Great blog post by Thursday Bram who writes for the OPEN Forum:

When you’re running a small business, it may seem like deciding between cash and accrual accounting is just one more thing on the long list of things you need to get done. But the fact of the matter is the decision on which accounting method you’re going to use makes a difference in something as simple as how you do your taxes and can have long-lasting effects beyond the end of the year.

The cash method of accounting is the most common choice for small business owners. Under the cash method, you don’t count income until you have the cash or the check in hand and you don’t count expenses until the money leaves your account. In comparison, under the accrual method of accounting, you record transactions when they happen, no matter when the money actually changes hands. The cash method tends to more popular because it’s easier for many businesses to keep track of. But if there’s a lengthy delay between when you do work and when you receive payment, some issues can occur.

Read the entire article “Cash vs. Accrual and Why Accounting Matters for Taxes” here.

For receivables factoring, securing direct payments is critical to the factoring company. After the factor wires an advance of a creditworthy customer invoice, the factoring agreement requires the proceeds of the invoices are to be sent directly to the accounts receivable finance company. The actual payment has been purchased and belongs to the factor. All parties must recognize this and agree to third party payments. Because the factoring agreement allows for deposits in the name of the client, the checks can still be made out in the name of the vendor, but they must be routed to the factors’ lockbox or bank wire instructions.

A notification is sent to each customer account to be financed with the proper payment instructions. Once that notification has been received by the customer (account debtor), no matter what the circumstances, those instructions cannot be legally changed without agreement of the factoring company. In this case, it is a crime to mis-direct payments that are due to the factor. The factoring agreement has in place a penalty fee associated with mis-directed deposits of factored payments. But the greater risk overall is defaulting on the invoice factoring relationship entirely.

From this New York Times article:
Federal and state officials, many facing record budget deficits, are starting to aggressively pursue companies that try to pass off regular employees as independent contractors. Companies that pass off employees as independent contractors avoid paying Social Security, Medicare and unemployment insurance taxes for those workers. Companies do not withhold income taxes from contractors’ paychecks, and several studies have indicated that, on average, misclassified independent workers do not report 30 percent of their income. Portraying regular workers as contractors allows companies to circumvent minimum wage, overtime and antidiscrimination laws. Workers classified as contractors do not receive unemployment insurance if laid off or workers’ compensation if injured, and they rarely receive the health insurance or other fringe benefits regular employees do.

Workers are generally considered employees when someone else controls how and when they perform their work. In contrast, independent contractors are generally in business for themselves, obtain customers on their own and control how they perform services.

Venture capitalist Fred Wilson sets out to provide his views of the different legal structures a business can fall under. Different structures provide different advantages for taxes, liability and ownership matters, so entrepreneurs need to know their priorities when choosing an S corporation, limited liability company or other entity. His blog post ends up being a wonderful discussion in the following comments section. Remember his emphasis is on the potential for investors to join the entity.

Read it all here.

The stimulus plan created for small businesses the America’s Recovery Capital or ARC loan program. With $255 million of funds, it is geared to help businesses who have an existing loan with their loan payments.

This problematic SBA program is actually providing relief to small business owners with existing debt. Read this article to get the run down on whether this program can help your situation.

The upshot is; the business must show the downturn in the economy has had a negative affect on the company and that the proceeds from the loan can only be used to pay down business debt.

There are many types of commercial financing that are available to business owners. The most notable would be a term loan or the line of credit from an institutional bank. Due to current economic conditions, for a variety of reasons, the bank may be unable to provide financing to certain business situations. Luckily, business owners have been able to turn to another alternative for working capital called “factoring.”

Using invoices as collateral, factoring companies provide commercial financing by making advances on accounts receivable. An invoice is defined as a product and/or service that has been delivered / completed and accepted by a creditworthy customer. A factor can be either a private company who finance invoices, or a bank or public institution that has a factoring division set up to provide this service. What is important to note here is, the financial condition of the borrower is not as critical as the creditworthiness of their customers.

Here are a few examples of good invoice factoring scenarios;

- A business in a growth spurt which has wide fluctuations in revenue balances making lending limits difficult to project.
- In having a tough time keeping up with 941 payroll tax payments to the IRS, extra capital helps to avoid added penalties & interest.
- Service companies working for large creditworthy customers, who the factor knows will pay their bills
- A business that is hiring staff on a new project and needs capital to keep up with payroll
- Corporations looking for working capital without loss of shareholder equity
- A light manufacturing company placing continuous orders with a supplier for new production

-

Examples where factoring would not be a fit;

- Start-ups who have a new contract but need up-front money to get it going will not qualify until they actually can produce an invoice
- Situations related to real estate property are usually unavailable for factoring.
- Factors cannot provide up-front capital to open a restaurant.
- Factors do not cash out annual contracts (money today for funds that will be collected over the next year)
- Factoring is not for any type of retail store that sells to everyday public consumers.

In order to effectively consider receivables factoring as a commercial finance option there are two elements that must be in place. The first is the creditworthiness of the customers. A factoring company calls your customers, “account debtors” or payers of an obligation. A factor’s criteria would be that these account debtors have some sort of reasonable public credit history. Meaning that by checking a credit agency like Dun & Bradstreet, the customer has been given credit terms in the past, and pays their bills fairly on time. So invoice factoring needs to have good customers.

