1. Know Your Credit Score and Get It At Its Best.

Probably the single most important thing that determines your ability to get financing for a new business is your credit score. Since the business has no history of its own yet, lenders will look to your personal credit.

You can find out your credit score for free by clicking here. Here’s a rough guide of how far your score will get you in terms of qualifying for business financing:

• Under 500 – Not possible for a new business to get funding.
• 500-680 – Limited financing options and high interest rates.
• Over 680 – Best financing options and low interest rates.

If your credit score is not as high as you’d like, you can increase your score in simple ways, such as paying all your bills on time and reducing your outstanding debt. Some people prefer to use the services of a credit repair agency. Credit repair services can dispute errors on your credit report on your behalf and give you a personalized plan for improving your score.  Learn more by reading these articles:

• How to Improve Your Credit Score
• Best Credit Repair Companies – Who Can Fix Your Credit?

2. Decide How Your Business Will be Structured.

Once you get your credit score in order, you need to decide how to structure your business. A business can be organized as a Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Company (LLC), or Corporation.

If you do not choose a business structure, you are by default a sole prop if you operate alone or a general partnership if you have a business partner(s). It’s easy to get started as a sole prop or general partnership, but such businesses also face challenges in qualifying for financing because there’s no real distinction between you and the business.

In addition, sole props and general partnerships lack the benefits of limited liability. If someone sues your business, you could be personally liable to them if you are organized as a sole prop or general partnership.

LLCs, Corps, and Limited Partnerships are more fundable. You have to do more paperwork and follow more formalities when you have a business of this type, so it shows the lender that you are serious about the business. In addition, owners are shielded from personal liability for the debts and obligations of the business. Setting up an LLC, Corporation, or Limited Partnership is easy – click here to learn how.

3. Get Proof of Business.

In order to get business financing, you will be asked to submit proof of business. Based on how you organize your company, here’s what you can submit as proof of business for your startup:

• New LLCs and New Corporations – It’s easiest to show proof of business as an LLC or Corporation because the lender can look up an official record of your business online through your state’s Secretary of State website.
• New Sole Props and New Partnerships – New sole props and partnerships can show proof of business with an Employer Identification Number (EIN) and/or a Doing Business As (DBA) name. It is free to get an EIN on the IRS’ website, and you don’t need employees to get one. A DBA authorizes you to operate under a trade name such as Bob’s Widget Company.

4. Start Building Business Credit.

Building business credit early will help set you apart as a fundable business. Every business gets a business credit score that measures how responsible it is in paying back its bills, and having a good business credit score helps you qualify for low rate financing. You can get a summary of your business credit rating for free at Nav and a specific score for a price.

Until you start paying vendors or get a business loan, you won’t be able to build up too much business credit. However, you can take some simple steps in the right direction by opening a business checking account, applying for a business credit card, and getting a free D-U-N-S number.

5. Write a Business Plan.

Even if you have great personal credit and business credit, you will need a business plan to qualify for most types of startup financing. Writing a business plan has multiple benefits. It will help you understand your own product or service better and articulate your vision for your business with lenders, investors, and other people. It will even help you figure out exactly how much money you need to borrow to launch your business.

One of the easiest ways to write a business plan is to use LivePlan software. LivePlan is very user-friendly, with drag-and-drop content blocks to create your plan, a special tool to make financial projections, and a library of sample business plans for salons, restaurants, and hundreds of other types of businesses.

6. Bring as Many Personal Resources to the Table As Possible.

When borrowing money for a new business, lenders generally want to see you have some skin in the game. There are some exceptions to this, such as invoice factoring and merchant cash advances, but in general, you should try to come up with at least 20 % of the loan amount from personal resources.

The money can come from personal savings, family and friends, or from a retirement account. It can serve as down payment for a loan, and even if a loan doesn’t require a down payment, gathering personal resources will reduce the amount of money you have to borrow.

If you have a retirement account with at least $50,000, you can set up a Rollover for Business Startups (ROBS). A ROBS allows you to invest retirement funds in your business free of debt, taxes, and early withdrawal penalties.

7. Determine How Your Business Will Generate Revenue.

The last thing you should be mindful of before beginning the search for financing is how your business generates revenue. Your revenue model impacts the type of financing you’re eligible for. For example, B2B businesses that bill via invoice are eligible for invoice factoring. Companies that accept credit cards are eligible for merchant cash advances.

What’s Next?

Now that you know what you need to go from idea to fundable business, go here to learn more about the financing options available or give us a call at 800-216-9440!

The post 7 Steps to Turn Your Idea Into a Fundable Business appeared first on FitBizLoans.com.

If you have questions about truck financing or want a free quote, contact FitBiz Loans today!

Semi Truck Financing for Owner-Operators

Your chances of qualifying for commercial truck financing as an owner-operator and paying low rates dramatically go up if you do these 6 things:

1. Show proper proof of business
2. Get your personal credit as high as possible
3. Find a truck in good condition to lease
4. Collect enough money for a down payment and cash reserves
5. Obtain insurance
6. Find a good financing company

We will walk you through each of these steps below, but before we do, there are a couple of things you should know.

In general, getting commercial truck financing is relatively easy compared to obtaining other types of business loans because the truck serves as collateral. Rates range from about 4-16 %.

However, owner-operators with only 1 truck face some unique challenges in obtaining financing. If a large trucking company has 10 trucks and 1 goes out of commission, that’s only a 10 % reduction in its business. An owner-operator with a single truck, on the other hand, is completely reliant on that truck to produce business. This makes lenders more hesitant to provide financing. In addition, owner-operators who are just starting out may find it difficult to get financing because the business doesn’t have a track record yet.

For these reasons, it’s especially important to have all your ducks in a row before approaching a lender. Below, we explain the 6 things you can do to increase your chances of obtaining truck financing.

1. Show Proper Proof of Business

The first thing you’ll need to do when applying for semi truck leasing is to show proof that you have a registered business.

What you’ll need to show depends on how your business is set up. Here’s a list of what you can show:

• LLCs and Corporations – It’s easiest to show proof of business for an LLC or corporation because the lender can look up an official record of your business online through your state’s Secretary of State website. Setting up an LLC or corporation is easy – click here.
• Existing Sole Props and Partnerships – If your business hasn’t organized as a legal entity, you are automatically a sole proprietorship or partnership. A sole proprietor who has filed at least 1 year of taxes showing business income can submit their Schedule C as proof of business. Partnerships can submit their Schedule K-1, which lists each partner’s share in the business’ profits and losses.
• New Sole Props and Partnerships – New sole props and partnerships can show proof of business with an Employer Identification Number (EIN) and/or a Doing Business As (DBA) name. It is free to apply for an EIN on the IRS’ website, and if you choose to receive your confirmation letter online, you can use it right away as proof of business (a hard copy takes about 4 weeks to arrive). A DBA authorizes you to operate under a trade name such as Bob’s Trucking.

Beyond Proof of Business

In addition to proof of business, you may need additional authority to be an owner-operator. For example, you must have a Commercial Driver’s License (CDL). Independent owner-operators may also need a US Department of Transportation (USDOT) number and a Motor Carrier (MC) number. Lenders typically don’t ask for documentation of these items, but if you don’t have them, you’re driving at your own risk.

2. Improve Your Personal Credit As Much as Possible

Once you’ve done the initial work of registering your business, it’s time to consider your personal credit score. Your credit score can have a big impact on your ability to qualify for semi truck financing, particularly if you’re just starting out as an owner-operator. If you don’t know your credit score, you can check it for free by clicking here.   

