Category Archives: Small Business Financing

SBA Hits Its’ 7(a) Loan Cap Halting Funding for Remainder of Fiscal Year

Unfortunate news was released Thursday, July 23rd from the Small Business Administration (SBA) stating the $18.75 billion cap was reached at noon and therefore halting the funding of all remaining loan applications for the remainder of the 2015 fiscal year. The SBA did expect to reach the cap by late August, however it has come early this month. Continue reading

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A Simple Tax Mistake: Mixing Equipment and Supplies

Both first-time and experienced business tax filers get tripped up by which expenses are considered equipment vs. supplies. Supplies include things that you use during the year (e.g. printer paper, pens, toner cartridges). Equipment (i.e. capital expenditures) are typically higher-value items that will last significantly longer than one year. For example, a new computer, cubicles, printer, and a fax machine are examples of equipment. Continue reading

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Ready to Apply for Financing, but Don’t Know Where to Start? A FICO Score is a Must!

Financing 101, Small Business owners need a Fico score in order to qualify for loans. In simple terms it is a measurement representing the credit-worthiness of a business and the likelihood the entity will pay off debt…….

The FICO® Score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Score is calculated.

Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score.

How a FICO Score breaks down

FICO credit score chart

These percentages are based on the importance of the five categories for the general population. For particular groups—for example, people who have not been using credit long—the relative importance of these categories may be different.

Importance of categories varies per person

Your FICO credit score is calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.

The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact that it would for someone with a much different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO® Score.

Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Score chart are for the general population, and will be different for different credit profiles.

Your FICO Score only looks at information in your credit report

Your credit score is calculated from your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.

What the FICO Score ignores?
What are the minimum requirements to have a FICO Score?
What’s in my credit report?

Payment history (35%)

The first thing any lender wants to know is whether you’ve paid past credit accounts on time. This is one of the most important factors in a FICO® Score.

How is credit score calculated from payment history?

Amounts owed (30%)

Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO® Score.

How is credit score calculated from amount owed?

Length of credit history (15%)

In general, a longer credit history will increase your FICO® Score. However, even people who haven’t been using credit long may have a high FICO Score, depending on how the rest of the credit report looks.

Your FICO Score takes into account:

  • how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
  • how long specific credit accounts have been established
  • how long it has been since you used certain accounts

Community forums: Calculating Average Account Age

Types of credit in use (10%)

The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.

How is credit score calculated from types of credit in use?

New credit (10%)

Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.

visit www.myfico.com

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Credit 101, What is your Fico Score Made up of

FICO scores continue to serve as the first and most readily available indicator of credit risk. Therefore it is important to better understand what FICO scores look at. There are five categories that make up these scores:

  1. Payment History – 35%
  2. Amounts Owed – 30%
  3. Length of Credit History – 15%
  4. New Credit – 10%
  5. Types of Credit – 10%

As you can see, the most influential portion of this score is the payment history. The payment history is reported by credit grantors, including open and closed accounts. It is important to remember that payment in full does not remove the payment history.

Credit and collection accounts remain on the credit report for seven years plus 180 days from the date of the original delinquency and/or date of last activity. Courthouse records remain for seven years from the date filed. Bankruptcy chapters 7 and 11 remain for 10 years from the date filed.  While tax liens remain 10 years from the date filed as well, they could remain indefinitely if they go unpaid.

It is up to each individual to make sure his/her credit report is accurate. According to the FACT Act amendments to the Fair Credit Reporting Act requires each of the credit bureaus to provide consumers, upon request, one free personal credit report on any 12 month period.

Business credit is critical to the success of your business.  Often times business owners are not aware of the impact their personal credit has on their business.  Take action today by knowing what it being reported on your personal credit report.  We have listed some helpful links below to get you started.

www.annualcreditreport.com

 

  • Website recommended for free annual credit reports.  You are allowed one free copy each year for each of the credit bureau companies.
  • It does not come with a credit score for free but you have the ability to purchase your score at the time of ordering your free report.
  • Each of the bureaus now allows you to dispute any items on your report online.  They make it very easy.

www.ftc.gov

  • Federal Trade Commission has valuable information regarding all things credit related.   The best way to navigate the site is use the search engine in the top right corner and type what you are looking for (i.e. credit repair, identity theft, credit report, etc).
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How to Read a Balance Sheet: Working Capital

Working capital is simply current assets minus current liabilities. It’s the best way to judge how much a company has in liquid assets to build its business, fund its growth, and produce shareholder value.

If a company has ample positive working capital, it’s is in good shape, with plenty of cash on hand to pay for everything it might need to buy. But negative working capital means that the company’s current liabilities exceed its current assets, removing its ability to spend as aggressively as a working-capital-positive peer. All other things being equal, a company with positive working capital will always outperform a company without it.

Working capital is the absolute lifeblood of a company. For most companies, acquiring working capital was 99% of the reason they went public in the first place, whether they wanted to build their businesses, fund acquisitions, or develop new products. Anything good that comes from a company springs from working capital. And if a company runs out of working capital, but still has bills to pay and products to develop, it’s got big problems.

A key comparison

You can discover some pretty cool things by comparing working capital to a company’s current market capitalization. Market cap equals the value of currently outstanding shares of stock, plus any long-term debt or preferred shares (a special form of debt). You add in those last two factors because anyone buying the company would not only have to pay the current market price, but also incur responsibility for all its debts.

To compare the two metrics, divide working capital by market cap. Let’s use Joe’s Bar and Grill for another example. We know that Joe’s has $10 million in current assets and $5 million in current liabilities. If you also know that Joe’s Bar and Grill has no debt, and 1 million shares outstanding at $10 a pop, you can figure out the working capital-to-market capitalization ratio

(Cuent assets – Current liabilities) / ((Shares outstanding * Share price) + Debt)

Now let’s plug in those numbers from Joe’s:

($10 million – $5 million) / ((1 million * $10) + 0) = 0.5 = 50%

All that math tells you that working capital backs up 50% of the market’s valuation of Joe’s Bar and Grill. Theoretically, if you liquidated Joe’s tomorrow, you’d get $0.50 on the dollar from working capital alone. This is a tremendous amount of money to have at your disposal, and a huge plus for Joe’s. Basically, if you see working capital-to-market cap ratios of 50% or higher, your company’s looking good.

(For retailers and clothing manufacturers in particular, you might want to subtract inventories from working capital before you check that percentage, just to make sure the resulting number’s not too different.)

Even though working capital is nifty, simply comparing a company’s cash hoard to its market capitalization can also be pretty enlightening. Simply divide the company’s cash and equivalents by its market capitalization. If 10% or more of your company’s capitalization is backed up with cold, hard cash, you know it has ample funds to keep itself going.

By Motley Fool Staff

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