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Lease or Own: Which is Right for Your Business?

The decision to lease or own the location a business is located in is one of the most important that many small businesses experience as they grow. There is a myriad of factors that can cause confusion in addition to the legal and financial aspects of the decision. However, picking the right option is often a turning point in the success or failure of an enterprise.

Understanding the key differences.

The first thing to consider when looking at leasing or owning real estate is the key differences between the two. There the obvious differences, such as control of the property, but there are other differences that have an immediate financial impact. For example, when leasing a property, the upfront financial impact may be less as there is no major lump sum due for a down payment, however, the long-term costs are often higher.  Owning the property may have additional maintenance costs that a leased property will traditionally have covered under their lease agreement.

The other aspect to consider is how the areas property values are increasing or decreasing. If the property is in an area with an increasing value purchasing the property is ideal, as its value is added to a company’s assets.  If the property is an area where values are decreasing, or have stagnated, then leasing may be a better option. A decreasing or stagnated property value may also have an impact on the surrounding businesses. If multiple companies in the area have closed or relocated recently then a lease is preferable as it ensures continued mobility.

Loans and Financial health

All of this is, of course, predicated on whether a purchase is financially viable. Will a sudden loss of funds have a large impact on your company’s financial health? Will the long-term costs, like interest or repairs, be possible based on future financial outlook? There are loans that can help with the purchase of a property, however, some industries may not be as likely to receive loans from large banks. Brokers can assist in connecting businesses and loans, however concerns about location, costs, or business viability, may have an impact on how much a loan is worth or if it is given at all.

All of these things directly relate to the financial health of a business. As with any major decision a company must consider what the choice between owning and leasing will have on their bottom line and finances. The easiest way to understand that impact will be to conduct a cash-flow analysis. In order to do so you must know the purchase and financing terms, lease terms, the combined federal and state income tax rate for the company, the facility’s expected useful lifespan for the business, the estimated value at the end of its use, your cost of capital as well as any other costs that you would incur if you leased the facility but not if you purchased it, or vice versa.

Once that information is available a decision can be made on the opportunity to purchase versus renting, and a better understanding can be established for other major financial decisions.

Conclusion

The decision to rent or purchase real estate for a new or established business is a difficult one. It requires an understanding of not only the finances but what special needs each business has. A better understanding of each of these issues ensures that the process of making this decision is simplified. A financial broker can help find loans and determine which options are right for you.

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3 Federal Loan Programs Every Small Business Should Know About

When you’re considering a loan to take your business to the next level, you, like many entrepreneurs, may think first of your local bank. That makes good sense, given the relationship you may already have with them, and their knowledge of your goals and operation.

When you do so, you may well hear about not only the bank’s own loan options, but some they offer in conjunction with the federal Small Business Administration (SBA).

If they don’t come up, ask about them. Interest rates on loans made with the SBA are often (though not always) lower than those traditional banks offer. Additionally, the government backs SBA loans, which can lead to credit standards that are a little more lenient.

Here are a few specific SBA loan programs to consider:

The Microloan Program

This program offer a flexible solution that suits the needs of many small–even very small– businesses. The average loan amount is $13,000, but the programs allows for loans of up to $50,000. The cash can go towards inventory, equipment, supplies or working capital. Additionally, the repayment term has a maximum of six years, a relatively generous timeline.

Essentially, the SBA loans funds to a non-profit lender who then loans to small businesses. Seeking a microloan means contacting one of these intermediaries within your state and region. The SBA provides a list here.

Many of these microlenders engage with their surrounding community, and may also provide helpful free consulting and training. But a key drawback to these loans are their interest rates. Those currently range from 8 to 13 %, depending on the intermediary, which is a relatively high range. You may, therefore, need to shop around before you find an affordable option.

The CDC/504 Program

The name isn’t exactly catchy, but the benefits to this program can be compelling, especially if you’re seeking capital to expand your business–say through purchases of machinery or commercial real estate. Loan amounts can reach as high as $5.5 million and are granted based on “how funds will be used based on which goal they support,” according to the SBA.

Interest rates with the program are lower than with many bank loans; they’re typically slightly above the current rate for 5-year and 10-year U.S. Treasury issues. The SBA charges a fee of 3% of the principal, which comes directly from the loan. Terms range from 10 to 20 years, which allows borrowers ample breathing room to expand their businesses.

If the loan is approved, SBA will loan $65,000 for each job created or retained as a result of the financing. However, the program requires you to link the loan not only to job creation but to certain public policy goals, including rural development, business district revitalization, expansion of minority business development and more. Making your case can demand a good deal of effort, including lot of paperwork.
Collateral is also required, although the assets being financed are often accepted to satisfy this stipulation. This benefit makes the CDC/504 program a powerful tool for businesses in need of greater capacity to manage growth.