Borrowers who have been in business as an owner-operator for at least 2 years can typically qualify for 100 % financing if they have decent credit (above 550) and solid revenues. Borrowers with new businesses will typically need to put up a down payment unless they have excellent credit (above 700) and experience in the trucking industry. The down payment ranges from about 10-30 % depending on how strong your credit is.

We recommend you do the following to improve your credit score:

• Check out these tips on improving your credit score.
• Don’t submit too many lease applications because each one can ding your personal credit.
• Contact us today! We have a platform where over 70 lenders will compete to offer you the best rates on a lease (your credit score won’t be impacted unless you move forward on a quote).

Borrowers with lower credit scores should consider finding a co-signer to support their application. In most cases, the co-signer must be a blood relative or an owner of the business.

Keep in mind that even if you have great credit, certain red flags, such as a recent bankruptcy, tax lien, or past due child support, can prevent you from getting truck financing.

3. Find a Good Truck to Lease

Credit is not the only factor at play. As you might have guessed, the condition of your truck will also impact your ability to get commercial truck leasing and the rates you will have to pay.

Most owner-operators who are just starting out don’t have enough cash on hand to buy a brand new truck. That’s fine, but at a minimum, your semi truck should meet the following specifications:

• Less than 10 years old
• Less than 700K in mileage and in good condition

The older and more used a truck is, the less likely a lender is to provide financing. Why? Older trucks break down more frequently and have less value as collateral in the event that you default on your lease payments.

Traditionally, it was difficult to get financing for a truck unless you bought it from a dealer. Things have changed now, however, and as long as the truck is in good shape, you can get financing even if you buy the truck through a private party or auction. Just make sure you get a written quote to submit to the lender. The following details are typically required:

• Make and Model
• Year and Mileage
• Serial Number
• Specify If Used Truck
• At Least 3 Pictures of the Truck
• Condition Report
• Specify If Private Sale

4. Down Payment and Cash Reserves

Owner-operators need a healthy supply of cash to get into and remain in business.

Unless you have excellent credit, trucking experience, and a truck in tip-top condition, new owner-operators typically won’t qualify for 100 % financing. You’ll need to put some of your own money towards the purchase of the truck. The amount of down payment required varies from about 10-30 % depending on your credit score and the condition and age of the semi.

In addition to a down payment on the truck, you’ll need 1-2 months of cash reserves. Cash reserves cover repairs, insurance premiums, personal living expenses, and more if you have a slow month or two. Lenders prefer borrowers with cash reserves because they ensure that you’re not stretched too thin if business is slow for awhile.

Having cash reserves also just makes good business sense. Here’s what Phil Madsen, an experienced owner-operator who works with his wife Diane, had to say about the importance of having cash reserves:

“When a dry spell with additional repair expenses comes along like the one Diane and I are on now, expediters without financial reserves find themselves in a real pickle. They end up turning down excellent paying runs that pick up later because they need cash now and taking a cheap run today puts money in their hands. Or they borrow money from friends or reluctant relatives. Or they beg their fleet owners or carriers for advances against future earnings. Or they wash out of the business.”

5. Get Proper Insurance

You’ll need to show proper proof of insurance to the lender. You can get pre-approved for semi truck financing without insurance, but before the money is disbursed to your bank account, you’ll need to show proof of insurance.

According to David Meltzer, a commercial auto and truck specialist at East Insurance Group, “Insurance for an owner operator depends on what the business is comprised of.” If the business is just the truck, you’ll need a truck insurance policy to cover the truck and an add-on motor cargo policy for the cargo. If you have an office or employees, then you would need general liability coverage and a worker’s compensation policy.

The cost of truck insurance varies significantly based on factors such as the insured’s driving record and experience, the value of the truck, and estimated monthly mileage. However, Meltzer says that most 1-truck owner-operator policies that he has worked on have been in the $5K/year to 10K/year range.

If you hire out to a carrier, the carrier will cover some or all of your insurance needs, so be sure to check with them before getting your own policies.

6. Find a Good Financing Company

There are hundreds of commercial truck financing companies out there. Each of them have slightly different qualification requirements and specialize in different types of leases. The advantage of working with FitBiz Loans is our truck financing platform where over 70 lenders will compete to offer you the best rate. You don’t have to provide personal information, and your credit score won’t be impacted unless you decide to move forward on a quote.

Bottom Line

Being an owner-operator gives you the freedom of being your own boss. With that freedom comes new responsibilities however, among them the need to get financing for your truck. Following the 6 steps above will help you qualify for and get the best rates on semi truck financing.

If you have questions or are ready to lease your truck, contact us today for a free quote!

The post 6 Steps to Getting Semi Truck Financing appeared first on FitBizLoans.com.

In this article, we explain what a business plan should contain, why it’s essential to have a good business plan, and how to easily create one using LivePlan business plan software.

What is a Business Plan?

A business plan is a blueprint for your business’ future. It outlines your business goals and how you plan to achieve them. If you’re applying for a business loan, you will need a good business plan. LivePlan software, which we discuss in detail below, allows you to easily put one together.

A business plan will generally have these 7 components:

1. Executive summary – Company snapshot that briefly summarizes what your business does, key financial data, your target market, and other information that you will go into in more detail in the rest of your business plan
2. Company overview – Basics about your business such as location, ownership, and the product or service that your business is offering
3. Market analysis – Information about the industry, competitors, and how your business will differentiate itself from the competition
4. Organization & management – Details about how your business is structured (e.g. LLC, corporation, etc.) and credentials for the members of your management team.
5. Financials – This is an important section of your business plan when applying for a loan. You should provide at least 3 years of projections on business revenues, cash flow, and profits. These numbers should support the amount of money you are seeking to borrow. If you have an existing business or are acquiring a business, you should also include historical financial data for the business.
6. Product or service – Explains what market need your business is fulfilling and how your product or service will solve that problem.
7. Marketing & sales – Outline of pricing, promotions, and other sales and marketing strategies.

While these basic categories apply to most businesses, your plan will vary based on the type of business you have. For example, a construction company owner may spend a lot of time discussing government contract opportunities, whereas a retail shop owner may spend a lot of time discussing product line and location. The nice thing about LivePlan software is that it comes with hundreds of industry specific templates.

Why You Need a Business Plan

A business plan is typically required as part of the application process for a business loan. Beyond that, however, writing a business plan is important because it helps you gather your thoughts about your business. Whether you’re just starting out, acquiring a business, or have had a profitable business for years, you need to be able to speak with lenders, investors, employees, and other third parties about your business in an intelligent way. Putting together a good business plan can help you articulate your vision for your business.

Specifically in terms of financing, a business plan is important for these reasons:

A business plan is required for SBA loans and many other business loans

Imagine if you were lending money to your Uncle Bob for his latest business venture. Wouldn’t you be more likely to lend to him if he submitted a well-thought out plan showing how his business would be successful than if he just scribbled something on the back of a napkin? A lender is no different. Lenders require a well-crafted business plan for SBA loans and often times for other types of loans as well.

While lenders are most interested in the financial part of your business plan, they will also want to understand more about your business’ products and services, the competition, what you will be doing with the loan proceeds, and more. Understanding more about your business will help the lender trust you with their money.

A business plan with projections can inform you when it’s time to plan for financing.

When you have a business plan with projections, it becomes clear what your business will be spending money on in the next several months and the next few years. This can help you plan ahead.