The second element in this discussion will be, will the customer acknowledge to the factor that they have received the invoice, the obligation to pay, and they accept responsibility to pay this invoice in a timely manner. The threshold for determining this “verification” varies from factor to factor, client to client, customer to customer. Meaning, if there is a troublesome quality to the transaction, the verification process, or sign off on the invoice will be more involved, conversely in situations where there is a customer who is billed on a regular basis, the verification can be somewhat routine; like a simple email checking on the status of an invoice.

Having good customers who are willing to sign off on your invoices will be a well done recipe for invoice factoring.

The Federal Register was created to provide access to a wide range of Federal government contractor benefits and opportunities for funding. Each day agencies release hundreds of proposed rules and regulations, meeting notices, final rules, and changes to existing rules in the form of the Federal Register. However in their current format these new regulations and opportunities are very difficult to find and process in meaningful ways. One reason this is important is, staying on top of the latest developments within the government opens up the doors unlimited opportunities. One of the biggest problems agency procurement offices face is finding qualified contractors to bid on new contracts. By following what the government is doing, smart contractors can step in and fill the void by addressing changes or requests.

A small band of open source programmers built a site called govpulse.us. The purpose was to address the unyielding amount of data that is poured daily into the Federal Register. Creating the ability to have the Register usable is a bold achievement. By making such documents as the Federal Register searchable, more accessible and easier to digest, govpulse seeks to encourage every citizen to become more involved in the workings of their government and make their voice heard on the things that matter to them, from the smallest to the largest issues.

Given the right set of circumstances, a factoring company can provide operational capital using accounts receivables as collateral. This can be incredibly useful to assist in labor intensive contracts with strong creditworthy customers. Once securing an award for a large contract, new employees have to be brought on to do the work and they need to be paid regularly. A typical scenario would have the company putting on new staff to begin the work and over the next 30 days payroll will be paid from company reserves. When an invoice is produced, the factoring company wires funds directly to the company to help replenish their checking account. If the contract is going well, more staff is being placed and the elastic band that is the bank account gets stretched to the breaking point.

This scenario is also relevant where products are sold by manufacturers. Replace employees and payroll with suppliers and raw material. The point is, if the company funds can get to the first invoice, the factoring company can assist the rest of the way. Each succeeding invoice can be financed as it is submitted to the customer, providing the cash flow to operate. Invoice factoring may be a useful tool. Not a crutch. It is a bridge to a better future.

With today’s economic market landscape, invoice factoring companies are working hard on many new accounts. Having decided to be an active participant in the small business recovery, a factoring company can quickly provide funding to keep a struggling cash flow challenged company solvent. Because accounts receivable financing is so easy to set up, and quick to deliver, businesses are beginning to hear more about this commercial financing option. But if a business is considering invoice factoring, they need to be accessible. Both by phone and email, the factor can only work as fast as the client is available to answer a question or produce a needed document. Unfortunately, once the phone goes unanswered a few times and the potential client is unresponsive, the factoring company will move on, because there are other companies who are ready and willing to get started with receivables factoring.

Great blog post by Greg Satell discusses the problem of turning around a challenged company. Start with identifying those individuals in the company who are driven to see change come to turn around a bad situation. Then, rather than try and fix everything at once, pick small incremental steps that have a high degree of positive outcomes. Loose the dead wood, if someone is not contributing, don’t carry them. In the same vein, start re-organizing and placing competent workers in key positions. And finally, planning ahead is critical. Get some baseline assumptions and build a road to get out of a current challenged financial condition. The old business adage applies, if the company does not grow, it will die. Read the entire post and study Greg’s writing, you will definitely learn something about business.

Mike Clough is currently a volunteer business counselor with SCORE and penned a very helpful post on his blog BestBizPractices.org. The article, “Why Many Small Business are Struggling,” deals with the reluctance of small businesses to incorporate change. By sticking with the old traditional mechanical marketing model, a company will loose valuable time and opportunities for landing new business. In this current economic climate any company that hopes to survive must embrace every tool available to reach new clients. Not only embrace but master these tools in order to succeed.  Calling these tools - the emerging organic marketing model, Mike focuses on 5 key actions to begin;

1. Start Now - develop an effective strategy
2. Learn about Web 2.0 - more than LinkedIn, Facebook, Twitter
3. Work the strategy - how will these tools build each other
4. Commit the time - the strategy won’t work by itself
5. Use tracking - create a baseline and watch improvements

Read the entire post and get a definitive plan to use organic marketing to stay in the game.

Whenever a business offers payment terms to their customers - they become a sort of “lender.” The customer owes for the work, and the business is waiting for payment, essentially a business loan. There are things a business should note when offering terms that may bring beneficial results in the future. If a company has a strategic capital plan and the intent to raise outside capital, then knowing what makes the transaction attractive may make all the difference in securing capital. Certainly with invoice factoring, this holds true.

