Tag: small business owners

The True Cost of MCA Loans Compared to Alternative Funding Sources

Small-business owners need of working capital often turn to merchant cash advances (MCAs) to fill the gap. Given their popularity and the way the terms are presented, it’s easy to think that they’re a simple and cost-effective way to get a quick cash injection, but all too often business owners get far more than they bargained for and are tied into this costly way to borrow before they realize it probably wasn’t the best solution for their needs.

Below, we’ll break down what makes a merchant cash advance look attractive to small-business owners, how it works, and explore some alternatives, so it’s easier to see how it stacks up and determine if an MCA is the right choice for you.

What’s a Merchant Cash Advance?

Sometimes referred to as a business cash advance, a merchant cash advance involves selling your company’s future receivables to a third party. More often than not, the MCA is provided by the company that processes a business’ credit card transactions, so the lender already knows how much the business is earning and can scrape their repayment and fees off the top of the business’ future earnings fairly easily.

That said, an MCA is not really a loan, which gives the company funding the deal more wiggle room in the fees it charges and how it behaves in general.

How Are the Fees of Merchant Cash Advances Calculated?

MCAs don’t use traditional interest calculations. Instead, they measure using something known as a multiplier. Understanding how it works is the key to knowing how much you’re really paying for your cash advance.

Sample MCA Calculations

As a small-business owner being told your multiplier is going to be somewhere between 1.1 and 1.5, it’s easy to think that’s an interest rate because that’s what you’re accustomed to. It’s not. It’s what your principal amount will be multiplied by to calculate the fees of your advance. Let’s break it down.

Payback Amount = Advance Amount x Multiplier

Let’s say you get an advance of $50,000 and your multiplier is: 1.25. The calculation is 50,000 x 1.25= 62,500. The total payback amount is $62,500.

Cost of Advance = Total Payback Amount – Advance Amount

Continuing with the numbers above, the calculation is: 62,500 – 50,000 = 12,500. The cost of advance is $12,500.

Percentage Cost = Cost of Advance / Advance Amount

Following along with the same numbers, the calculation here is: 12,500 / 50,000 = 0.25. The MCA percentage cost is 25 percent.

Annualized Interest Rate = (Percentage Cost x Days in a Year) / Days to Repay

Continuing with the example, and assuming the business owner expects to pay the balance off in three months, the calculation is: (0.25 x 365) / 90 = 1.01. In simplified terms, we’ve just discovered this MCA has the equivalent of over 100 percent annualized interest rate.

What Are the Benefits of Merchant Cash Advances?

As mentioned earlier, MCAs look good on the surface and can be tempting to small-business owners for a number of reasons.

1. They’re Easy to Get

You could almost liken an MCA to what payday loans are for the consumer market. The MCA company doesn’t do a whole lot of digging into your history or credit. Their decision is largely based on the revenue they see coming in through your recent credit card transactions. That means businesses without a strong credit history and time in business can still qualify for funding this way, even if they’re denied business loans and lines of credit.

2. They’re Fast

Because they’re not traditional loans, there’s far less red tape with MCAs. Businesses can often get approved within a day or two, and the money is transferred into their bank account right away, just like the payments they earn through credit card transactions are.

3. They’re Flexible

Oftentimes, there are large variances in how much a business can have advanced and in the amount that gets scraped off their future earnings. For example, a business might be able to get anywhere between a few thousand dollars or up to hundreds of thousands of dollars and the amount being scraped off the top (known as a holdback) could range from 10 to 20 percent of each future transaction until the balance is paid.

Some are set up to work more like lines of credit, too. For example, a business might be approved for a $50,000 advance. When they pay off $10,000, they can request another $10,000 advance.

Naturally, the terms offered will vary from one MCA company to the next and will fluctuate based on the terms a business selects, so it’s important to do some homework before accepting an offer.

Where Do Merchant Cash Advances Fall Short?

Most small-business owners only hear about the benefits before signing up, but it’s the areas in which they can fall short that cause trouble down the line.

