How the SBA May Help You Recover From Natural Disasters

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How the SBA May Help You Recover From Natural Disasters

Hurricanes, wildfires, earthquakes, volcanoes, mudslides — all can be devastating to the health of your small business.

In 2017, 40 percent of small businesses located within a FEMA-designated disaster zone reported natural disaster-related losses, according to the Federal Reserve. Forty-five percent of affected businesses reported asset losses of up to $25,000, while 61 percent reported revenue losses of up to $25,000.

Recovering from a natural disaster can be an uphill climb but the Small Business Administration offers relief in the form of Economic Injury Disaster Loans (EIDL). These loans can help you get your business back on solid ground.

How Economic Injury Disaster Loans Work

The EIDL program provides small businesses with funding to repair and rebuild following a natural disaster. As of 2018, qualifying businesses can borrow up to $2 million, which can be used for:

  • Replacing or repairing damaged equipment or machinery
  • Buying new inventory or replacing other assets, such as computers, that were damaged or destroyed
  • Repairing or rebuilding your physical premises if they were damaged or destroyed
  • Making improvements that could help reduce the risk of natural disaster-related damage in the future, such as installing generators or storm windows and doors

The main goal of the program is to help businesses that have been affected by a natural disaster get back to normal operations as quickly as possible. These loans are low-cost, with a maximum interest rate of four percent per year, with terms that can extend up to 30 years.

Who’s Eligible for a Disaster Loan?

In addition to small businesses, the EIDL program is also open to small agricultural cooperatives, small aquaculture operations and most private nonprofits.

It goes without saying that your business needs to be located in a federally declared disaster area to qualify. But, physical property damage to your business isn’t a requirement for eligibility.

There is one caveat, however. The program only offers these loans to small businesses if the SBA determines they’re unable to get credit elsewhere. If you’re able to get approved for an equipment or term loan, for instance, an EIDL wouldn’t be an option.

Covering the Gap When Insurance Falls Short

The SBA has a second program to help businesses that have physical property damages which aren’t covered by insurance. The Business Physical Disaster Loan program also offers up to $2 million to small businesses that need to repair or replace property, equipment, inventory or fixtures following a natural disaster.

The maximum interest rate is four percent if you’re unable to get credit elsewhere. If you have other borrowing options, the max rate tops out at eight percent. Like the EIDL program, repayment terms can stretch up to 30 years.

It’s possible to qualify for both an EIDL and a physical disaster loan — you’re just limited to borrowing $2 million total through both programs. You can submit an application for each loan program online to get the ball rolling on disaster relief for your business.

Wil Rivera

Wil Rivera

WD

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Which Bank Is Best for Your Small Business?

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Which bank is best for your small business?

As a small business owner, there’s a seemingly endless list of things to worry about, but banking shouldn’t be one of them. Your bank should offer the tools, resources, capabilities and service that are most essential to your business success.

But, what’s the best bank for small business?

Many business owners feel neglected by their bank, according to the J.D. Power 2017 U.S. Small Business Banking Satisfaction Study. If you’re a business owner or CFO who’s considering a banking switch, this guide may help you find your ideal banking match.

How to Find the Best Bank for Small Business

Finding the right bank for your business starts with doing your homework. Here are some of the most important things to consider as you compare banks:

Products and services: A checking account and a savings account are the two most basic financial tools you may need, but in searching for the best bank for small business, it’s important to look beyond that. For instance, you may need help with payroll services, payment processing or inventory management. Wealth management services, cyber security products and services or key person insurance may also be on the list of solutions you need your bank to provide.

Digital banking: Tech is increasingly important among small to medium enterprises, particularly where banking is concerned. Sixty-eight percent of small business bank customers’ interactions are either online or mobile. As you evaluate banks, pay close attention to online and mobile banking capabilities to ensure that you have the access, features and functionality you need to manage your business accounts on the go.

Financing options: You may not be seeking financing for your business right now, but don’t overlook what a bank offers in the way of financing options. Check to see if the bank offers business credit cards, business lines of credit and business loans. Take a look at what’s required to qualify for a loan or line of credit in terms of annual revenue and business longevity. Finally, consider the costs of borrowing with a particular bank. Hone in on the APR for credit cards, loans or lines of credit, as well as origination fees, annual fees and late fees.

Customized advice: Every business owner’s situation is different and there may be specific financial issues that you need guidance on more than others. The bank you choose should be able to offer the type of personalized advice you need most, when you need it.

Deposit account fees: Banking fees can take a significant bite out of your bottom line. In Nav’s 2018 Business Banking Study, 17% of business owners said they chose their current bank because it was least expensive. The biggest fee to watch out for is usually the monthly maintenance fee for checking, savings and money market accounts. Some banks allow you to offset or avoid this fee by maintaining a minimum balance or reaching a certain transaction volume each month, but not all do. Other fees to be aware of include cash deposit processing fees, wire transfer fees, fees for certified or cashier’s checks, overdraft fees, and returned deposit fees.

Deposit account APY: If you’re considering an interest-bearing checking account, savings account or money market account for your business, you want to make sure you’re getting the best rate possible on your balances. Compare the annual percentage yield (APY) for different interest-bearing accounts to see which banks have the most tempting offers. Remember, however, to weigh the interest you could earn on your balances to the fees you may have to pay to maintain your account.

