of you knows what the other is doing. Both partners should have access to the records of the other since you are sharing a household.

Depending on the credit scores for both spouses, it may make more sense to keep separate accounts especially if you want to buy a home soon. One spouse alone on a mortgage is going to have a higher chance of getting the loan than two people with mixed credit scores.

2. Determine who will be the primary overseer of your money. This will include how you make decisions about both small and large purchases. The person who is most organized and financially savvy may be the best choice for managing the finances. However, both partners should take on the responsibility in some way. So, choose duties according to your individual strengths.

For example, one of you may be better at saving, so you will be in charge of building an emergency fund and overseeing retirement savings. The other may be in charge of paying monthly bills and balancing the checkbook. Decide based on what’s best for you and your spouse.

3. Agree about which of you will handle certain expenses. You will need to know who is writing the check for rent, paying the electric bill and other household bills. You do not want to get into a situation where both of you thought the other paid the electric bill and you learn that it wasn’t paid when the lights are turned off. You also don’t want to pay bills twice and be short money.

Being upfront about how much both of you make and how you will divide the bills will make things much easier. Some families divide everything I half while others just pool their money regardless of who makes what.

The use of credit cards versus cash should also be explored as one partner may be used to always using a card and then paying it off once a month while the other only uses cash. This needs to be talked about.

4. Don’t make big purchases without your spouse’s blessing. Regardless of who makes more money, a big ticket item should be bought together. This is a good time to set boundaries about how much either of you can spend without talking to your spouse. This can be as simple as saying you have a spending limit of $100 without checking in since that is a low amount in your budget and won’t overdraw the account.



Part 3 Overcoming Money Troubles.

1. Build a household budget. This budget should include all the household bills, ongoing needs and bills that were outstanding from before you got married. The budget needs to be realistic and something you both commit to. Consider these tips:

Tally up every single monthly expense and plan for them in advance.

Include separate and joint goals.

Include long-term goals like saving for a down payment on a house.

Negotiate with ongoing bills to cut down interest rates or get rid of fees.

Automate whatever you can so that you don’t miss paying bills and acquire late fees.

Go back and revise your budget as needed.

2. Start building an emergency fund. If you didn’t already have an emergency fund before getting married, now is the time to build one. An emergency fund acts as a cushion in times when unexpected expenses pop up or one of you is out of work.

How big your emergency account is will depend on you and your spouse. Many families tuck away enough money for at least 3 to 6 months of expenses. This provides greater security over the long haul.

This savings account would be for true emergencies only, not impulse buys. Take the time to set boundaries as to what qualifies as an emergency.

Some households use a credit card for emergencies like car repairs. Make sure you both agree if this is a good use of your credit cards and leave the available balance for such an emergency. If either of you has problems with managing credit cards, this may not be the best option for your household.

3. Know your debt situation and decide on a strategy to pay it off.[13] Both of you should have a very clear idea of the other person’s debt as well as your own. Don’t fall prey to the idea that it’s your spouse’s problem—it’s not. Both of your debt is usually considered during major purchases, so working together to shrink each person’s debt is ideal.

It can also be helpful to get financial advising or attend a debt reduction course for couples. If you have a significant amount of debt—or have no idea where to start to pay it down—it may be practical to involve a professional who can assist you.

4. Plan for your retirements. Talk to your spouse and come up with a plan that suits both of you for retirement and start saving. Keep in mind, that men and women often have varying opinions when it comes to retirement, so be willing to compromise and consider your spouse’s perspective.

Include payments to 401K and other investments as a part of your budget. Part of this process also includes changing the beneficiaries for each account now that you are married.

If you don’t already, you also need to draw up life insurance policies to secure your spouse and your family in case of a tragedy.



Question : If we get a divorce, will my wife get 50% of my 401K too?

Answer : Honestly, this depends on the state and the county where you are getting divorced. Different locations have different rules of division in a divorce. Some states are equitable division, meaning you split 50/50 while others are not.