1. Merchant Cash Advances Aren’t Always Covered by Usury Laws

As explained earlier, MCAs are not loans, so they’re not subject to the same laws as loans are. One area of importance is the interest rates. Whereas traditional loans have a legally mandated interest rate cap, MCAs can and often do cost exponentially more than loans.

2. Flat Fees Are Hard to Assess

Traditional loans are subject to the Truth in Lending Act (TILA), which generally requires lenders to tell borrowers their annual percentage rate (APR) in plain terms. By law, they have to clearly explain what the total costs are, including fees, ensuring borrowers know and can compare various financial products with ease. MCAs are not loans, so they’re not subject to TILA and may not tell you what your APR is or how much you’ll pay in a straightforward way. You’ll have to do the calculations for yourself. This is in addition to performing the multiplier calculations as shown earlier.

3. The Fast Repayment Schedule Can be Punishing

When you take out a loan and pay it off quickly, you’ll normally pay less due to reduced interest costs. Because MCAs charge fees, not interest, you don’t usually get a price break for paying it off faster. In addition to this, the amount being scraped off the top is based on the percentage you agreed upon, which means you pay more when you earn more.

4. Double Dipping Can Trap You in a Debt Spiral

Let’s say you’re barely getting by because of a business lull, you take out an MCA to cover operating expenses, and you agree to a 25 percent holdback. Going forward, you’ll only get to keep 75 percent of your earnings, which may or may not be enough to cover operating expenses, especially if your business lull continues. This is a common situation for small-business owners, who are then left to find another working capital solution.

5. An MCA is Expensive

Some MCAs start at around a 15 percent APR. However, others climb well over 100 percent. It can be one of the most expensive ways to get working capital.

6. MCAs Can Be Difficult to Understand

Between the multiplier, APR, holdbacks, and other terms used with MCAs, you practically have to learn a whole different language just to make it through a contract. The calculations involved in sorting out your total cost make it even more difficult to understand an MCA.

7. Fluctuating Daily Payments

Because of the way holdbacks work, you may have a busy day or week in which you pay back a higher dollar funding amount than you would with a slower day or week. Unless your credit card charges are static or relatively stable from one period to the next, it’s very difficult to tell when you’ll pay off the advance or how much you’ll pay during any given period.

8. MCA Funding is Typically Based on Credit Card Receipts

One of the reasons it’s easier to get an MCA is because qualification is based on your credit card transactions. This is a double-edged sword if you have other sources of income. For example, you may not get all the funds you need if your customers pay by check or cash.

9. You Really Need Long-Term Capital

Although this was touched on earlier when we discussed debt spirals, it bears repeating. An MCA can only work for you if you’re certain you only need the cash for a short period of time. Otherwise, an MCA can be very damaging to your long-term needs.

Evaluating the True Cost of MCA Loans and Their Alternatives for Small Businesses

As small business owners navigate the complex terrain of financing options, understanding the true cost of a Merchant Cash Advance (MCA) compared to alternative funding sources becomes paramount. While MCAs are quick funding solutions, especially for businesses with limited access to traditional bank loans, the overall financial implications can be substantial. When calculating the cost of MCA loans, it’s clear that the convenience of easy approval and immediate cash flow can come at a price, often marked by high APRs and a repayment structure that challenges your business’s long-term financial health. In contrast, exploring alternatives to merchant cash advances, such as term loans, business lines of credit, or even invoice factoring, could bring to light financing options that better align with your company’s repayment capabilities and growth objectives. These alternatives not only offer a diverse range of repayment terms and interest rates but also encourage small business owners to compare the total borrowing cost, ensuring a more informed decision that supports sustainable business operations. By meticulously assessing each financing option’s true cost and suitability, businesses stand a better chance of selecting a solution that complements their financial strategy without compromising their future revenue or cash flow stability.

What Happens if You Default on a Merchant Cash Advance?

Penalties for defaulting on an MCA vary depending on the terms of your contract. On a standard contract, most small-business owners can expect to pay additional fees during the next cycle, though some contracts include a stipulation that the MCA company can permanently raise the rate or increase the holdback going forward.

It’s also common for MCA companies to report to credit bureaus, which can damage your personal credit score and make it even harder to qualify for traditional bank loans in the future.