Special incentives: Some banks sweeten the deal for business banking customers by offering special perks or incentives, such as a cash bonus for opening an account or a rewards program that’s linked to your checking account’s debit card. Still others offer discounted rates on financing options, free safe deposit boxes or waived fees on certain services. These extras may be secondary to some of the other criteria mentioned so far but it’s worth looking into see what a particular bank offers.

Convenience and access: If you’re busy running a business, you don’t have time for obstacles when it comes to accessing your accounts. As you scout out banks, consider how many branch and ATM locations there are, and how easily accessible they are to you. Think also about customer service availability. Smaller banks may only offer assistance by phone or email during regular business hours, while larger banks may be available 24/7.

Ease of transitioning accounts over to a new bank: Making the move to a new bank should be a smooth as possible so you’re not wasting valuable time. Some banks offer a switch kit to help you move your accounts over in a streamlined way. That’s something you may want to take advantage of if you want to minimize headaches with transferring accounts.

Reputation and personality: Finally, consider the bank’s reputation and the overall vibe it exudes. A bank that has a track record of engaging in questionable business practices or a reputation for being standoffish to its business clients is one you may want to avoid.

The Best Bank for Small Business Isn’t One Size Fits All

What your business needs from a bank may be entirely different from what another business owner is looking for. Determining which bank is best for you requires an understanding of what your business desires most in a banking relationship. If you’re not sure what that is, think about what’s lacking with your current bank. Then, use that as a guideline to evaluate how different banks may be able to fill in the gaps.

Bernadette Abel

Bernadette Abel

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How to Handle Orders without the Danger of Too Much Inventory

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too much inventory

You need inventory to fill orders, so having plenty of everything on hand might seem smart. There would never be a stockout and closing sales would be as easy as sending someone to the warehouse. But maintaining too much inventory may undermine your business.

Holding considerable inventory can force you to hold more product than is necessary. What you might consider, instead, is only stocking the amount of merchandise you need, and the inventory turns ratio (ITR) can help you find the inventory levels for your business.

Availability is good, but has a cost

High availability means buying, carrying, and storing a lot of product. Inventory costs money, so you end up using capital that could otherwise help grow and sustain the company. Too much money in inventory can also affect your need to finance and how much you might need.

And there are other problems: Inventory ages, not only on the books, but on the shelves. You may have products fall out of support, become discontinued, get damaged, or otherwise lose value. Then there’s the cost of storage space and increased headcount to manage the additional product.

This all adds up to money your business will have to spend on maintaining a constantly full inventory level.

Increasing inventory turns

Instead of more inventory, consider replenishing stock more frequently. So long as there are enough products on the shelf to satisfy orders that will come in until the next delivery, you can keep customers happy and reduce costs.

This is why you need to look at the ITR. ITR shows how frequently you replace stock over a given period – such as each month, each quarter or each year.

Calculate inventory turns by dividing the cost of goods for the sales you make in a period by the value of your average inventory over the same period.

The idea is to push inventory turns as high as you can to make better use of that inventory.

Setting the right turns level

Finding the right ITR can be a challenge. If you drive turns too high, you may miss filling orders in a timely basis because you don’t have the products you need. Too low, and it means cash is locked up.

Balance inventory turns with sales, vendor stock availability, supplier reliability, and minimum order sizes. Sales fluctuations like seasonality or outsized importance of certain products can also make it tougher to monitor and control ITR. Arrival of new stock in a timely manner becomes more critical.

There is no magic way to know what ITR will be right for your company, but understanding how ITRs work may help you test stock levels and optimize for your operations.

Bernadette Abel

Bernadette Abel

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The Five C’s of Credit and How They Impact Business Financing Decisions

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The 5 C's of Credit and How They Impact Business Financing Decisions

If you’ve heard of the five C’s of credit, you may assume that this phrase is only associated with personal credit; however, it’s also a tool used by lenders to evaluate businesses pursuing credit options.

Here’s why the five C’s of credit are important to your business; how lenders evaluate each of them; and how to best position your business when applying for financing.

What are the 5 C’s of Credit?

The term “five C’s of credit” refers to one way in which lenders evaluate the credit-worthiness of an applicant. It can be used for individuals and couples applying for personal credit such as a loan, credit card or a mortgage. But, it’s also used to help assess the “worthiness” of business credit applicants.

Lenders review how well a business meets each of the five C’s, and then use their findings to help make a lending decision.

1. Character

Character refers to the likelihood that a business will pay back borrowed money. Information for the Character portion of the five C’s of credit often comes from the history noted on a business’ credit reports. It will also include the business credit score generated from these reports. Business credit reports come from business credit reporting agencies such as Dun & Bradstreet, Equifax, and Experian.

These detailed reports contain particulars of previous borrowing arrangements – including total amounts borrowed and repaid, as well as delinquencies and late payments. The reports also include details of judgments, liens, and accounts in collections going back through seven years.

2. Capacity

Capacity is your ability to pay back the money borrowed from the proceeds of your business. Before a lender gives a borrower any money, they’ll want some evidence that the borrower (being the business), generates enough money to make payments on the loan. So Capacity is the proof that the business has the cash flow to not only make the payments, but to also cover all the business expenses, other debts and obligations, and pay the wages of its employees.