Warnings.

Money troubles have ended more than a few marriages. If you are both responsible, open and honest about money, it will make for a stronger marriage.

Be mindful that some people are sensitive about discussing money. To some, money means power and control and these are very volatile subjects. Handle with care.

It can be a difficult and uncomfortable transition going from being a single person in total control of your finances to being part of a couple. If your partner is resistant, give him or her time. If you can show them that you are interested in working as a team with no judgments, your spouse will eventually come around.

February 10, 2020

how to discuss finances together in a marriage

How to Discuss Finances Together in a Marriage.

Finances are a hot topic when it comes to all relationships, especially marriages. Saying “I do” means more than just sharing a life together, it also means sharing financial responsibility for that life. Whether good or bad, each spouse needs to be open and honest about his or her current financial standing. What’s more, the couple must work together to decide on important financial decisions for the future. Learn the basics for discussing money with your spouse.



Part 1 Communicating Effectively

1. Broach the subject casually with your spouse. The time to start talking about merging your finances is before the wedding, but at least 40% of couples avoid doing so.

Start the conversation with your action items first. This could mean starting off by talking to your spouse about your desire to look at your own credit score as you prepare to buy a house and suggest that he or she does the same. Say something like “Have you checked your credit report lately? I’ve been wanting to get a good picture of my financial standing. Maybe we can do it together?”

Things like credit scores for both of you may change how you approach buying a home, for example. You may find if one of you has a higher score than the other, it may be better to buy without both of you on the mortgage. However, things line up, remember you are on the same “team”.

2. Gather data to support your decisions. Print your credit reports and any supporting documentation, such as account balances and credit card debt. Financial choices need to be based on numbers not emotion. Make sure you both have a clear idea of what debts came into the union and how you can work to pay those down.

Early on you are doing this to get on the same page about your individual financial pictures. However, in the future, it may be nice to take time each month to sit down together and look over the numbers. Viewing credit card statements and account balances can be a way to keep you accountable as far as goals and also open the floor for an ongoing discussion with your spouse.

3. Be candid about any bad habits. Before you get started, you must be forthright with your spouse about any habits you happen to have that are not apparent on your credit reports.

An example of a bad habit would include not taking the time to write down purchases made on your debit card so you can balance your check book. When you were single, this may have not seemed like a huge deal, but with two people sharing accounts it can quickly become a problem.

Other bad habits you need to bring to your spouse would include past blemishes on your credit like having too many credit cards open, being in default on student loans or having bills in collection. All of these issues can impact credit, but they can also be addressed and resolved.

4. Refrain from pointing the finger. Placing blame and arguing over money will not make any issues better. If you ask your spouse to be honest about credit challenges and then start the blame game you will probably not get that same level of honesty in the future.

5. Listen to understand, not to reply. This means looking at your spouse as he or she is speaking, listening carefully to fully get his or her point of view, and then taking that one step further by confirming what you have heard.

When you sit down to have a tough conversation with your spouse, you will break the trust if you are not willing to listen. Don’t ask the tough questions unless you are ready to handle any answer.

The exchange of information should be fair and equal.



Part 2 Setting Ground Rules.

1. Decide if you will merge all the money or maintain separate accounts. Even after getting married there are no laws that say you have to merge all your accounts. Having separate accounts does not mean neither of you knows what the other is doing. Both partners should have access to the records of the other since you are sharing a household.

Depending on the credit scores for both spouses, it may make more sense to keep separate accounts especially if you want to buy a home soon. One spouse alone on a mortgage is going to have a higher chance of getting the loan than two people with mixed credit scores.

2. Determine who will be the primary overseer of your money. This will include how you make decisions about both small and large purchases. The person who is most organized and financially savvy may be the best choice for managing the finances. However, both partners should take on the responsibility in some way. So, choose duties according to your individual strengths.