Sometimes, MCA providers require a personal guarantee from the business owner too. In these cases, a business owner who defaults may be putting their personal assets, such as their home, in jeopardy if they were used as collateral.

Merchant Cash Advance Alternatives for Small Businesses

No matter your situation, there’s usually a way to secure funding for your business. A few of the most common financing options are covered below.

1. Long-Term Small Business Loan

Long-term small business loans are what most people look for when they have a funding shortfall. You can usually get a large lump sum payment and then pay it back with interest over a longer repayment term – usually over a period of years. It’s one of the more affordable ways to borrow, but lenders have strict criteria for small business borrowers, such as having a good credit score, strong cash flow, and years in business.

2. Short-Term Small Business Loan

Short-term small business loans are ideal for businesses that need a quick cash injection to cope with an emergency or cash flow gap. They’re more expensive than traditional long-term loans, so they work best if you can pay the balance off quickly, though they usually have a fixed interest rate, which can make a short-term business loan easier to manage.

3. Small Business Line of Credit

A small business line of credit will typically have a higher interest rate than a long-term loan, but the business owner can draw from the line as the balance is paid down. It works like a credit card. However, the criteria for qualifying is similar to that of a long-term loan.

4. Invoice factoring

Invoice factoring or receivable financing involves selling your B2B invoices to a third party. There’s no debt to pay back and no ongoing charges like you’d experience with an MCA. You simply select which invoices to factor and the factoring company provides payment for them at a discount right away which will free up your working capital needs. Then, the factoring company collects payment from the customer. This MCA alternative is ideal for businesses that don’t qualify for loans and that are put off by the high fees other options come with.

Top Alternatives to Merchant Cash Advances

Thankfully, even if you’re exploring MCAs because you don’t qualify for traditional lending options, various companies may still be able to help.

PayPal Working Capital

In the modern era, many small-business owners rely on online POS providers rather than traditional credit card processors. Companies such as PayPal, Stripe, and Square all have various programs that allow business owners to tap into working capital based on the amount they process through their company. PayPal Working Capital, for example, works similarly to an MCA, but terms are a bit different. The business pays less if the balance is paid off early and the repayment terms are often more flexible than MCA terms.

OnDeck

Small-business owners that find themselves looking for funding on a regular basis may want to check out OnDeck, which offers pricing breaks for repeat borrowers. The company provides fixed-fee financing with APRs that generally range from 9 to 99 percent.

Charter Capital

Businesses that work in the B2B niche and invoice their clients should check out Charter Capital. As a factoring company, Charter Capital purchases invoices from their clients and can even provide same-day funding so that you have cash flow to pay things like business expenses. There’s an easy application process, no repayment amount and no debt spiral to get caught in. Businesses also benefit from reduced collections costs, as they’re no longer responsible for chasing down payments.

Get a Free Invoice Factoring Rate Quote

If it sounds like invoice factoring may work for your small business, get the information you need to make the best decision. Request a complimentary rate quote from Charter Capital.

November 23, 2020
What Working Capital Options Are There for Small Businesses?
Small businesses have historically turned to banks to get the funding they need, but traditional funding is expensive, and it’s always been tough to get approval. In the throes of COVID-19, approval rates further plummeted to a mere 11.5 percent, according to the Small Business Lending Index. No doubt, a result of the increasing difficulties small businesses face trying to keep their doors open amid a pandemic and make good on their payments.

As one of the most economically challenging years on record comes to a close, and small-business owners look to the future, many seek reliable working capital solutions. Below, we’ll explore what’s out there and which solutions are most viable for those persevering through the pandemic and its aftermath.

Alternative Loans vs. Traditional Loans for Small Business

There are distinct differences between alternative business loans and traditional loans offered by banks. Whereas the banks have gravitated toward federal programs and have a slew of guidelines they must follow to participate, alternative programs have been able to maintain their community focus by eschewing them. That in mind, alternative business loans are a great option when banks fall short.