To evaluate a business’ capacity, lenders will review the financial statements and financial ratios of the business, including:

  • Debt-to-Income Ratio (DTI)
  • Debt-Service-Coverage Ratio (DSCR)
  • Current Ratio
  • Debt-to-Tangible-Net-Worth Ratio
  • Inventory Turnover Ratio
  • Accounts Receivable Turnover Ratio (ART)
  • Payables Turnover Ratio
  • Cash Flow Statement
  • Income Statement

When it comes to evaluating business capacity, a lender may also consider your managerial capacity. This is your business knowledge and professional experience.

3. Collateral

Any lender faces the risk that borrowers won’t return the money they borrowed. So lenders look for ways to reduce that risk and secure their loan, which brings us to the third C of Credit: Collateral.

Collateral is any asset used as security for the lender. Lenders could seize secured business assets of value such as real estate, equipment, and machinery to sell and recoup some or all of the unpaid loan if the borrower can’t pay it off. For example, a business may get a loan secured against vehicles or a commercial building.

4. Capital

Another factor that influences lenders’ willingness to loan money to a business is the owner’s equity. How much of your own money have you invested in your business? Your “skin in the game” indicates your financial commitment to the business. This equity, referred to as capital, gives lenders an idea of just how risky the owners consider their own business. Generally, the more of your own money invested, the better it is in the eyes of a lender.

5. Conditions

The fifth C of credit is one that you have little control over, yet it also influences business lending decisions. The current macroeconomic and microeconomic conditions could impact a business’ ability to pay back a loan. So lenders carefully consider the economic environment as part of a lending decision.

Demonstrate that you have a good understanding of current (and forecasted) economic conditions, and how they’ll potentially impact your business by referencing them in your discussions and correspondence with your lender. This shows lenders you’re a forward-thinking and responsible business owner who is committed to growing your business through changing economic conditions.

Once you know about each of the 5 C’s of credit, you can better understand how lenders use them to make lending decisions for businesses. And you’ll have a better idea of what to watch out for, and what to work on when making financial decisions for your own business.

Wil Rivera

Wil Rivera

WD

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That “Cheap” Business Finance Rate Could Cost You a Bundle: Interest and Your Business

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That cheap business finance rate could cost you a bundle: interest and your business

The last decade has been an era of cheap money for businesses, with interest rates at historical lows. But those days may be ending. How you look at financing — in particular choosing between fixed and adjustable rates — may have to change.

These are the good old days.

Access to capital can often make or break a business. Each year, fifty-three percent of business owners kick in additional funding, according to the Small Business Administration. Almost a quarter add more than $50,000.

The adage that it takes money to make money is fine — if you have the cash on hand. If you don’t, it’s time to look at outside financing. But that may take some unlearning of recent lessons.

The global economic collapse beginning in 2008 was brutal, but it did have one benefit for some businesses: Because the U.S. Federal Reserve and other regulators slashed interest rates to stimulate buying, over the last decade the cost of money has been incredibly low.

Businesses who were approved for traditional forms of financing had enviable choices, including taking adjustable rates over fixed ones to keep borrowing costs down.

The Two Types of Interest Rates

A quick refresher: whether talking consumer or business financing, there are two general types of interest rates: fixed or variable.

A fixed rate is just that; the borrower pays a set interest percentage of the principal. Monthly payments don’t change.

Variable rates start at one rate. After some time, they shift to an amount based on any one of several common benchmark rates.

The Fed’s federal funds rate is one example of a benchmark rate. So is the prime rate, which is based on the federal funds rate, and is often what a bank’s best customers get. Another benchmark is the London Interbank Overnight Rate (Libor) — the rates banks charge one another on short-term borrowing.

The variable financing rate will be some number of percentage points over a benchmark rate. When the benchmark goes up, so will the variable rate. If the benchmark drops, the variable rate does as well.

Most people are familiar with variable rates from mortgages and credit cards. They are common in small business financing as well.

Variable Rates Have Been Low

In the past, business owners chose variable rates that were initially low. The idea was that when the rate increased, either revenues would have grown enough to more than offset it or refinancing at a lower rate would eliminate the extra costs.

For the last decade, however, variable rates have acted strangely. Because benchmarks were so low, you could effectively get a great rate for the life of the financing. There was always the gamble that the rate would climb, but in hindsight, for years you could win the game. Variable became almost the same as fixed.

No longer. By June 2018, the Fed had increased the federal funds rate seven times in three years.

As job growth remains brisk and the economy improves, regulators could keep increasing their rates, making all the benchmarks increase. Variable rates will follow, making the era of super-cheap money over. Opting for a variable rate instead of a fixed rate could now cost you.

Create a Financing Strategy

If you’re looking for financing, you’re best off doing some calculations in advance to see how a variable and a fixed rate might compare. Consider that a variable rate loan might increase a couple of times during the life of the financing:

  1. Look at how much the Fed has raised the key interest rate over the previous 12 months and assume for a moment that the increases will continue in the near future, given how low rates have been.
  2. Calculate the full principal, the length of the business loan, and the initial rate. Then use an amortization schedule to calculate how much you pay in the first year.
  3. For the second year, calculate with an increased interest rate (initial rate plus the last 12-month increased in a benchmark) and the remaining financing time. Use an amortization schedule to calculate how much is paid in the second year.
  4. Keep doing this for at least one or two more years with benchmark increases.
  5. Finally, calculate the remaining principle, time left on financing, and the “final” interest rate. (Remember that this is an estimate and there might be additional rate increases.)
  6. Add the payments over all the years and compare that to what you’d pay with available fixed rates.