The Disaster Loan Program

Banks can be notoriously averse to helping businesses that have been crippled by a storm or other disaster, since those can reduce the ability to repay the funds.

The SBA’s Disaster Loan program offers financing to help enterprises of all sizes recover from the after-effects of natural events or other calamities. A wide array of impacts are covered, from damage to buildings, property, and machinery through losses of inventory to reduced revenue from company inactivity after the disaster.

The maximum loan amount is $2 million. Interest rates are capped at an attractive 4%, and repayment terms are as long as 30 years. (If the business has credit available elsewhere, the interest rate is instead capped at 8%.) These lenient parameters are designed to give the borrower the resources and time to get back on their feet without crippling costs.

The SBA aims to administer disaster loans rapidly, within two to three weeks, they claim–far faster than with most of their loan programs. You need not wait for an insurance settlement to come through to apply, although any eventual proceeds that duplicate impacts covered by the SBA loan must be applied against that loan.

Your local bank isn’t the only place that offers these special SBA loan programs. Alternative Funding Partners offers business financing solutions backed by the Small Business Administration. As an approved SBA lender, we offer entrepreneurs, professionals and business owners the ability to take advantage of flexible terms and competitive loan rates to fund a range of business needs – from start-ups to business acquisitions, real estate, equipment, working capital and more.

Small Business Loan Form Concept

How to Repay a Business Loan and Remain Financially Stable

Just about every small business finds itself in a cash crunch from time to time. In fact, in 2015, small U.S. businesses borrowed almost $1.2 trillion, and in the last twelve months, 73 percent of small businesses used financing, according to the Small Business Administration. This is to be expected, as most small businesses don’t have the deep pockets that larger corporations enjoy.

For many, the answer is working capital funding, either in the form of merchant funding or a business loan. Small business owners who have pursued these products have learned that its far easier and more convenient to borrow from a non-bank commercial lender. The harder part for some is knowing how to pay back a loan without compromising the viability of your business.

How to Pay Back a Loan

Business loan repayment is a serious issue when your company is in a slow period. Of course, it’s easier to pay back a $5,000 loan than a $500,000 loan, but whatever the size, it’s important to know how to pay back a loan. Here are some tips that can help a wide variety of small companies manage business loan repayment:

  • Create or revise your budget: Every business needs a budget, even if it’s just some notes jotted down on a piece of paper. But it’s a far better idea to use budgeting or spreadsheet software that lets you visualize your upcoming cash flows. After all, how do you respond to a cash shortage if you don’t know the amounts of money flowing into and out of the business? Your working capital (current assets – current liabilities) is key; if it’s underwater, you’re fighting against the tide to keep your company afloat. To avoid drowning in a sea of unpayable bills, use your budget to make changes that minimize your expenditures and maximize your collections.
  • Minimize expenditures: Examine your budget for opportunities to cut your cash outflows. Start by speaking with your suppliers and ask about extending terms. If some won’t play ball, try finding replacements. Postpone non-critical purchases, slow down the restocking of inventory, cut back on employee work hours, withhold retirement plan employee contributions and in general avoid spending money for as long as possible. However, never miss a critical payment, such as ones to a lender or to the IRS, since missed payments can have a disastrous effect on your business.
  • Accelerate collections: You might be in a position to accelerate collections. For example, if you are due payments from commercial customers, try negotiating with them, perhaps offering a special discount for a quick payment. Another tactic is to apply for a merchant cash advance, in which you receive cash now in return for the remittance of upcoming credit card receipts. If you have any superfluous equipment, now would be a good time to liquidate it. You might want to wholesale your inventory through an auction to raise cash fast. If you get paid by the hour or by a unit rate, perhaps you can work extra hours to increase revenue. If your business sells products or services that feature elastic prices, you might be able to charge more without losing sales volume. This is often possible when there isn’t any easily substitutable offering. Some companies can raise money by selling equity in the business to junior investors. This is a big step and should not be taken lightly.
  • Talk with your lender: If you’re having trouble paying back your loan, speak to the lender about resetting terms in a way that will work for you. It might involve extending the length of the loan, which cuts the size of the payments, even if the interest rate goes up. Perhaps you can arrange to pay smaller amounts more frequently. You might be able to adjust the payment date to one that better coincides with the timing of your collections.

It makes sense to establish contingency plans for times when working capital is tight. Those plans should include identifying and establishing a relationship with a reputable lender that can provide both business loans and merchant cash advances. A good lender is on your side, and will work with you to help you survive hard times.

Thankfully, Alternative Funding Partners is on your side and helps business owners find the financing they need with flexible terms and repayment plans to fit every business’ budget.

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