Borrower Requirements

Banks have rigid borrower requirements. In short, banks are incredibly risk averse, and they often work with SBA loans. It’s hard to qualify for an SBA loan to begin with, but if a borrower defaults on one, the SBA picks up most of the outstanding balance, so the bank isn’t on the hook. Generally speaking, they’re not eager to lend cash unless they’ve got an assurance like that or you’re solid on paper; have a good credit score, have steady cashflow, are making strong profits, etc. Many small businesses simply can’t meet the criteria, and even those which did prior to COVID-19 struggle today.

Alternative business loans typically have reduced borrower requirements. Alternative funding options rose to popularity because of the obvious gap banks leave behind. There are solutions for virtually every stage of growth, whether you’re still building credit, experience revenue hiccups, or receive payments inconsistently.

Speed of Funding

It can take weeks or months to get bank funding. There are lots of regulatory hoops to jump through when you get traditional lending. Suffice it to say, even an SBA Express Loan can take 30-60 days to pay out, while more standard options typically fall in the realm of 60-90 days.

Funding is generally faster with alternative lending. Each lender and program is different, but there are alternative lenders that can deposit funds in your account the same day you’re approved. It’s quite common for a small-business owner to complete the entire process and have their cash in less than a week.

Types of Alternative Business Loans

Because traditional lending leaves small businesses underserved for lots of reasons, there is all sorts of different types of alternative lending options to help fill the gaps.

Business Term Loans

The business term loan is what comes to mind when most people think of a loan, even if they don’t know the proper term. In short, a lender provides a lump sum for a specified period of time and the borrower pays it back in installments with interest. Criteria for qualifying for business term loans is rigid. You’ll typically need excellent credit, steady cash flow, and to meet other requirements unless you’re using collateral.

Lines of Credit

Just like credit cards, lines of credit are accounts with a predetermined limit that borrowers can draw upon. When the account has a balance, the borrower must make regular payments toward it. Requirements for qualifying are similar to a business term loan.

Invoice Factoring

Although technically not a loan, invoice factoring allows B2B companies to sell their invoices to a third party, known as a factor or factoring company. The factoring company gives the business a lump sum payment that covers most of the invoice, then collects from the company being invoiced, and then sends the remaining payment, minus a nominal service fee, to the business. It’s easier to qualify for factoring because the invoice serves as collateral and instant funding is sometimes an option.

Merchant Cash Advances

Also known as MCAs, merchant cash advances are typically used by companies that accept credit card payments. The lender, typically the company processing the credit card payments, looks into how much the business earns in credit card payments and establishes a loan amount based on the income. Rather than the business making payments to the lender, the lender deducts a portion of income from future sales to cover the interest, fees, and balance. Some MCAs work like term loans, where the borrower receives a single lump some, while others work like lines of credit and the borrower can draw from their available limit. Because the payments serve as collateral, it’s usually easier to get approved for an MCA but it’s common for borrowers to pay 20 to 30 percent for the privilege.

Peer-to-Peer

Sometimes referred to as P2P, peer-to-peer lending allows individuals and groups of people to fund a loan. With today’s modern P2P platforms, individual contributions can range from a few dollars each to well into the thousands and, although these are typically everyday people, more often than not, they’re looking for proof that they’ll get their cash back with interest just like the banks would. Sometimes the platforms set the exact same criteria banks use too. That in mind, it’s not always easier to get a P2P loan than it is to get one from a bank.

Crowdfunding

Often confused with peer-to-peer lending, crowdfunding gives the investors an equity stake in the company. Although you don’t have to pay the investors back, they retain their stake indefinitely, meaning they will earn income from your business for as long as it’s producing income. An example of this is Kickstarter. Although the requirements aren’t as stringent as a bank’s, the business owner must essentially dazzle investors enough to get their buy-in and build relationships to encourage contributions.

SBA Loans

Small Business Association (SBA) loans actually come from a bank, just like other traditional lending solutions do. That means they’re not really alternative loans, but they’re widely misunderstood, so we’ll cover them here. With an SBA loan, the SBA agrees to pay back most of the loan if the borrower defaults. This gets banks to agree to lend more often because there’s less risk for them. However, the criteria for approval is very close to what you might find from a traditional bank loan. A new business, or one with bad credit, is going to have a hard time getting an SBA loan.