You might choose to run estimates for different numbers and amounts of rate increases. This modeling can help you manage risk and choose an option that works for your business.

Wil Rivera

Wil Rivera

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Borrowing and Business: What You Don’t Know Can Hurt Your Finances

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Borrowing and Business: What You Don't Know Can Hurt Your Finances

So, you’re feeling confident enough about your business to go shopping for a loan. Congratulations! But before you start looking you should understand these five important areas impacting loans, beginning with the difference between interest rates and APR.

What is APR?

APR is the annualized percentage rate, which measures the cost of borrowing money. It includes the total cost for the loan including covering all fees that the lender might charge.

By looking at the APR, you can objectively compare the costs of loans from different banks. That’s entirely different from looking at the headline interest rates that sometimes get advertised. Such headline rates frequently don’t include all the fees that you must pay to get the loan.

In short, if you looked only at the headline interest rates, then you might think you got a good deal when in reality you didn’t.

Always ask the loan officer for the APR in any loan. If they won’t provide it, then choose another bank.

LIBOR and interest rates.

The cost of a lot of business credit moves up and down in line with something called LIBOR, the London Interbank Offered Rate, which is an interest rate charged by banks to lend to other banks.

When the banks see little risk of lending to each other, then the LIBOR will be lower than it would be otherwise. When they see heightened risk of lending to each other, then the LIBOR typically rises as it did during the financial crisis.

Commercial businesses typically pay a fixed amount above the LIBOR for the duration of the business loan, see the Small Business Administration website for examples. The prime rate, which is a common benchmark lending rate for both commercial and consumer loans, is usually between 2.5 and 3.5 percentage points higher than the LIBOR rate, according to the FinAid website.

The LIBOR is also partly determined by decisions made by the Federal Reserve, which is a target interest rate for short-term overnight loans between banks. When that rate changes you can usually expect the LIBOR rate to change as well. In the simplest terms, if the Fed Funds rate rises then you should expect LIBOR to increase.

Recently, the Fed has been transparent about likely future changes in Fed Funds rates. If you regularly read the business press, you’ll be aware of most likely future changes in the costs of borrowing.

Fixed versus floating interest rates.

Not all business loans have interest rates which vary. Some have a fixed rate for the term of the loan. Such loans reduce the uncertainty about what would happen to the company’s profitability due to changes in short-term interest rates.

The cost of these loans is typically far higher than for variable rate loans. That’s because the bank takes on the risk of the interest rates changing over the term of the loan.

When a company purchases a long-lived asset, such as a factory building, it can make sense to seek out a fixed rate loan. That’s similar to seeking out a fixed rate home loan mortgage. Often, purchasing a building is a major expense and the predictability of the same monthly payment can help managers plan better for the future.

On the other hand, working capital typically gets funded through credit lines with variable rates of interest. That makes a lot of sense. When times are lean in business, then interest rates are lower and so are working capital needs. Conversely, when the economy is expanding, then although the cost of borrowing is usually higher, so is the demand for goods and services.

Sensitivity and the cost of borrowing.

Before you take out a loan, you need to understand what would happen to your profitability if the cost of borrowing increased.

For instance, if the cost of borrowing is $5,000 a month in interest and your company still would likely be profitable, then that is a good start. But then you also need to know if the business would remain in profit if the cost of borrowing increased. For instance, what would happen it the interest expense was half as much again, or $7,500 a month. Making theoretical changes and then calculating the likely outcomes is known assensitivity analysis. It is something that your Chief Financial Officer or accountant should be capable of doing.

If a change in interest rates of relatively small magnitude would vastly reduce profitability, then you might want to consider a smaller loan.

Likewise, when you conduct the interest rate sensitivity analysis, you may want to consider what would happen to the earnings if revenue fluctuated when the company also had a new loan. If even a small dip in sales would cause the company to lose money then perhaps it would make sense to be cautious by reducing the possible size of the loan.

Wall Street Prep has some useful tips on running sensitivity analysis.

Derivatives and interest rates.

Interest-rate derivatives exist to help companies guard against changes in the cost of borrowing. Rather like knives, when appropriately used, they can be a useful tool. However, when wielded incorrectly they can be harmful.

So-called interest rate swaps can be used to convert a variable rate loan to a fixed rate loan, and vice versa. These products can be useful, but the customers should have a high level of sophistication.

Unfortunately, in the United Kingdom, some banks inappropriately sold small businesses some of these products. That eventually led to losses by some buyers of these derivatives. Given that many of the people selling these swaps hold higher-level finance degrees it is frequently the case that the buyers are far less sophisticated than those selling the products.

Two things to take away from this episode. First, if you have any doubts that you truly understand the product then don’t buy it. Second, just because these problems occurred in the U.K. don’t think they couldn’t happen in the U.S.

Wil Rivera

Wil Rivera

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5 Tips for Running a Lean Operation

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5 Tips for Running a Lean Operation

The best things in life are simple.  The same concept applies to running your business! Running a lean operation correctly is the most efficient way to foster growth without adding a ton of stress to you, your employees and your pocket book. The less moving parts needed to keep your business running efficiently, the better. If you feel your business is spiraling out of control, you’re tired of staying up all night just to get your work done for the day, or you feel like there is just way too much on your plate, it’s most likely because you’re trying to run a “flashy” operation, not a lean one.