A contract for payment might include one of the following terms; milestone payments or progress payments. For a factoring company, these distinctions are critical to securing accounts receivable financing. Milestone Payments in a contract means, very specific deliverables are outlined in the agreement whereby when the milestone has been reached, the customer will pay an agreed amount. Progress Payments, on the other hand, only allow for regular percentage payments of the entire contract. For example, on a million dollar contract the customer agrees to pay the business $100,000 a month. The difficulty with this arrangement, for a factoring company is, for whatever reason if the customer is dissatisfied with the work they will stop making payments. This puts the factor in jeopardy trying to recover payments. Many factors will not finance a progress billing contract.

By specifying very tangible work events, once the customer has verified that they indeed receive the product or service outlined in the contract, the customer will have to pay the invoice as per the agreement. A factoring company who must rely on winning in a collection dispute will be able to advance on a milestone payment.

Knowing this distinction ahead of time, and making the necessary changes to the contract will better guarantee access to outside capital further down the line.

When talking about finding capital for a business, the pitch can be simplified to three very basic points. Everything else moves from these central questions;

1. How Much/What For? The more specific the better, how much is the capital requirement and for what exactly will the capital be utilized. All accompanying documentation is helpful, but this answer needs to be well thought out and defended in any discussions with investors or lenders.
2. Repayment? Again, what is the plan? After all is said and done how will the capital be repaid? What are the fall back positions? Best case/worst case? What collateral is involved? Where is the value of the proposition?
3. Who Will Make It Happen? Certainly one of the most critical questions to be answered. Who has the previous experience to make the idea succeed? Is there a team, how well do they work together, how well do they know each other?

With a fully qualified explanation to these three questions, the road to understanding the business concept will be much easier. It will create the foundation that any capital provider is seeking to engage in further in depth negotiations.

Jill Hamburg Coplan wrote an excellent article recently about small businesses raising capital. The lack of understanding concerning the basics of debt financing versus equity investment is troublesome. Astute business owners should know these basic concepts along with the benefits and problems of each type. The issue goes goes beyond the simplistic reasoning that early stage companies are better suited for equity and later stage mature companies should borrow money. It is critical to build a finance strategy that allows for a) getting in and out of a particular deal b) ability to raise additional capital c) doesn’t alter the core mission of the founders. Knowing what the providers of capital are doing at any given moment in a struggling economy is key to not wasting precious time looking for capital in the wrong places. Reading “Raising Capital: Equity vs Debt” should help.

In business, access to capital at all times is crucial. Being locked out of obtaining working capital can break a company. Today, in this current economic climate, qualifying for credit from an institutional bank is tricky. There is no uniform credit culture among banks anymore, at least for the time being. Some banks are lending others are not. But in some cases securing a line of credit can become an insurmountable hurdle blocking the way of explosive growth.

A company that has been slogging along and is finally poised to double its revenue will be ill served with an insufficient line of credit. When a bank line of credit hits its limit, in most cases, that credit line has to be retired before any new funds will be available. This is happening all over the country. Companies have been caught short with their expansion plans by a lack of a sound capital strategy. Meaning that all forms of working capital should be considered, and a good game plan implemented to utilize the best sources at the right time to keep the business humming. By not planning ahead countless hours, weeks and months are wasted getting out from a line of credit that is no longer serving its purpose.

what are you thankful for today?

Thankfulfor.com was conceived and developed by Shiny Heart Ventures, a small technology company with heart and soul, focused on creating community powered products and services that remind us of the joys of life. It’s your personal gratitude journal. It’s also a collective gratitude journal, for all of us. Because the more gratitude floating around this universe, the better. Just sign up and enter what you’re thankful for today. You can keep it private or tell the world. Remember to be thankful.

It should be noted there is a distinction to be made regarding equity investors. Knowing the difference between Angel investors and Venture Capital is critical to working with and marketing to them.

With Angel investors the first very important attribute should be – are they truly professional accredited investors. Only work with professional investors who properly know how to manage the transaction so that it does not encumber further investment down the road. Angel investors have various motives and drivers that will get them to become a partner in a company. A good book that goes into this is Finding Your Wings.

Unlike angels who work independently, Venture Capital Funds are managed by a team of people who answer to shareholders. The VC group goes out and raises a Fund themselves, targeting a specific mission. By the time a potential client is being considered, there is a council of voices that must be attended to and reasoned with. So the experience is much more institutional, with layers of process. Obviously smaller VC funds are more streamlined, but for the purposes of this discussion the difference between working with an Angel and a Venture Capitalist is generally individual versus group.

This article, Are You Overleveraged But Too Undervalued to Sell?, is a good introduction of mezzanine debt structure and terms by John Hammett with Corporate Finance Associates. Due to the ebb and flow of the economic recovery many companies find themselves in the margins when it comes to ongoing financing.

Mezzanine debt gets the name because it’s half way between senior bank debt and equity. Because it’s kind of both, it serves really well in the right situation. Mezzanine is semi-permanent capital, like equity, so the company does not have to make monthly or quarterly payments of principal. It usually has a 5 to 7 year term.

A new investment of mezz into your company can pay off some of the burdensome bank debt with more patient capital without giving up a percentage of ownership that would come with selling equity.

Read the entire article here.