Equipment Loans

With equipment loans, the item you purchase is used as collateral, so it’s sometimes easier to get approved. If you need tires for your truck, machines for manufacturing, office items like computers or printers, an oven for your bakery, or similar equipment required to operate, an equipment loan may be ideal. However, you will typically need to pay at least 20 percent of the cost of the item and meet other eligibility criteria.

Best Working Capital Financing Options for Small-Business Owners

Coming out of 2020 and throughout 2021, small-business owners are likely to become even more reliant on alternative lending to get working capital than they have in the past. A few of the best working capital financing options for small-business owners are outlined below.

Funding Circle: Best for P2P Loans

Offering some of the most competitive rates among online lenders, Funding Circle is a solid P2P choice. APRs range from 12.18 to 36 percent, there’s no minimum revenue requirement, and you can get cash in as little as three business days. However, you will have to have a minimum credit score of 660, plus their process requires a business lien and personal guarantee.

Kiva: Best for Microloans

The non-profit crowdfunding platform Kiva offers interest-free loans of $1,000 to $10,000. It relies on the premise that everyday people will read your personal story and want to fund your loan, with each person providing $25. In the background, Kiva actually works with larger lenders and full underwriting teams who fund the loans in a more traditional manner. However, the lenders are more willing to loan because some of their risk is mitigated by people chipping in.

Accion: Best for Startup Business Loans

The non-profit Accion provides microloans and general small-business loans ranging from $200 to $750,000 and pair it with counseling and mentoring to make entrepreneurs more successful. Their goal is to help the most vulnerable groups succeed, and as such, they focus on lending to women, veterans, people with disabilities, Native Americans and other minority business owners. The minimum credit score starts at 575 and APR ranges from 7 to 34 percent for most loans.

OnDeck: Best for Repeat Borrowing

If you have a credit score of at least 600, OnDeck may be able to get you cash on the day you apply. However, the company has a fixed-fee structure, which means you won’t save anything by paying the loan off early and APRs can range from 9 to 99 percent.

StreetShares: Best Balance of Rates/Requirements

Businesses that don’t usually qualify for loans due to limited time in business or low revenue may have better luck with StreetShares. With a minimum credit score of 600, borrowers can qualify for as much as 20 percent of their annual revenue and get an APR somewhere between 8.00 and 39.99 percent.

Charter Capital: Best for B2B Companies with Invoices

Offering invoice factoring for a wide range of industries, Charter Capital provides same-day funding without taking on a loan that needs to be repaid. Because factoring relies on the creditworthiness of the customer paying the invoice, even businesses without good credit can qualify and there’s no long-term contracts.

What Are the Uses of Alternative Loans?

Alternative loans can be used the same way traditional loans can, though some are set up to help with specific needs.
- Payroll
- Equipment
- Real Estate and Expansion
- Inventory
- Vendor Payments
- Working Capital
- And More
How to Obtain Alternative Financing

Getting started with alternative financing is easier than you might think.

1) Find out which types of alternative financing are right for you. Use the list on this page to get a better feel for which types work best for various needs and what options are likely to deliver the best value.

2) Talk to various lenders. See if they will provide you with a free estimate or rate quote, but be wary of companies that do hard credit checks in order to do this. Whereas a soft check won’t harm your credit score, it can be difficult to get approval for a loan if you have recent hard inquiries.

3) Ask for it in writing. Look over your contract and their proposed rates to ensure everything is in order. Watch for hidden fees and penalties. Try to find options you can pay off early or that don’t require contracts.

4) Get advice if you need it. Use resources like the BBB and review sites to see what experience others have had with a lender. Talk to other business owners who have had needs similar to yours and have gotten alternative financing.

5) Compare your options. When you have a group of lenders and packages, compare them together and see which one is right for you.

Explore Invoice Factoring with Charter Capital

If getting an instant cash injection without taking on a loan sounds ideal for your situation and you invoice other businesses, get a free factoring rate quote from Charter Capital.
September 14, 2020
11 Ways Small Business Owners Can Reduce Tax Preparation Stress

If you’re a small business owner, tax season can be one of the most stressful times of the year. It doesn’t have to be so challenging, though. We’ll go over 11 simple things you can do to breeze through filing this year and beyond below.