The rule that small business owners must live by is innovate or die. If you aren’t consistently looking to make your business operate more efficiently, even in periods of expansion, you can’t expect your business to stick around for the long game. Regardless of the industry that you are in, these same rules apply. You must always be on the search for new ways to streamline your processes.

The good news is that achieving a lean operation is much easier than it may initially appear. Small changes will add up over time. Before you know it, your business will be back on track – minimizing costs and maximizing profits at every turn. Most importantly, you’ll be able to use the time you get back on establishing a healthy work-life balance.

How can you achieve a lean operation? Let’s discuss some tips and tricks you can use in your business to identify and remove unnecessary and wasteful processes. But first, it’s important to fully understand the meaning of a lean operation.

What is the ultimate goal of lean operations is to have?

The principles of “lean operation” were born in the manufacturing sector by Toyota in the 1980s. They were wasting far too many parts in their manufacturing process and decided to make a significant move: instead of building to meet specific sales projections, they began to manufacture vehicles as orders were placed.

Following these same principles, running a lean operation refers to removing unnecessary processes, products, or anything else in your business that may be causing additional financial stress. It’s all about keeping only the things that you need and getting rid of anything you don’t. Running a lean operation is a never-ending journey. It is not something you do one weekend.

The motto you need to commit to heart as a small business owner is “innovate or die.” If you aren’t innovating, one of your competitors is. Don’t be left in the dust, and consistently look for ways to improve and simplify your operations.

Tip 1: Make Time for Improvement

This first and most crucial step is to dedicate time to focus on finding operational inefficiencies. We recommend that you schedule time at the beginning of every month to sit down and focus solely on ways to innovate and improve your processes.

We recommend around 10% of your total working hours should be devoted entirely to this innovation process. It may seem like a lot, but using this time to focus on improving your business as you expand will pay off in the long run. Once you find the time to do it (maybe on days you know your workload is less) mark it on your calendar and hold yourself to it.

Tip 2: It All Starts with A Solid Strategy

Now that you’ve scheduled your monthly operational assessments, you must come up with a strategy to make the required changes each month. This is the time to set goals for your business—tangible financial metrics to measure your progress.

Do you want to increase sales without hiring additional employees? Or would you like to automate certain aspects of marketing your business, freeing up time for you to focus on other areas? Whatever your goals are, write them down and hold yourself to them.

Tip 3: The Pareto Principle

Also commonly referred to as the 80/20 rule, the Pareto Principle created by Vilfredo Pareto in 1906 after he noticed that 80% of property in Italy was owned by 20% of the population. He then began observing this same pattern in almost everything. The principle specifies “an unequal relationship between inputs and outputs. [It] states that 20% of the invested input is responsible for 80% of the results obtained,” according to Investopedia. Obviously, this principle is especially applicable to business operations.

Based off this principle, the Pareto Chart was created. The chart is a great way to visually represent which 20% of inputs are responsible for 80% of the outputs. It is a hybrid between a bar graph with a line plotting the percentage each of the inputs makes up. The y-axis of the chart is for frequency, and the x-axis is for your inputs. It can be a little tricky to figure out at first, but once you have a solid understanding, it can be incredibly useful in finding the snags in your operation.

Once you start thinking with the 80/20 mindset, you will immediately start to notice the biggest sources of your problems. It could be that one employee is responsible for 90% of the accounting errors, or that two clients are responsible for 80% of your sales.

Tip 4: Improve Efficiency from the Bottom-Up

Changing your overall systems isn’t something that should start at the management level. Instead, your most significant improvements in efficiency should begin on the front-lines of your operation – with your outward facing employees and the day-to-day processes they follow.

It is also important to empower your employees to make suggestions instead of ruling with an iron-fist approach. Your employees are the ones that work every day doing the same tasks, helping customers, and making sales. If they have an idea of how their job could be more efficient and save them time, take the time to listen to them and be flexible.

Give every reasonable idea a chance, and you might notice huge effects on the amount of time you spend managing, the number of sales they’re making, and how much less stress you have knowing your employees are working in a system they helped to create.

Tip 5: Cut Out ANY Inefficiencies

We get it – your business is your life. You’ve spent years coming up with the perfect product or service; dedicated vast sums of capital to getting it off the ground; and (most important!) your time and energy to make it work. Making changes to your business can feel like you’re dismantling your livelihood. However, to make your business operate more efficiently, you’re going to have to rip off the band aid.

Nothing is sacred in your operation. It doesn’t matter if you’ve invested hours in coming up with what you believe to be the perfect financial reporting system—if it isn’t working, get rid of it.

Making your business thoroughly efficient is a never-ending journey and is a constant balancing act of managing existing processes and finding new ways to optimize them. As you grow, continually optimizing your operations will become even more critical to your business’s success. A larger business can make it more difficult to control every operational aspect and you might need to seek out expert advice from industry leaders. Whatever the case may be, always be on the lookout for new ways to streamline your operation. This will lead to a healthier bottom line, less financial risks, and new core company strengths.[/vc_column_text][/vc_column][/vc_row]

Wil Rivera

Wil Rivera

WD

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The Pros and Cons of 9 Restaurant Location Types

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The Pros and Cons of 9 Restaurant Location Types

Do you decide on a restaurant location before or after the entire concept?