For example, if your business plan calls for new equipment in 12 months, you’ll know that you should start looking for equipment financing before the year is out. You can also predict approximately how much financing you’ll need. If you’ll need a large amount of capital, knowing the timeline in advance can also help you save towards a down payment.

Additionally, many businesses have slow seasons or down-cycles. A business plan can help you know when to expect them and the amount of capital you need to ride them out.

A business plan with projections can inform you when it’s the optimal time to borrow.

You should be strategic about obtaining business financing. Ideally, you should apply for financing when your company’s financials are strongest. That will ensure that you qualify for the largest amount of capital and the best interest rates. Writing a business plan lets you set and track financial goals for your business. With those goals in mind, you can request funding when your business is at its best to make sure you get the funds you need on the best terms possible.

Writing a Business Plan Made Easy With LivePlan Software

LivePlan is business plan software that’s made with the busy small business owner in mind. It allows you to quickly and easily assemble a business plan that presents your business in the best light and includes all the information that a lender would want to know. With LivePlan, it’s also easy to update your business plan as your business grows and adapts.

LivePlan costs $11.66 per month (if you pay annually) and offers a 60-day money back guarantee (it costs $19.95 per month if you pay monthly). Given that professional business plan consultants can charge thousands of dollars to write up a business plan for you, this is an excellent value.

To test LivePlan, we used the software ourselves using a hypothetical company called Suzy’s Build a Pizza Shop. Here’s a step-by-step look at the benefits of using LivePlan:

1. User-friendly plug and play software

Once you create an account with LivePlan and sign in, you will be brought to the main dashboard. To start, click “Plan” on the top menu. You can then click on the user-friendly content blocks to write up your business plan and to edit text.

Sometimes, it helps to have a sample business plan from your industry as a guide for your own. You can click on “Help & Resources” in the top right corner of the dashboard to get to LivePlan’s Sample Plan Library. There, you can choose from hundreds of business plans in your specific industry.

2. As-you-go instructions and examples

If you don’t know what kind of information to include in a particular section, LivePlan will tell you. For example, if you’re unsure of what to put in the target market section, LivePlan will tell you what questions to answer and will even give you examples from a wide range of industries.

3. Customize your plan

Sometimes, you may want to customize your plan to suit your business goals. For example, not every business plan includes a discussion of pricing, but pricing may be critical to the success of our hypothetical pizza shop if there a lot of competitors nearby. LivePlan lets you add custom sections to your business plan and remove sections as needed. You can do this by clicking the “change what’s in this section” tab which appears at the bottom of each content block.

4. Easily plot out your financials and make projections

The financial section of the business plan is usually what scares people, but keep in mind that, as the experts at LivePlan say, “business planning is not accounting.” You don’t have to be 100 percent accurate with your financials, but should try to make realistic estimates. When you get to the financial section of your plan, you’ll want to click the “Forecast” tab at the top of your LivePlan dashboard. This tab is where you create projections and track your finances.

Once you click the Forecast tab, you will be prompted to input 7 different types of financial data: Revenues, Direct Costs (i.e. cost of goods sold), Personnel Costs, Operating Expenses, Assets, Assumptions (e.g. estimated sales cycle), and Financing. Again, as before, LivePlan will walk you through a description of each type of financial data so you know exactly what to include. For example, here’s what revenue forecasts look like:

From the financial data that you provide, LivePlan will create 3 financial statements for you with projections: Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows. You can choose whether you want projections for 3 years or 5 years. Here are sample profit and loss projections for Suzy’s Build a Pizza:

5. Track your financial goals

A good business plan is a “living document” that you can easily change as your business grows. One of the main reasons we recommend LivePlan is because once you use it to create your business plan, you never have to start from scratch again. For instance, if you add a new revenue stream or an asset such as new equipment, you can update that in LivePlan.

You can also see if you’re on track to meet your projections and industry benchmarks. Through the “Scoreboard” tab, connect LivePlan to QuickBooks, Xero, or enter your accounting information manually to track actual progress against your plan. This is an easy way to keep your business healthy and in check.

Bottom Line

There’s no doubt you’ll need a good business plan when applying for a business loan, but it can help with more than that. Writing a business plan can help you assess your business’ vision and your strategies for managing growth. The process of writing a business plan can seem intimidating, but it doesn’t need to be. LivePlan software makes it easy and intuitive to create a business plan and to update your business plan as your company grows.

The post Writing a Business Plan Made Easy appeared first on FitBizLoans.com.

Keep in mind, this checklist is designed for conventional bank loans and SBA loans. If you want to reduce your load of paperwork, consider obtaining business financing from an alternative lender. Alternative lenders typically require minimal paperwork, which speeds up the process of getting a loan. The catch is that they are generally costlier than a bank or SBA loan. Need help deciding? Contact us today for a personalized business loan consultation.

What You’ll Need for Your Small Business Loan Application

Informational Documents

Basic Personal Information

In most cases, the first page of a small business loan application will ask for basic personal information, such as your name, address, phone number, and SSN. You may also have to provide the SSN and contact information of those who own 20 % or more of the business.

Basic Business Information

Basic business information, such as the business’ tax ID, number of employees, and business location(s), comes next. If you are leasing office space, you may also have to provide a copy of your lease.

Business Legal Documents

Depending on the lender, you may be asked to produce business formation documents, (e.g. LLC filing records), business licenses, records of pending legal claims (if applicable), previous bankruptcy records (if applicable), and contracts with other businesses (if applicable).

Business SIC and NAICS Industry Codes

These are codes that describe your business’ primary activity. Being placed in a ‘risky’ category, such as real estate investment, can affect the interest rates you qualify for. Click here to look up your SIC code and here to look up your NAICS code.

Personal and Business Credit Reports

Your credit score is an important part of your ability to get a small business loan. The lender will, as part of its due diligence, obtain its own copy of your business and personal credit reports. However, it’s helpful to get your business and personal credit reports in advance so you can find out where you stand and clear up any errors. Nav lets you view your personal and business credit information in one place – you can get score summaries for free and detailed reports for a fee.

Your Resume and Resumes for Your Management Team

If you’re starting a new business or acquiring a business, lenders typically like to see 3-5 years of management or relevant industry experience. You should include resumes for yourself and your management team in your small business loan application.

Financial Documents

Last 3 Years Business and Personal Tax Returns

Tax returns tell the lender about your business’ financial performance over the last few years. Lenders also want personal tax returns because, if you default on a personally guaranteed loan, the lender can come after your personal assets. You must submit personal tax returns for anyone owning 20 % or more of the business.

Last 1 Year of Business Bank Statements

Bank statements give the lender a window into your business’ cash flows. If there are long periods during which your cash flow was in the negative, you should be prepared to explain that to the lender.

Current Year’s Balance Sheet and P&L Statement

The balance sheet and profit & loss statement are usually included as part of a business plan (see below). They show the revenues your business is bringing in by selling goods or services, your business’ operating expenses, as well as other debt that your business has. Accounts payable and accounts receivable should be included on the balance sheet. As with bank statements, if there is something negative in these documents, be prepared to discuss that with the lender.

Collateral

If your lender requires collateral, take stock of business assets, such as equipment, and identify their value. This is called a collateral statement and should be included in your small business loan application. If you’re willing to pledge personal assets (e.g. your home) as collateral, you should have document their value as well.

Information on Existing Debt

Existing debt can affect your ability to qualify for a loan, as well as the interest rates that you pay. Make note of the names of existing creditors, outstanding loan balances, interest rates, terms, and how many payments are left on existing loans.  