Why is Tax Season So Stressful for Small Business Owners?

Most small business owners are responsible for multiple aspects of their companies. You’re probably the manager, accountant, human resources department, and can add dozens of other titles to your name too. That makes it challenging to be organized throughout the year, to begin with, but as tax season approaches, you’ve got deadlines with potential bills and fees hanging over your head as well. If this sounds familiar, read on. We’ve got you covered.

Managing Tax Season Stress is Easy When You Set Yourself Up for Success

Meditation and self-care can only go so far when minimizing tax stresses as a small business owner. Knowing what to focus on and being prepared are keys.

1. Know Your Tax Filing Deadline

The IRS has multiple deadlines throughout the year, with certain types of entities being required to file tax returns by March 15. Sole proprietors get a small break and have the same April 15 deadline as individuals.

It’s worth noting that even though the IRS has extended the deadline in the past, the agency plans to stand firm on the traditional April 15 deadline this year, per CNBC reports. While you can file for an extension if you’re in a pinch, overlooking the date entirely can leave you with penalty fees and interest. Mark the date on your calendar now and set aside time to tackle the various preparation tasks well in advance.

2. Don’t Go it Alone, Hire an Accountant

Particularly with all the self-help tools available today, it can be tempting to save a few bucks by handling your own tax return. However, tax preparers can reduce your stress by providing an extra layer of assurance that you are less likely to get audited and have an issue down the line. Plus, tax professionals stay on top of all the latest changes, so you may wind up saving money overall by not missing out on potential tax deductions.

3. Separate Your Business and Personal Finances

Business owners often mingle their personal and business finances. It’s the simplest thing to do when you’re running the business alone and aren’t taking a standard paycheck or salary. However, experts caution against this practice. “As a business owner, establishing a distinct separation between your personal finances and your business finances is pivotal for protecting your own assets and credit,” the Small Business Administration (SBA) reports.

If you aren’t already tracking finances individually and using separate bank accounts, make the split now to reduce potential issues in the future. You can also use a credit card for business transactions to make splitting them from your personal expenses easier.

4. Keep Your Tax Information Organized

Following number three on this list will go a long way toward keeping your finances organized, but it’s not enough by itself. You should have a system in place to keep receipts organized throughout the year, so you aren’t forced to dig for papers and possibly overlook expenses you can write off when tax season approaches. To simplify things further, you may even want to invest in business finance software that can help you stay organized throughout the year to ensure you have accurate records.

5. Create a Tax Schedule for Other Quarterly Taxes

Medicare taxes, payroll taxes, Social Security, and more typically have quarterly due dates. At this stage, you may also owe state and federal taxes based on your anticipated annual earnings too. Meeting these deadlines helps ensure you stay on track and don’t wind up with a surprise bill when it’s time to pay your small business taxes.

6. Make Sure Your Business is Structured Properly

Rules are different for sole proprietorships, partnerships, LLCs (limited liability companies), and S corporations. A tax professional can walk you through the options and help identify which one is not only appropriate for your situation but will allow you to minimize your tax liabilities too.

7. Contribute to Your Retirement Account

One of the most recommended retirement account options for self-employed people is the SEP IRA. This employer-funded retirement account allows you to contribute nearly ten times more than you’d otherwise be able to contribute to a traditional IRA and reduce your business income tax in a big way. “But they also carry a contribution quirk,” explains CPA and former IRS agent Kemberley Washington for Forbes. “As an employer, you must contribute the same percentage of employees’ salaries to all those eligible for a SEP IRA.” With that in mind, you may want to go an alternate route if you have employees and don’t want to make everyone equitable shareholders.

8. Lower Your Tax & Maximize Your Refund

If you don’t already have a retirement account, setting up retirement plans for you and your team can help too. “Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA, or qualified plan (like a 401(k) plan.),” the IRS notes. “A tax credit reduces the amount of taxes you may owe on a dollar-for-dollar basis.”