Restaurants involve both arts and science. Many of the decisions involving their creation and operations are driven by emotion or an artistic sense of what will appeal to the public and drive the success of the venture.

Most people have an idea of what they want their restaurant to be long before they find a potential site. Unfortunately for many of them, they are not willing or capable of making the changes that their market calls for. It is far easier to be a good matchmaker than back peddling a year or two down the road to re-engineer your concept. If you are totally set on a specific concept / menu, make sure you do your market research and ground work thoroughly before committing to a location.

Your concept / menu and brand are your business drivers. If people are attracted to what you are offering in food, service, ambience etc., your concept / menu should be strong enough to consistently attract patrons to fill your seats. It is your restaurants soul. If it doesn’t fit the market you are considering – move on.

Who is your customer?

Most restaurateurs have a fairly good idea of the type of restaurant they wish to open, even before they have a location. Rarely does it evolve the other way. Occasionally a more seasoned operator might find that one outstanding spot and create the right style of restaurant to fit that particular location.

In any case, before you do anything you need to answer the following questions:

  • Who is your primary target audience?
  • Who is your customer?
  • What is their price point?

Having definitive answers to these three questions is the key to the success of your new location.

Is it a young tech professional market? Hipster urbanites into eclectic funky places? Young families with mortgages seeking places that they can bring their kids? High income executives seeking more upscale environments? Baby boomers downsizing in a golf community? Whatever the market is – establish a clear vision of who you are trying to attract and serve. They may not be your entire customer base, but this will be the primary driver of sales.

Who lives and works here?

With the vision of your primary target audience upfront in your mind, you can begin the search. An old restaurant site search standard states – “85% of your patrons will come from no more that 3 to 5 miles from their bedpost”. People will eat out more in close proximity to where they live and work.

When people are in transit, opportunity and accessibility will drive dining decisions as evidenced by diners and other quick serve restaurants popping up along major thoroughfares and highways. It is more about pass by traffic than it is about who lives there.

Decide what is most important to you?

Did you stumble across what you believe to be a killer location without consideration for the target market or specific restaurant concept? Are you married to a single concept / menu that fits your skill set? Is it more important to be located in the new hot neighborhood or are you seeking population density or a certain income demographic profile? Is your budget the biggest consideration?

Make sure you get your priorities clear, because once on the hunt, emotions often take control of reason and many buyers find a thousand reasons to justify a really bad decision.

What type of location best fits your vision?

9 Advantages and Disadvantages:

1. Urban Commercial / “Downtown” – Primarily commercial neighborhoods. Usually in a major metropolitan area surrounded by offices with little or no residential zoning.

  • Advantages – strong demand generators such as offices and retail. Potentially good lunch and early dinner business. Could be a great Monday through Friday business. Depending on the city, you might even get more favorable rents.
  • Disadvantages – less local traffic because of light residential component. Serious drops in traditional dinner business and on weekends, vacation periods, holidays etc.

2. Urban Mixed Use / “Uptown” – Greater residential component. Mixed residential, commercial and sometimes offices. Smaller businesses and local shops may be the only demand generators.

  • Advantages – stronger dinner business and late night business with ability to build regular clientele. High concentration of urban apartment dwellers.
  • Disadvantages – less commercial / corporate office traffic. Lunch can be extremely tough in these areas.

3. Central Business District (CBD) / Retail Corridor – most often in a suburban setting. This is where everyone in town comes to shop and recreate. Think of this area as the “Town Center”.

  • Advantages – Often has strong local traffic. Area filled with demand generators. A true destination for residents of surrounding real estate. Usually a center for retail, entertainment and other restaurants. Clusters of restaurants provide shared exposure to market and offer diners variety and increased frequency in the area.
  • Disadvantages – Traditional retail is experiencing heavy challenges with decreasing traffic and competition for internet retailers. Heavy restaurant competition might not be advantageous if too many similar concepts compete for limited dollars. These locations are subject to community business fluxes such as school vacations, holidays, bad weather etc. Lunches will very often be soft and the vast majority of sales will be derived on weekends. Also, very often the cost of real estate may be artificially high due to limited availability of space and restrictive zoning.

4. Regional Mall – Most often a recognized stand-alone – a broad market region that attracts customers from a wide radius and offers heavy variety of retail, entertainment and restaurant options.

  • Advantages – Originally these locations offered high foot traffic and concentration of customers seeking to spend considerable time at the location. The traditional retail environment is changing and compressing and they no longer attract the same traffic as in years past. Today the primary drivers of traffic to regional malls are very often the restaurants and entertainment venues like movie theaters. Clusters of restaurants provide shared exposure to market and offer diners variety and increased frequency in the area. Competition is usually restricted (ie. Only one Italian restaurant or steakhouse permitted). Plenty of parking.
  • Disadvantages – Dying traditional retail traffic. High cost for rent, common area charges and build out continue despite recent developments in retail contraction. Independent restaurants are forced to compete against well-financed national chains. These locations are subject to community business fluxes such as school vacations, holidays, bad weather etc. Typically the majority of sales will be derived on weekends. Operators are subject to strict mall operating rules governing hours of operation etc.

5. Big Box Retail / Freestanding Pads – Big draw retailers and discount houses like Costco and Walmart that attract regional car traffic but very little foot traffic. Freestanding pads in front of these locations are primarily the domain of national restaurant chains and high volume independent regional chains / operators.