Future Business Plans

Business Plan

Including a good business plan with your small business loan application shows the lender that you’re not in business just for short term gain but that you have thought about your long term business goals and how to achieve them.

As for what to include in a business plan, that requires its own checklist! At a minimum, it should contain your target market, competition, executive team, and business model (including your budget for different business activities, such as marketing).

Startups should provide 3-5 years of financial projections. Existing businesses can provide projections for the next 12 months and the last 3 years of financial history.

Business plan writing is both an art and a science. If you need some guidance, we recommend using LivePlan business plan software. This user-friendly software will help you put together your business plan in no time and easily update your plan as your business grows.

What Lenders Will Ask You

When applying for a small business loan, be prepared to discuss yourself and your business and answer the following questions. Gathering the paperwork you need will help you develop compelling responses.

• What does your business do?
• Why are you applying for a loan?
• What will you do with the loan proceeds?
• What are your business and personal credit like?
• Who’s in your management team?
• Do you have management or industry experience (particularly important if you’re starting or buying a business)?
• Do you have other business loans?

Bottom Line

Sometimes, getting a business loan can feel like a bumpy road. The checklist above will help smooth out and speed up your small business loan application. Keep in mind that every lender has its own specific requirements, but the checklist above includes basic information that most bank and SBA lenders will want to see. If you need help finding a business loan, we’re just a phone call away and will walk you through the entire process step by step.

The post Small Business Loan Application Checklist appeared first on FitBizLoans.com.

The post Equipment Lease Calculator appeared first on FitBizLoans.com.

Having a good business credit score can help you qualify for low rates on a business loan and favorable payment terms from suppliers.

This article will give you a crash course on business credit, providing an overview of why it is important, how to establish business credit and get a copy of your business credit report, and how to raise your business credit score.

Why Should I Care About My Business Credit Score?

If you are a typical small business owner, you have a thousand things competing for attention. So why should you give any thought to your business credit score?

Because good business credit can decrease your cost of doing business in these ways:

• Qualify for the best rates on business loans. Business owners that understand their credit scores are 41 % more likely to qualify for loans and credit cards than those who don’t. Creditworthy businesses tend to get the largest amounts of financing and the lowest interest rates.
• Get good payment terms from suppliers. Suppliers are more likely to grant favorable payment terms to businesses with good credit.
• Reduce reliance on your personal credit score. If you have good business credit, suppliers and lenders may extend you credit without checking your personal credit history. That way, your business won’t suffer even if your personal credit is weak.

Who Tracks My Business Credit Score?

Dun & Bradstreet (D&B), Experian, and Equifax are the big 3 business credit bureaus.

Each agency has its own method of scoring businesses. Here is a rundown of the differences:

It’s important to establish credit with all 3 agencies because they are each used in different circumstances. While suppliers tend to prefer D&B, banks and other lending institutions prefer Experian and Equifax.

How Do I Establish Business Credit and Get a Copy of My Business Credit Report?

Establish A Credit File

Before you can get a business credit score, you need to establish a credit file with at least one bureau.

In most cases, you don’t need to do anything to establish a credit file with Equifax or Experian. These agencies automatically check for new business filings in every state and comb through public records. According to Caton Hanson, Co-Founder and Chief Counsel of business and personal credit monitoring platform Nav, your business can be scored based solely on information in such records.

Establishing credit with D&B takes a bit more work. First, you need to get a D-U-N-S number, which gets you added into D&B’s business database. Getting a D-U-N-S number is free and can be done through D&B’s website or Nav.

Next, you need to provide at least 3 trade references. Trade references, similar to employment references when applying for a job, come from suppliers and lenders that you’ve worked with.

You may get trade references by asking suppliers and creditors that you have a positive relationship with to report your payment activity to the credit bureau. Alternatively, if you subscribe to D&B’s CreditBuilder service for $99/month, D&B will contact your trade references on your behalf to verify that you are a customer and have been paying on time.

Get a Copy of Your Business’s Credit Report

After establishing a credit file, you should get a copy of your business credit report. In contrast to consumer credit reports–which you are entitled to get for free once a year–business credit reports cost money.

You can get a one-time report directly from the agency:

• D&B – Buy report starting at $61.99
• Experian – Buy report starting at $36.95
• Equifax – Buy report starting at $99.95

To monitor your credit on an ongoing basis and get alerts as your score changes, it’s best to use an online credit monitoring service. We recommend Nav because they allow you to continuously monitor your personal and business credit reports in one place. Nav gives free access to your personal credit score. To get your business credit score, there is a $29.99 monthly fee.

Is My Business Credit Score Good?

Business credit scores are more complicated than personal credit scores, which fall in the familiar 300-850 range. Each business credit bureau scores businesses in its own way. Whether a business credit score is “good” depends on the agency that provides the score and the scoring model that it uses.

D&B

The most well-known business credit score is D&B’s Paydex score. It ranges from 1-100. Generally, anything above 80 is considered to be a good Paydex business credit score. The score is based strictly on how a business pays its bills to vendors.

D&B also has a Financial Stress Score (FSS) and Commercial Credit Score (CCS), both of which range on a 0 to 5 scale. By comparing you to other businesses in your industry, these scores predict the likelihood of your business failing or becoming severely delinquent in payments over the next 12 months. The lower your FSS or CCD are, the better, with the exception of zero which means out of business or bankruptcy.

Experian

Experian has only one business credit score, called the Credit Ranking Intelliscore. It ranges from 0-100. Similar to Paydex, scores above 80 indicate good credit. However, Intelliscore is more comprehensive and some say more predictive than Paydex because it accounts for more than trade payment history. Also factored into the score are your payment history with lenders, public records (e.g. company size, number of employees, etc.), financial performance of the business,  and other performance indicators.

Equifax

Equifax’s primary Credit Risk Score ranges from 101-992. The higher the score the better. Equifax calculates this score by looking at your available credit, how much credit you’ve used, how many payments you’ve missed in the past, and the length of time since your oldest financial account was opened.

The Business Failure Score, ranging from 1000-1,880 (higher is better) assesses the likelihood of your business going bankrupt or closing down in the next 12 months. This score looks primarily at transactions where you’ve paid late.

FICO SBSS

There is one last business credit score you should be aware of, especially if you’re applying for a bank loan or an SBA loan. It is called the Small Business Scoring Service score from Fair Isaac Corporation, the same company in charge of the popular consumer credit score model.

Lenders use the SBSS, which ranges from 0-300, to pre-screen applicants for SBA loans and standard bank loans. According to Nav, the cutoff for SBA loans is currently 140, and it’s a bit higher for other bank loans. The SBSS score is calculated based on data from both your business credit reports (from the other 3 agencies) and your personal credit reports.

You can find out your SBSS score by signing up for Nav’s Premium Plus plan.

How Do I Improve My Business Credit Score?

If there are errors in your business credit report, contacting the credit bureau will help resolve the problem and raise your score. If there aren’t any errors but you’re not happy with your business credit score, here are 5 simple steps you can take to improve it.

1. Separate Business and Personal Finances

Having separate bank accounts and credit cards for personal and business matters helps ensure that if something affects your personal finances, it won’t hurt your business credit score. Same goes for vice versa.

2. Get and Use a Business Credit Card, Line of Credit, or Lease

In order to have a good business credit score, you need to build up a history of prompt payments. Getting and using a business credit card is a good means to this end. You get the added bonus of earning cashback and rewards points. Ensure that you make timely payments, and if possible, pay more than the minimum monthly payment.