You may also want to explore often-overlooked deductions, such as mileage, and expenses beyond employee wages, like insurance premiums. If you’re not sure what to look for or if you qualify for certain deductions, check with a tax professional.

9. Track Carryover Tax Deductions

It’s easy to forget what you’re entitled to from prior years, so pull out a copy of your income tax returns from last year to check. “Losses may either be recognized in the current year, carried back to the previous two years, or carried forward for up to a maximum of 20 years,” reminds Chron small business accounting expert Leigh Richards. You may also be able to deduct depreciation from prior years or have other carryovers.

10. Stay in Touch Year-Round with Your Tax Planning

The best way to make tax season stress-free is to keep up with tax planning throughout the year. Particularly if you’re working with a tax planner who can help you make strategic decisions, you may be able to lower your liabilities even more. However, being organized and prepared to file will make the tax filing process simpler regardless.

11. Improve Your Cash Flow for Easier Forecasting and Payments

Keeping up with quarterly payments can be a serious challenge if your cash flow fluctuates or you have slow-paying clients. Invoice factoring, or the process of selling your unpaid B2B invoices to a factoring company, can make it easier to forecast income and provide you with cash to cover expenses if your tax bill is more than you can comfortably cover. To find out if factoring is a good fit for your small business, start with a free quote from Charter Capital.

Disclaimer: The author of this article, Charter Capital, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. We do, however, hope this article provides you with ideas to discuss with your tax, legal and accounting advisors and that it is helpful in reducing your tax preparation stress.

September 9, 2020
Unpaid Invoices: How Do You Ensure Your Clients Pay On Time?

If you’re worried your clients won’t pay their unpaid invoices due to COVID-19 and the residual economic ripples, you’re not alone. In an era where 55 percent of “temporary” small business closures have become permanent, according to Business Insider, and business bankruptcies are skyrocketing 26 percent per Wall Street Journal reports, it’s clear businesses are struggling with cash flow problems.

Banks and financing companies are all too aware of this. Sometime around April, roughly one in four consumers saw their credit card limits slashed, or accounts closed unexpectedly, according to LendingTree. The Federal Reserve’s most recent survey paints a grim picture too, saying banks are raising the requirements to get loans; better credit and increased collateral are the new standards. “Major net shares of banks that reported reasons for tightening lending standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so,” the report reads.

Your Clients May Leave You with Unpaid Invoices

The risk that comes with being unable to collect on unpaid invoices is real. Seemingly solid, good-paying companies are turning delinquent overnight, and if you’re invoicing clients after you’ve provided them with services or goods, you are extending them credit too, though typically not with the same protections banks and financing companies secure for themselves. Preliminary findings from the B2B AI platform Sidetrade show a 23 percent hike in delinquency in the U.K., 52 percent in France, and more than 80 percent in Italy. Numbers for the U.S. have not been released, but unofficial reports indicate the problem is growing across America too. Analysts at McKinsey predict delinquency may grow to three times its current levels by 2022.

Can Your Outstanding Invoices be a Tax Deductible?

Sometimes people hope their outstanding invoices will help them out, come tax time. Companies that practice accrual accounting, meaning they record expenses and revenue when the transaction occurs, can usually deduct overdue invoices as a bad expense when they file the next year. However, businesses that use a cash-basis method, meaning they log expenses and revenue when cash changes hands, cannot deduct them from taxes since the payment was never recorded as part of their income to begin with.

Should You Continue Working for a Non-Paying Client?

When someone owes you a balance, and they’re not making good on it, it’s ill-advised to continue working for them. However, when the balance is paid, it’s a matter of personal choice. Just be sure to address the loopholes that enabled them to become delinquent before resuming work.

The Legal Route: Is Court a Viable Option for Unpaid Invoices?

Naturally, most businesses try to work with a delinquent payer through debt collectors before taking legal action. However, collection agencies can only do so much. So, when it becomes clear the money isn’t likely to materialize, businesses may have little choice but to retain a lawyer.

Determine if going to court is worthwhile.