For example, one of you may be better at saving, so you will be in charge of building an emergency fund and overseeing retirement savings. The other may be in charge of paying monthly bills and balancing the checkbook. Decide based on what’s best for you and your spouse.

3. Agree about which of you will handle certain expenses. You will need to know who is writing the check for rent, paying the electric bill and other household bills. You do not want to get into a situation where both of you thought the other paid the electric bill and you learn that it wasn’t paid when the lights are turned off. You also don’t want to pay bills twice and be short money.

Being upfront about how much both of you make and how you will divide the bills will make things much easier. Some families divide everything I half while others just pool their money regardless of who makes what.

The use of credit cards versus cash should also be explored as one partner may be used to always using a card and then paying it off once a month while the other only uses cash. This needs to be talked about.

4. Don’t make big purchases without your spouse’s blessing. Regardless of who makes more money, a big ticket item should be bought together. This is a good time to set boundaries about how much either of you can spend without talking to your spouse. This can be as simple as saying you have a spending limit of $100 without checking in since that is a low amount in your budget and won’t overdraw the account.



Part 3 Overcoming Money Troubles.

1. Build a household budget. This budget should include all the household bills, ongoing needs and bills that were outstanding from before you got married. The budget needs to be realistic and something you both commit to. Consider these tips:

Tally up every single monthly expense and plan for them in advance.

Include separate and joint goals.

Include long-term goals like saving for a down payment on a house.

Negotiate with ongoing bills to cut down interest rates or get rid of fees.

Automate whatever you can so that you don’t miss paying bills and acquire late fees.

Go back and revise your budget as needed.

2. Start building an emergency fund. If you didn’t already have an emergency fund before getting married, now is the time to build one. An emergency fund acts as a cushion in times when unexpected expenses pop up or one of you is out of work.

How big your emergency account is will depend on you and your spouse. Many families tuck away enough money for at least 3 to 6 months of expenses. This provides greater security over the long haul.

This savings account would be for true emergencies only, not impulse buys. Take the time to set boundaries as to what qualifies as an emergency.

Some households use a credit card for emergencies like car repairs. Make sure you both agree if this is a good use of your credit cards and leave the available balance for such an emergency. If either of you has problems with managing credit cards, this may not be the best option for your household.

3. Know your debt situation and decide on a strategy to pay it off.[13] Both of you should have a very clear idea of the other person’s debt as well as your own. Don’t fall prey to the idea that it’s your spouse’s problem—it’s not. Both of your debt is usually considered during major purchases, so working together to shrink each person’s debt is ideal.

It can also be helpful to get financial advising or attend a debt reduction course for couples. If you have a significant amount of debt—or have no idea where to start to pay it down—it may be practical to involve a professional who can assist you.

4. Plan for your retirements. Talk to your spouse and come up with a plan that suits both of you for retirement and start saving. Keep in mind, that men and women often have varying opinions when it comes to retirement, so be willing to compromise and consider your spouse’s perspective.

Include payments to 401K and other investments as a part of your budget. Part of this process also includes changing the beneficiaries for each account now that you are married.

If you don’t already, you also need to draw up life insurance policies to secure your spouse and your family in case of a tragedy.



Question : If we get a divorce, will my wife get 50% of my 401K too?

Answer : Honestly, this depends on the state and the county where you are getting divorced. Different locations have different rules of division in a divorce. Some states are equitable division, meaning you split 50/50 while others are not.



Warnings.

Money troubles have ended more than a few marriages. If you are both responsible, open and honest about money, it will make for a stronger marriage.

Be mindful that some people are sensitive about discussing money. To some, money means power and control and these are very volatile subjects. Handle with care.

It can be a difficult and uncomfortable transition going from being a single person in total control of your finances to being part of a couple. If your partner is resistant, give him or her time. If you can show them that you are interested in working as a team with no judgments, your spouse will eventually come around.

February 10, 2020

How to Calculate an Amount to Be Financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

how to calculate an amount to be financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 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

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

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 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 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