Alternatively, you can build business credit by getting a small business line of credit or an equipment lease. We can help you with this!

3. Choose Suppliers and Lenders That Report to the Business Credit Bureaus

Suppliers and lenders are not required to report to business credit bureaus. Whenever possible, choose vendors that voluntarily report to at least one major business credit bureau, particularly if you have a young business and are focused on building credit.  

A good place to start is by asking your current suppliers and creditors if they report to the business credit agencies. Even if they don’t, your vendors may agree to start reporting because there’s no cost to them to do so.

4. Pay Your Bills Early or On Time

It might sound like we’re stating the obvious here, but in order to maximize your business credit score, you have to pay all your suppliers and lenders on time. For the highest scores, pay early. The bulk of your business credit score depends on how timely you pay parties that you do business with.

5. Don’t Use Too Much Credit

The less credit you use out of the credit you have, the better your business credit score will be. For example, if you have a $1 million business line of credit, there’s no need to use it all. By using less, you show creditors that your business is doing well enough financially that you don’t have to max out your credit line.

Beyond the Score: Other Important Information In Your Business Credit Report

Your score is not the only important information in your credit report. In fact, a short while ago, we interviewed Levi King, CEO and Co-Founder of Nav, on our sister site Fit Small Business. He said that many small businesses are surprised to hear that the content of their business credit reports is just as or more important than their numeric scores. Below are a few things to look out for. For a more in-depth look at each section of your business credit report, click here.

Liens

Many business loans and lines of credit are secured by a lien on business assets. A lien gives the creditor the right to take those assets if you don’t pay back what you borrow.

You can only pledge your assets to one creditor, so having a lien on your credit report can prevent you from getting a second loan or line of credit for your business.

Sometimes, creditors forget to remove a lien from your report when you’ve paid off a loan. When you make your last payment, it’s wise to confirm with the lender that the account has been closed and the lien taken off your report so it won’t affect future attempts to get financing.

Bankruptcies and Collections

These are the troublesome things that every business owner hopes not to have on their business credit report. But if you do, you should know how to deal with it.

If you have had a previous business bankruptcy, it will be difficult to get a business loan or credit card in the future, particularly if it’s within the last 2-3 years. If you have a bankruptcy, one tip is try to get to a retail business card (e.g. a Staples card or Home Depot card) and build up your business credit that way. Such cards are typically easier to qualify for than a standard credit card or bank loan.

Similarly, if you’ve had accounts sent to collections, lenders and suppliers have less reason to trust you. You can minimize damage to your score by building up a positive payment history going forward.

SIC & NAICS Industry Codes

Every business has Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS) codes, which show up on your business credit report. The codes are assigned based on data about your business in Census surveys and other public records.

Having the right code can sometimes mean the difference between qualifying for a loan and being rejected. For example, a company that makes real estate signs may be wrongly coded as a real estate investment firm. Real estate investment is a speculative, risky industry, so getting a loan will be a lot harder than if you were coded as a designer or sign maker.  

You can change your codes by contacting the credit bureau. These are some examples of high-risk industries:

• Real estate investing and other types of investing
• Car sales
• Adult entertainment
• Travel/transportation industry
• Money lending/collecting
• Restaurants
• Dry cleaners

Bottom Line

Building your business credit score is one of the most important steps you can take as a small business owner. It opens up financing opportunities and business relationships that can help your business succeed.

It can be confusing to understand how business credit reports and scores work. This guide should provide a start. Small steps, such as paying your bills early and separating business and personal finances, can have a big impact on your business credit score.

The post Your Business Credit Score – The Ultimate Guide appeared first on FitBizLoans.com.

• SBA Loans and Bank Loans – Above 650
• Commercial Real Estate Loans – Above 650
• Buying a Business Loans – Above 650
• Peer2Business Loans – Above 620
• Online Loans – Above 500
• Invoice Factoring – Above 500
• Equipment Financing – Above 500

If your credit score isn’t where you’d like it to be, you can increase it with some adjustments to the way you handle your finances. In this article, we’ll share with you some tips on how to improve your credit score and whether and when it makes sense to use a credit counseling or credit repair agency.

Step 1. Find Out Where You Stand.

You can’t improve your credit score without first knowing where you stand. According to a survey by the American Bankers Association, just 42 % of Americans know their credit score. 

For free access to your personal credit score, visit Nav, a credit monitoring platform. Nav will show you your FICO score, which is the main consumer credit score. It ranges from 300-850, and the higher the score the better. The nice thing about Nav is that it also tracks business credit, allowing you to monitor your personal and business credit in one place.

Experian, TransUnion, and Equifax are the three primary consumer credit agencies. While these credit bureaus won’t give you your credit score for free, they will give you free access to your credit report once a year. For access, visit AnnualCreditReport.com. Your credit report will tell you why your credit score is what it is. The reports will show how you perform on the different elements that make up your credit score:

• Payment history on loans and credit cards (including collections and bankruptcies) – makes up 35 % of your credit score
• Debt level and credit utilization (i.e. the amount of credit you have used out of the credit available to you) – makes up 30 % of your credit score
• Length of credit history – makes up 15 % of your credit score
• New credit accounts and inquiries – makes up 10 % of your credit score
• Credit mix (i.e. types of accounts you have) – makes up 10 % of your credit score

Remember, there are things other than your credit score that can be a nonstarter with business lenders. For example, if you have a recent bankruptcy, foreclosure, or tax lien, then you will have trouble getting a business loan regardless of your credit score.

Step 2. Fix Errors On Your Credit Report To Increase Your Score.

Almost 80 % of credit reports contain errors, and by getting them fixed, you can improve your score. For example, you might find that a loan went to collections when you actually paid if off on time, or an account may show up on your report that you never opened.

By law, both the credit reporting agency and the creditor are required to correct inaccurate information in your report. It’s completely free to dispute inaccuracies, and you can do so in one of two ways:

File a dispute with the credit reporting agency, either electronically or by mail.
Include copies (not originals) of documents that support your claim;

-OR-

Go directly to the source, and contact the creditor to file a dispute.
Follow the procedures that the creditor tells you.

After you report the error, either to the agency or to the creditor, the creditor has 30 days to investigate the information in question. If the creditor finds that the disputed information is inaccurate, it must notify all three credit reporting companies so that they can correct the information in your file. At that point, the credit reporting agency must give you a free updated copy of your report and, at your request, send the updated report to entities that have recently checked your report.

If the dispute is not resolved in your favor, you can ask for a statement of the dispute to be included in your file. This way, lenders who check your credit report in the future will know that you believe the negative information to be incorrect. If you’re unhappy with the way that a dispute was handled, you can also get further help by submitting a complaint to the Consumer Finance Protection Bureau.

Unfortunately, accurate but negative information can only be removed from your report with time. Late payments and collections appear on your report for 7 years and bankruptcies for 10. The silver lining is that negative information has less impact on your credit score as time passes.

Step 3. Five Tips on How to Improve Your Credit Score.

Beyond correcting errors on your credit report, there are other ways to improve your credit score. None of these are a quick fix but can make an impact in a few months to a year.

1. Use credit responsibly.

If you haven’t built up enough credit, you could have a lower score or even be unscorable. One way to build up credit is by getting a credit card, charging some expenses to it, and paying off the balance each month. By having more credit available to you, you can increase your credit score.