In the initial stages, an attorney may be able to send a demand letter on your behalf to someone that owes your business money in order to get the wheels turning. That can help if the customer is prioritizing payments and struggling, though it’s rarely worth the expense if the invoice amount is lower. Going to court can also work too, but most states set a minimum for small claims court—typically around $2,000—so it’s not normally suited to smaller invoices.

Apply New Strategies for Non-Paying Customers

Keeping your emotions in check and maintaining good records are practices to continue, but you can reduce the risk of delinquency and maintain strong business relationships by exploring new strategies too.

1. Make sure you followed the procedure and then follow up politely.

Literally every business is in crisis these days and emotions are running high. Particularly as businesses cope with shifting priorities, it’s easy to overlook an invoice. It would be understandable if someone on your team made an invoicing error too. If you notice an account has become delinquent, take a look through their history to ensure all billing protocol was followed on your end. Then, reach out to the customer with a gentle reminder or nudge to let them know they’re overdue.

2. Give discounts on unpaid invoices and charge a penalty.

Discounts on unpaid bills are a positive way to motivate people to pay their invoices on time or early. A reasonable late fee or interest fee is acceptable too. Be sure your policies clearly state that you’ll be doing this and include mentions of it on your invoices as well as on any billing correspondence.

3. Abandon the stiff business approach.

Ensuring “continuity and compassion in customer assistance” are paramount going forward, say McKinsey analysts. They anticipate customer service needs growing and recommend increasing customer service channels as well as customer care associates to keep things running smoothly. However, you may want to consider giving more flexibility than normal. For example, if you have a great client who has always been a good payer and they’re a bit late, it’s ok to waive their fee to maintain the relationship. You may also want to explore things like extended payment terms or a more flexible payment plan if you can afford to do so.

4. Consider collections, arbitration, mediation, and court.

The legal system is still a viable option for delinquent payers but bear in mind the courts are inundated with issues surrounding late payments courtesy of COVID-19’s ripple effect. It may be better to save this as a final step after all other options have been exhausted.

5. Get Started with Invoice Factoring to Solve Cash Flow Issues

An invoice factoring service can free you from the entire collections process and give you the working capital you need right now. It involves selling your overdue invoices to a factoring company. Each works differently, but you can generally expect a lump sum upfront that covers most of the outstanding balance. From there, the factoring company handles the collection process and sends you any remaining cash minus a nominal fee when the customer pays. Factoring companies look into the creditworthiness of the customers before accepting unpaid invoices, which provides assurance they’ll pay.

Get Started with Invoice Factoring

For more than 20 years, Charter Capital has been helping businesses grow stronger through invoice factoring. With same-day funding, low rates, and flexible terms that allow you to factor on an as-needed basis, we can help you too. Get started with a complimentary invoice factoring rate quote.

August 31, 2020
Survival Instincts: American Small Businesses Doing What It Takes

For all businesses, being resourceful is essential when costs rise. With the current economic conditions, many companies are finding creative ways to deal with rising costs. At the top of this list is the cost of energy and fuel. In an April survey, American Express found that 86 percent of small-business owners are feeling the effects of higher energy and gas costs.

Many business owners are using this lull in the economy to closely assess their costs and cash flow. In lean times, savvy business owners make management improvements that they have thought about for years. Discipline and resourcefulness established in difficult periods can help give business owners the tools they need to maintain their business over in the long term. Simple, but meaningful, strategies can make a big difference to the bottom line: Reviewing/revising budgets, and sticking to them; Outsourcing (payroll, accounting, HR, IT); Getting receivables in line (Charter Capital can help with that); Cutting postage and overnight fees by sending document via email; Buying used equipment for non-critical tasks.

Since approximately fifty percent of every dollar in the economy is generated by cash-starved small businesses, their effects can be felt throughout the economy. If they are unprepared and their operating expenses go up, they may not be able to pass along these costs quickly enough to keep their business cash flow positive. Without proper planning and some outside help, very few small businesses have large enough cash reserves to ride out a recession.

In an increasingly competitive global marketplace, small business owners shouldn’t take anything for granted. Entrepreneurs should always be looking at ways to stay lean and efficient. No matter the size of the company, it should be a part of the “corporate culture.”

September 4, 2008