  • Advantages – Big foot print. High exposure to highways and vehicle traffic. Big boxes are demand generators that give visual exposure to restaurant. A cluster of restaurants on pads offers greater traction. A true destination for residents of surrounding real estate. Competition is usually restricted. Plenty of parking
  • Disadvantages – Often have a high cost for build out and rent, common area charges. Deals for pad sites are typically for land leases requiring the operator to pay for the build out of the facility as many landlords have eliminated or reduced their contribution to tenant improvements even for highly qualified operators. If the developer / owner of the complex agrees to pay for build out with cost recovered through future rent payments, escalations can crush the long-term viability of the restaurant. High demand for these locations from well organized national chains and franchises make it difficult for some independents to compete.

6. Strip Center Retail – These smaller clusters of retail stores, restaurants and service providers like banks, supermarkets and Post Offices are built in line to address the needs of local communities.

  • Advantages – If tenant mix is good it draws people to the location for multiple reasons. Offers higher visibility as a destination for residents of surrounding area. Competition is usually restricted. Parking is usually positive. Rents are generally competitive.
  • Disadvantages – Most favorable location in many strip centers are the “end caps” otherwise visibility and logistics might be compromised. Tenant mix is vital to generating foot traffic. Poor mix results in negative perception of center with negative spillover on the restaurant. Parking may be at a premium with restaurant competing with other businesses for parking spaces.

7. Non Traditional Outlets / “Hermit Crabs” – these are anything from concession stands in food courts to snack shops in gas stations, to rest stop eateries on highways, to corporate dining rooms, or lunch rooms in office complexes.

  • Advantages – Captive audience. Limited hours of operation. Often little or no rent as an amenity to the building. Facilities often managed and maintained by sponsor / landlord.
  • Disadvantages – Little outside exposure to customers except in the case of rest stops etc. Limited hours compress your flexibility to build additional day parts for business.

8. Seasonal Operations – these can be anything from restaurants that operate at ski resorts to waterside with outside dining. These restaurants can experience radical business fluxes and are totally dependent on seasonality.

  • Advantages – High traffic in season. Local demand generators build solid market base. An operator can earn a solid return for the year within a few months of operation.
  • Disadvantages – Limited prime trade time presents considerable risk particularly if area is weather dependent i.e. if there is no snow at a ski resort one winter, or it rains every weekend at an ocean side resort town in summer. Operator very often must pay rent all year even if operating for only a few months a year. Building a new staff every year is difficult and expensive. Consistency is often in jeopardy from year to year.

9. Specialty /Ambience Driven / Charm Locations – unique restaurants that offer ambience as a primary motivation for customers. Quaint country inns, roof top restaurants with dramatic views, restaurants on cruise boats etc.

  • Advantages – Traffic is driven by the location / atmosphere making execution important. Very often the special occasion restaurant of choice. High recognition as supported by the unique character of the restaurant.
  • Disadvantages – Usually not the “everyday” restaurant, therefore has limited market. Most often a special occasion or recreational restaurant. Physical character of restaurant may not be strong enough to sustain interest of customers. Might be out of the way and if it isn’t supported by additional demand generators, it may not be viable.

Check out even more on how to improve your restaurant with “11 Best Ways a Restaurant Can Go Digital.” [/vc_column_text][/vc_column][/vc_row]

Wil Rivera

Wil Rivera

WD

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How Do Small Business Administration (SBA) Loans Work?

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How SBA Loans Work

Next up in the “How It Works” series let’s take a look at how  SBA loans work

Every business is unique.

What works for one may not work for another. With a range of choices, each with its own unique requirements and mechanisms, how do you identify which type of financing is best for your business and your needs at this time? You should start with the basics with a full understanding of your situation.  You need to be clear about what you want/need versus what your business can take on. Whether you want capital immediately, or sometime later in a lump sum, or phased over time, take stock of your situation and needs first and then consider your financing options.

Let’s take a look at one of the most frequently used business financing options available to small businesses:

How SBA Loans Work – Small Business Loans through SBA

Government-backed Small Business Administration (SBA) extends aid to all small businesses via loans that help them to not just start up a business but to also sustain and grow that business. While the agency itself does not provide financing, it makes affordable loans available through SBA approved lenders like banks. These loans are designed to meet very specific business purposes, so it is important to understand each of these options before applying for an SBA loan. Though cheaper, you may find it difficult to qualify for these loans. Many individuals are disqualified due to  insufficient collateral, low credit scores or falling within an unqualified category.

SBA loan programs are designed to meet major financial requirements of varied small businesses. These include microloans, real estate loans, equipment loans, and basic loans under the 7(a) program. You can use the loans provided through the 7(a) program for a variety of purposes – setting up a new business, acquiring a business, purchasing equipment and machinery, or as an influx in working capital, among others

How SBA Loans Work – Eligibility

The general small business loans from the 7(a) program are the most popular among all SBA loans. Since these loans are guaranteed by federal agencies, lenders can offer businesses very lucrative and flexible terms for these loans. It is no secret that the 7(a) loans through the SBA are by far the best way for any small business to get financing if they are able to qualify.