Just make sure you don’t utilize all the credit you have, or your score could actually decrease. In other words, just because you have a new credit card with a $5,000 credit line, don’t max it out. Ideally, your credit utilization, which is the amount of credit you use out of the credit that’s available to you, should be 30 % or less.

Don’t close unused credit cards either (unless there’s a high annual fee, and the lender won’t waive it for you). Doing so reduces your available credit balance and closes credit lines with history, and this can hurt your credit score.

2. If you have missed payments in the past, get current and stay current.

Payment history makes up a whopping 35 % of your credit score, so paying your bills on time will have the greatest payoff for your score. According to Equifax, even a payment that’s just a few days late or one late payment can dock your score by 50-100 points! The good news is that the impact goes both ways. Just as a single late payment can really impact your score, paying on time can significantly improve your score as well. As positive payment history accumulates, it will outweigh past late payments.

3. Pay off as much debt as you can.

After payment history, the next largest share of your credit report, at 30 %, is made up by outstanding debt. The more debt you have relative to the amount of credit that’s available to you, the lower your credit score will be. In other words, if you have a $6,000 credit limit on your credit card and use every dime of it, your credit score will take a hit because you’re relying too heavily on debt.

Chip away at your credit card debt by paying off as much as you can every month. Most credit card companies report to the credit bureaus every 30 days, so if you’re diligent about paying down your balances, you can see your credit score increase in 2-3 months.

4. Negotiate with your creditors and lenders.

Sometimes, it can feel like you’re under a mountain of debt with no way out. If you’re not able to manage your debt level, I suggest contacting your creditor or lender. Sometimes, the creditor will agree to accept a lower payment on an outstanding bill or will work out a payment plan with you. When negotiating with a creditor, your ultimate objective is to convince them to list the account as “Paid as Agreed” or “Current” with the credit reporting agencies. This shows that you favorably settled the debt and will help raise your credit score.

5. Limit rate shopping when looking for business financing.

Every time you apply for a loan or a credit card, the creditor will do a hard pull of your credit, which can dent your credit score by 1-5 points. I’ve seen clients who started out with a decent credit score, only to see it sink after applying for a bunch of loans. When you’re on the market for a business loan, apply strategically to a small set of lenders. One of the benefits of FitBiz Loans is that we can get your application viewed by thousands of lenders without any impact to your credit score.

There are special rate shopping rules for mortgages, car loans, and student loans that minimize impact to your credit score, but these do not apply to business loans.

Step 4. Should You Use a Credit Repair or Credit Counseling Agency?

There are three kinds of services that can help people with bad credit scores:

• Credit counseling agencies
• Credit repair agencies
• Credit monitoring platforms

Credit Counseling Agencies

Credit counseling agencies will help you manage debt and develop better financial habits, and they may offer courses on personal finance. You can think of them as an educational resource that can help you improve credit in the long run. They are usually free or charge nominal fees. For help finding a credit counseling agency near you, you can use the Department of Justice’s online directory.

Credit Repair Agencies

For more immediate assistance, you can seek out a credit repair agency. These are agencies that can help you remove negative information from your credit report for a fee. According to Dave Fulk, president of credit repair service National Credit Federation, credit repair services typically cost anywhere from $500-5000.

Anything that a credit repair agency can do, you can do yourself for free. However, credit repair agencies can save you time by, for example, reaching out to creditors to negotiate a debt settlement on your behalf or by helping you dispute a complicated error on your credit report. The good agencies, says Fulk, will honestly evaluate whether they can help you or if you’re better off doing things yourself. Unfortunately, there are a lot of credit repair scams out there, so it helps to know what a credit repair service can and cannot do.

What a credit repair agency can do:

• Help you dispute inaccuracies on your credit report. Credit repair agencies can help you put paperwork together for a dispute or even eliminate the need for a dispute by contacting the creditor. We recommend submitting a dispute yourself however because creditors are not legally required to investigate disputes that are submitted by someone other than the consumer.
• Verify debts with your creditors.
• Negotiate with creditors on your behalf to settle an outstanding debt.

What a credit repair agency cannot do:

• Remove negative but accurate information from your credit report.
• Get you a “new credit identity” to help you hide a bad credit history. Your social security number or business EIN identifies who you are on loan or credit card applications. Trying to get a new EIN or SSN to hide a bad credit history is illegal.

Credit Monitoring Platforms

Credit monitoring platforms such as Nav are yet another resource for improving credit. Nav will show you your personal and business credit reports and scores, help you track changes in your reports and scores over time, analyze why your score is what it is so that you can pinpoint areas of improvement, and provide informational articles on how to raise your score.

Avoiding Scams

Avoid the following types of agencies as these are probably scams:

• Agencies that have high fees or request “voluntary contributions” as this can put you in deeper debt, particularly if they ask you to pay upfront or a flat fee before doing any work for you.
• Agencies that require personal information from you before telling you about the services they provide.
• Agencies where employees are paid more only if you pay a fee or sign up for a particular service. This creates a conflict of interest.
• Agencies that ask you to dispute accurate information or ask you to lie on loan or credit card applications.
• Agencies that encourage you to find people who will co-sign loans for you or add you as an authorized user to their accounts. While this is certainly permissible, all parties involved should understand their rights and responsibilities.
• Agencies whose credit counselors aren’t certified or accredited by an outside organization.

Bottom Line

Having a good credit score is key to getting low-rate business financing. It’s definitely possible to raise a bad credit score, but it takes time and patience. The first step is to fix errors on your credit report. Then you can take other steps, such as getting current on loan payments and paying off credit card debt. If you need a helping hand, there are several types of agencies that can help you better manage your finances and improve your credit score over time, but be wary of agencies that charge high fees or promise quick fixes.

The post How to Improve Your Credit Score appeared first on FitBizLoans.com.

Can I Qualify for An SBA Loan?

Our calculator is specially designed for 7(a) loans, the Small Business Administration’s (SBA) most popular loan program. Most SBA 7(a) loans go to established businesses that meet the following requirements:

• 2 or more years in business
• Owner’s personal credit score is above 650
• Sufficient business income to make loan payments

Owners of newer businesses as well as people who want to buy a business may also qualify for a 7(a) loan if they have the following:

• A personal credit score above 650
• A down payment of 20 % or more
• Industry relevant or business management experience
• Sufficient business income or projected income to make loan payments

In addition to the above, you will have to personally guarantee an SBA loan, which means that the lender can come after your personal assets if you can’t pay back the loan. The lender will also consider any collateral that you can bring to the table.

What is an SBA Loan?

Small Business Administration (SBA) loans are US government-backed loans that are available to entrepreneurs who are starting a new business, buying a business, or running an established business.

Our calculator is designed for SBA 7(a) loans. The SBA itself does not give these loans. A bank or direct lender issues the loan, and the SBA guarantees up to 85 % of it. This gives financial institutions more incentive to lend money to small businesses.

The government guarantee allows small businesses to receive SBA loans at low interest rates and spread out monthly payments over long loan terms.

SBA Loan Calculator Summary

Our SBA loan calculator estimates your interest rate and monthly payments for a 7(a) loan. It also approximates your Debt Service Coverage Ratio, which is used by lenders to determine your eligibility for an SBA loan.

Inputs

Loan Amount: What size of loan do you need? We can help you get SBA 7(a) loans from $30K to $5 million.

Loan Term: The length of an SBA 7(a) loan usually spans between 7-10 years, but it can vary depending on the lender.

Annual Business Income Including Owner’s Salary: How much income did your business generate in the most recent year? Alternatively, if a new business, how much income do you project the business will generate next year? If you’re taking a salary, include that in the calculation.

Outputs

Effective Interest Rate: The calculator will tell you how much interest you are paying over the course of the loan. The interest rate on an SBA 7(a) loan ranges from 5.5 to 6 %, depending on the term and size of the loan. This rate does not take into account other fees that may be charged, such as the SBA guarantee fee (3-3.5 % of the loan amount for loans above $150K), referral/packaging fees, and closing costs.

Monthly Loan Payments: What will the monthly payment be? Before getting an SBA loan, most business owners want to know the monthly payment. Our calculator will tell you the monthly payment, assuming that all payments are equal and made once monthly.

Debt Service Coverage Ratio: In order to determine if you have sufficient income to meet the loan payments, lenders will look at your Debt Service Coverage Ratio (DSCR). The DSCR compares your business’ net operating income to the total loan payments. Ideally, your DSCR should be above 1.25 for the best chance of being approved for a loan.

How the SBA Loan Calculator Works in Detail

Interest Rate and Monthly Payments

Our SBA loan calculator tells you what the maximum interest rates and monthly payments will be on your 7(a) loan. The SBA sets the maximum interest rates that lenders can charge on 7(a) loans, based on the length of the loan term and the amount being borrowed. For most loans, the maximum interest rate ranges between 5.5 to 6 percent.

Based on the loan amount and loan term that you input, our calculator figures out and displays the maximum interest rate. Your interest rate may be lower than the maximum displayed. In general, interest rates are lower for larger loan amounts and shorter time periods.

Note that this interest rate does not take fees into account. SBA loans have a guarantee fee, referral/packaging fee, closing costs, and may have other fees like application fees. Currently, there is no guarantee fee on 7(a) loans under $150K. For loans over $150K, the guarantee fee starts at 3 percent of the SBA-guaranteed portion of the loan and increases incrementally based on the size of the loan. The referral/packaging fee is approximately 4 % of the loan, and closing costs are around $100-200.

In order to estimate the monthly payment, the calculator assumes that the loan will be paid off in equal monthly payments throughout the term of the loan.

Keep in mind that interest rates on most SBA 7(a) loans are variable. This means that the rate and your monthly payments can change based on market conditions (most 7(a) loans are pegged to the Prime Rate). If market rates rise, the interest rate and payments on the loan will rise as well. Though difficult to predict, there is usually a small increase in market rates over the course of several years.

Debt Service Coverage Ratio

The calculator also displays your Debt Service Coverage Ratio (DSCR). The DSCR is a financial ratio used by lenders to determine if you can afford an SBA loan. It’s calculated by dividing your business’ net operating income (actual or projected) by your total loan payments. Ideally, your DSCR should be 1.25 or higher.

For example, let’s say your annual business income is $100,000, and you want to take out a 10-year $250,000 SBA loan. Your loan payments for one year will be approximately $33,312 (the loan calculator shows a monthly payment of $2,776 – multiply this by 12 to get the annual loan payment). Dividing $100,000 by this number gives you a DSCR of 3. This shows lenders that your business’ income is more than enough to cover your loan payments and will help you get approved for SBA financing.

Bottom Line

An SBA loan is often the least expensive source of capital for a small business. Use our calculator to estimate the cost. If you’d like to talk with one of our financing specialists about getting an SBA loan for your business, click here!

The post SBA Loan Calculator appeared first on FitBizLoans.com.

What is Key Man Insurance, and Do I Really Need It?

Key man insurance is life or disability insurance on the key people in a business. If the covered individual(s) passes away or becomes disabled, the insurance company will pay a benefit to the business.

Key person insurance is important for three main reasons:

• If a key person dies or becomes disabled, the insurance proceeds help the business survive and pay its bills until it can hire and train a replacement.
• If you have a business partner(s), key person insurance gives you the means to buy out his or her portion of the business if they are unable to work due to death or disability.
• Lenders, including the U.S. Small Business Administration (SBA), may require borrowers to carry key person insurance to qualify for SBA financing.

If you’re a one person shop with no employees, then key man insurance may not be necessary because without you, your business ceases to exist. However, if you’re planning to apply for a business loan, then a lender may still require you to get key man insurance as security to make sure the loan will be paid even if you pass away or can’t run the business anymore.

Small businesses with multiple partners, employees, vendors, and customers have an even bigger need for key man insurance. The insurance helps the business maintain continuity if a key person dies or experiences an illness or injury.

How Does Key Man Insurance Coverage Work?

Despite the fancy name, key man insurance coverage is actually not that different from plain vanilla life and disability insurance. The business simply purchases a life and/or disability insurance policy that names the key employee or owner as the insured. The business pays the premiums and is the beneficiary of the policy.

If the named individual dies or becomes disabled, the insurance company will pay out a sum of money to the business. This gives the business enough money to weather the loss and manage the transition.

Life insurance on the key person

Derek Mazzarella, a registered insurance agent and financial advisor with Bulfinch Benefits Group, says that most small businesses start out by purchasing 10-year term life insurance on a key person and keep renewing it for as long as the key person is with the company.

Term life insurance policies pay out a death benefit if the covered individual dies during the term the policy is in effect. If you know the key employee or owner is going to be with the business until retirement, then the business may want to consider purchasing whole life insurance. Whole life insurance policies pay out a death benefit no matter when the covered person dies.

Whole life insurance policies have high premiums, but such policies also build up a cash reserve, says Sung T. Chang, an insurance agent with New York Life Insurance Company. When the key person retires, ownership of the policy can be transferred from the company to the key person, and the reserve can be used by the key person to supplement retirement income.

Disability insurance on the key person

If you buy only life insurance on a key person, your business is only half covered. Disability is statistically more likely than death, and disability of a key person can actually be harder on a business. “Disabilities of key employees,” Mazzarella says, “tend to be tougher on the business than death because there is uncertainty with when an employee will be able to return to work if at all.”

To cover all the contingencies, make sure you cover a key employee with both life and disability insurance. You may not necessarily need to purchase two separate policies; some life insurance policies come with riders that offer disability coverage. Ask your insurance broker for more details.

How Much Key Man Insurance Do I Need?

This varies depending on your reason(s) for purchasing the key man insurance.

If you’re getting key man insurance because a business lender requires it, you’ll need enough insurance to pay off the loan. If you’re getting insurance so that you and your business partner can buy out each other’s shares of the business, you’ll need enough insurance to cover the buyout. Lastly, if you’re purchasing key person insurance for continuity reasons, you’ll need enough coverage for the business to get back on its feet after the loss of a key person.

Most insurance companies, says Chang, set a multiple of 5-7 times the key person’s salary as the maximum limit on key man insurance.

Key Man Insurance Cost

Just like if you were to buy life insurance for yourself or a family member, the cost of key man insurance varies based on multiple factors:

• Age, gender, and health of the key person
• Salary of the key person and primary job duties
• The length of the insurance (term vs. whole)

For example, a 10 year term life insurance plan with Guardian Insurance that provides a death benefit of $250,000 for a healthy, relatively young key person would cost approximately $700-800 per year.

Where to Buy Key Man Insurance

When you’re ready to purchase key man insurance, says Richard Reich, President of Intramark Insurance, “contact a reputable life insurance broker who represents many of the highly rated companies.” Ask the broker to get you quotes from insurers that offer competitive rates on both life and disability insurance. A few good examples are MetLife, Prudential, Mutual of Omaha, Transamerica, Guardian Life, and Principal Financial Group.