To be eligible for 7(a) loans a business must be for-profit; operate within the United States; show a business need for the funds, and – most importantly – show proof that you’ve exhausted all other avenues and financial resources before applying. This means, you will need to have used your own personal assets, reached out to family and friends, and be able to show that you applied for and had been declined by a traditional lender. It’s no wonder, then, that most small businesses find these loans out of their reach. In fact, a 2016 Forbes report points out that, “The head of the U.S. Small Business Administration has cited industry estimates that 80 percent of small business loan applications are rejected.”

How SBA Loans Work – What you should know 

  • Lowest cost option for small businesses looking for financing to start up or grow a business.
  • Offered by traditional and alternative lenders and backed by government guarantee.
  • Multiple types of loans and grants depending on business type and need.
  • Businesses applying for a loan must first use other resources including personal assets.
  • Personal guarantee required by business owners or top management of the company.
  • Long application and funding process compared to alternate financing options.

SBA loans may be a good option when:

  • Working capital is needed to expand the business over the next few years.
  • Consolidating loans from multiple lenders.
  • Hiring new employees or opening a new location.
  • Recovering from declared disasters.
  • Your business is impacted by NAFTA.

SBA loans may not be an option when:

  • Working capital is needed immediately for a very short term.
  • Consolidating loans will require the company to take a loss.
  • Business owner cannot provide a personal guarantee.

Besides the general 7(a) loans, the SBA provides 7(a) loans to cover special situations like companies conducting business in underserved communities and companies looking to expand export activities. There are also microloans up to $50,000, and special programs to help businesses recover from declared disasters. To learn more about SBA loans visit their website right here. Many traditional and alternative lenders also help businesses navigate through the process of applying for these loans.

Want to learn more about your options? Here are the pros and cons of the revenue-based financing.

Wil Rivera

Wil Rivera

WD

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How It Works: Revenue Based Financing

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How It Works Revenue Based Financing

KEY TAKEAWAYS

  • Revenue-based financing provides small businesses with quick access to capital. But, it is not a loan. Instead is a purchase of your future sales.
  • With quicker approval times and lower credit score requirements, revenue-based financing can be a great financing option. But, it will directly impact daily cash flow as a percentage of your daily or weekly sales are deducted as repayment.
  •  This form of financing is ideal for businesses with an immediate need for funding, those without adequate collateral, or those not meeting the criteria for traditional loans.

Are you looking for small business loan and alternative financing options?

This is by far the most frequently used option for small business financing. Revenue-based financing allows small businesses to take financing against their continued business success. The oldest form of revenue-based financing is the popular Merchant Cash Advance (MCA). This option truly aligns the interests of both parties. That’s because the financing partner only gets paid if the small business continues to be viable and successful.

It is no wonder then that merchant cash advances continue to see a healthy increase

A 2016 report on Merchant Cash Advance/Small Business Financing Industry byBryant Park Capitalnotes that, “the volume of merchant cash advances provided to U.S. SMEs has steadily increased over the last couple years, projected to reach $15.3 billion in 2017, up from an estimated $8.6 billion in 2014.”

Not surprising, considering quick upfront capital can make a huge difference to any small business. Typically, revenue-based financing provides a lump sum of cash to a small business. This is with the understanding that it will dip into a fixed percentage of the future sales. It’s a great option for any small business owner who is looking at short-term financing (between 6-18 months), cash flow and working capital.

A few years back, merchant cash advances were limited to those businesses that received customer payments via credit or debit cards – like bars, nail salons, restaurants, retailers, and other forms of B2C companies. But now, with advancements in the system, merchant cash advances can work for almost any type of small business.

While merchant cash advances give your business that financial backup, it’s also important to know that it directly impacts your daily/weekly cash flow. Good lenders ensure that the funds they advance to merchants ensure healthy growth in the business even when daily/weekly remittances are being taken from the business’s revenue stream. Uninformed merchants can easily fall prey to unscrupulous lenders who can overburden a business’s cash flow. Therefore, small businesses applying for a merchant cash advance should first make an objective analysis of whether this service is best suited for their business.

What you should know about revenue-based financing

  • Quick access and faster approval of the application.
  • Much lower credit score requirement compared to a traditional loan.
  • Qualification does not require secure assets.
  • A fraction of the company’s daily/weekly sales goes toward its outstanding financing amount.
  • Supports payments to be processed against both credit card and cash payments (ACH).
  • Instead of fixed monthly payments regardless of the business performance, the remittances are tied to the success of the business.
  • Flexibility of daily/weekly payments with the ability to true-up payments against the actual performance of your business provides peace of mind and extra cushion when times are lean.
  • There is an immediate impact on your business cash flow.

Revenue-based financing may be a good option when:

  • The small business will not meet SBA loan requirements.
  • There is an immediate need for funding.
  • The company does not have enough collateral for traditional long-term loans.

Revenue-based financing may not be an option when:

  • The funds will provide only temporary reprieve but cause irreparable harm to cash flow.
  • The business already has a number of outstanding loans or advances.
  • Your credit score is below 550. In this case, alternate options like Factoring may be more appropriate.

It’s important to remember that unlike other traditional loan options, which are usually backed by a collateral or federal guarantee, this financing type presents a great risk to the alternative lender. That is why it is a more expensive financing option compared to traditional loans. Businesses should therefore thoughtfully consider when this option makes sense for them and carefully vet the alternative lender.

Bernadette Abel

Bernadette Abel

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