Bottom Line

By purchasing key man insurance, you will have the peace of mind that your business will be protected if a key owner or employee passes away or becomes ill. We recommend purchasing the policy sooner rather than later because you never know when it will be needed!

The post Key Man Insurance – What it is and How it Works appeared first on FitBizLoans.com.

Before refinancing business debt, ask yourself the following 5 questions.

1. Will I Benefit From Refinancing?

Before refinancing a loan, you should first evaluate the terms of your existing debt and ask yourself, “Can I do better?” In particular, you should consider the interest rate and remaining term on your current loan.

Interest rate on existing debt:

If you currently have an SBA loan or bank loan with interest rates under 10 %, that’s hard to beat. If you have more expensive debt, perhaps from credit cards or an alternative lender, then you may be able to benefit by refinancing with a less costly loan product.

However, in order to qualify for refinancing, something typically needs to have changed since the time you originally borrowed money.

Here are a few examples:

• Has your personal credit score or business credit score improved since the time you applied for the original loan?
• Have your business revenues increased since you originally applied for financing?
• Were you in a time crunch when searching for financing the first time around, which forced you to choose a more expensive loan?

If you answered yes to any of these questions, you may be able to get a better interest rate and lower monthly payments  by refinancing.

Even incremental improvements can make refinancing beneficial. When Michael Zadeh, owner of Zadehkicks, an Oregon-based designer footwear business, was just starting out, many lenders turned him away because he didn’t have a long credit history. He ended up having to get a costly merchant cash advance with an APR of 60 % to help him purchase inventory and grow the business! One year later, after building up a history of timely payments with the MCA, Zadeh was able to refinance the MCA to a 22 % APR term loan from online business lender Dealstruck.

The key is to think about the current creditworthiness of your business and yourself and whether you can qualify for a loan with more favorable terms now than you did the first time around.

Term of existing debt:

Prior to refinancing, you should consider where you are at in terms of paying off existing debt.

For most commercial loans, initial payments go towards paying down interest, and later payments go towards paying down principal. If you’ve already paid down most of the interest on your loan, those are “sunk costs,” and you may not be able to save money in the long term by refinancing.

However, if your main reason for refinancing is to lower your monthly payments, then it may make sense to refinance even if you’re in the tail end of your current loan term. Refinancing to a loan with a longer term will make your monthly payments more manageable. For instance, if you have a 5-year loan that’s set to reach maturity soon but you’re struggling with the monthly payments, you can lower those payments by refinancing with a 10-year SBA loan.

2. Do the Fees Make It Worthwhile to Refinance?

Small business owners should keep in mind that it’s not free to refinance business debt, and at times, the fees can make it prohibitively costly. Fees may include an origination fee, application fee, lender fee, appraisal fee (if commercial property is involved), and a prepayment penalty that applies if you refinance again before the loan is paid off.

For example, many business owners choose to refinance existing debt with an SBA 7(a) loan. Business loans subsidized by the U.S. Small Business Administration (SBA) have the lowest interest rates on the market. However, fees and closing costs can constitute 4-8 % of an SBA loan. If the fees are higher than what you would save by refinancing (i.e. through lower monthly payments), then it may not be wise to refinance right now.  

Going to the lender that issued the original loan gives you some leverage to negotiate lower fees or have them eliminated all together. In addition, most fees can be either paid upfront or rolled into the loan.

3. What Is My Reason(s) For Refinancing?

There are numerous reasons that lead small business owners to refinance:

Lower Monthly Loan Payments

You can lower your monthly loan payments by refinancing to a lower-rate loan or longer-term loan. Remember that you need to have good credit (above 600) in order to qualify for an SBA loan or ordinary bank loan. Those with lower credit will have to seek out alternative loans. Whether you qualify will also depend on other factors, such as your business revenues, how long you’ve been in business, and how much collateral (if any) you have. Requirements vary based on the lender.

Consolidate Multiple Business Loans

Carrying multiple sources of business debt can be a good reason to refinance. For example, sometimes people rack up debt on a bunch of credit cards. If you have good credit (above 600), you can refinance outstanding credit card balances into a lower-rate peer2peer loan or bank loan.  

Avoiding An Upcoming Balloon Payment That You Can’t Afford

Commercial real estate loans and other large business loans are often structured as balloon loans. This means that the lender will review these loans every 5-10 years, either extending the loan at that point or requiring the outstanding balance to be paid in full in a balloon payment. If you can’t afford the balloon payment, you may need to refinance.

Switch Out a Variable Rate for a Fixed Rate

Some business loans, especially bank and SBA loans under $100K, tend to have variable rates. This means they are tied to a market rate. While market rates are currently at a historical low point, they can increase. If you’d rather have the guarantee of a fixed rate and a fixed monthly payment, you can try to refinance to a fixed rate loan.

Cash-Out Refinancing

Normally, when you refinance, you replace the existing business debt with a new loan for the same amount. With cash-out refinancing, you trade in the existing business loan for a larger loan.

You put the difference back into your business to purchase inventory, remodel, hire employees, expand, etc. The advantage of cash-out refinancing is that it can help your business grow long term. The downside is that you’re stuck paying back more debt than your started with.

In most cases, cash-out refinancing is available only for commercial property loans, and you must have significant equity in the property.

4. How Can I Find a Lender To Refinance My Loan?

Finding a lender for refinancing is not that different from finding a business loan in the first place. At FitBiz Loans, we have helped many business owners refinance their debt. Answer just a few questions to get started.

The cheapest option is generally to go to the lender that issued the original loan and see if they will refinance your business debt. The original lender is more likely to waive any fees associated with refinancing.

It’s wise to avoid the situation that led to the need to refinance in the first place. For example, many banks offer balloon loans to clients who are looking to refinance, but that may lead you to have to refinance again.

If you have bad credit, refinancing may not be an option. If you’re struggling to pay off an existing loan and have bad credit, a better course of action is to contact the lender and see if they can work out a payment plan with you.

There are specific rules for refinancing with an SBA loan. Ricky Navarro, Senior VP and Director of SBA Lending at Marquis Bank, says the rules come into play when you want to refinance existing non-SBA debt into an SBA loan.

You can refinance into an SBA 7(a) loan, says Navarro, as long as the original purpose of your debt is eligible for a 7(a) loan and refinancing will rid you of a balloon/demand payment or lower your monthly payments by at least 10 %. These rules exist because the SBA wants to ensure that the new loan will improve your business’ cash flow.

In most cases, you cannot refinance existing non-SBA debt into an SBA 504 loan, which is used to finance real estate and other fixed assets. 

If you don’t meet these requirements, one way to get around the rules is to simply get an SBA loan, put the proceeds in the business as working capital, and use the resulting business profits to pay off the existing debt.

5. Will Refinancing Affect My Credit Score?

When you refinance existing debt, the old loan is typically closed out, and the new loan will show up on your credit report. Older, established debts are considered more valuable than new ones, so your credit score could get dinged. Moreover, the new loan is a new credit obligation, which can also lower your score.

Keep in mind that shopping for a new loan may trigger hard credit pulls, which can temporarily lower your credit score by a few points. You can decrease the number of hard inquiries if you rate shop during a 14-45 day period.  

Bottom Line

Refinancing is a good way to save money when you are facing a high interest rate or high monthly payments on existing debt. Just be sure to realistically evaluate the terms of your existing debt and whether you can benefit by refinancing. If you decide to refinance, we can help you explore your options–just fill out this 2-minute form to get started.

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