FINANCE BLOG

Improving one’s financial literacy is a goal that involves dedicating oneself to understanding and managing finances. No matter how strong the demand for your business or how solid your business plan, you still need some basic financial knowledge for long-term success. Financial literacy applies to both internal factors, such as how you manage expenses, and external elements, like understanding predatory lending practices. In this blog post,  we provide invaluable insights to boost your financial knowledge and empower your financial decisions.

Managing and Organizing Small Business Finances

By segmenting and organizing your finances, you can prevent missteps and optimize your money management. Here are some financial basics:

• Financial Planning: Separate personal finances from business finances. This involves opening a bank account dedicated to your business. In this way, you avoid mixing personal funds and business funds. You also avoid accidentally spending money on personal things that should be invested back into your business.
• Review Ongoing Expenses: Record all transactions. With meticulous bookkeeping, you have a running record of your finances. You can use this later to run reports, identify trends, examine spending, or evaluate revenue sources.
• Budgeting: Create and stick to budgets. As a small business, you should build income and expense budgets around goals, for example, profitability goals, sales goals, margin goals, etc.
• Prepare Ahead: Set aside emergency funds. While you can’t account for every possible emergency, you can set aside enough money to keep your business afloat for a specific time period, such as two months. This provides you with funds to withstand emergencies or general economic declines such as a drop in revenue, equipment failures, or unanticipated maintenance or repair issues.
• Seek Professional Advice: Find a financial advisor and/or professional tax preparer. Many business owners understand their industries well, but few have the broad financial knowledge to fully understand all the intricacies of the banking and tax systems. Having a knowledgeable financial partner and advisor that can help explain finances and taxes can help you leverage financial instruments and help you avoid potential issues associated with tax preparation and payment.

Types of Financing and Small Business Loans

You have a few options when it comes to funding your small business, and the right choice can depend on the age of your company, your company size, or revenue amount.

• Term loans: A term loan provides you a fixed loan amount that you pay off over a specific, limited period of time. Vehicle and equipment loans are examples of term loans.
• Lines of credit: A line of credit (LOC) is a predetermined maximum amount you can borrow, using as much of it as you need as you need it, and paying principal and interest on only what you’ve borrowed. As you pay back the borrowed amount, you can continue to borrow against the LOC.
• Small Business Administration (SBA) loans: SBA loans come from traditional lenders, but they’re backed by the SBA. The SBA has specific eligibility requirements, borrowing parameters and covenants to meet, so SBA loans are not available to all businesses.
• Equipment Financing: Equipment financing includes loans or leases. An equipment loan is a fixed term loan that uses the machine being financed as the loan collateral and you own the equipment. Leasing is a type of financing where you basically rent the equipment, making monthly payments to the leasing company, but at the end of the lease term you typically have the option to return the equipment or purchase it.
• Angel Investors: A cash investment from a family member, friend, or other entity is often considered an angel investment. Typically used by start-up companies, angel investors often ask for an equity stake in the business, rather than a set monthly repayment term.

Taxes, Tax Credits, and Section 179

Benjamin Franklin said, “The only certainties in life are death and taxes.” Taxes play a significant role in the financial landscape of a small business and there are many types of taxes that must be considered. But with the help of a tax professional, you can take advantage of tax credits and other forms of tax relief.

• Income taxes: Just like individuals, businesses must pay income taxes. The amount paid is dependent upon the business structure (sole proprietorship, partnership, Limited Liability Corporation (LLC), S Corp, or C Corp) and the income amount.
• Payroll taxes: Taxes typically withheld from an employee's paychecks include FICA (Federal Insurance Contributions Act) taxes (Medicare and Social Security) and federal, state, and local income taxes, if applicable. Businesses are then responsible for paying these taxes, along with federal unemployment tax (FUTA), to the Internal Revenue Service (IRS).
• Property taxes: Business property tax is the tax you pay on the assessed value of land or real estate owned by your business. The tax rate is based on the assessed value of your business's property, not its fair market value. Business property taxes are typically assessed by local and state taxing agencies, not the federal government, and not all states and local areas assess these.
• Sales taxes: Not all businesses are required to collect and remit sales tax. Sales tax is dependent upon the local or state tax laws, the type of product sold or service provided, and whether the product is sold for distribution and resale.
• Section 179: Section 179 allows for accelerated depreciation of an asset, enabling you to deduct the full cost of purchased equipment in the first year in which it was put into service (limitations apply), thus significantly reducing your tax burden. If you choose not to use the Section 179 deduction, you still have the option of utilizing standard deduction schedule to annually benefit from depreciation.
• Tax Credits: There are a variety of tax credits available to businesses, and the list and qualifications for these continually changes. Not all businesses qualify for all the credits so it’s important to understand which credits apply.

Knowing which taxes you must pay, and when, is only part of the story, there are also forms to submit and deadlines to meet, and these vary by jurisdiction and type of tax. A knowledgeable tax accountant is an invaluable resource for any business and can help you navigate the complex world of local, state, and federal taxes.

Beware of Predatory Lending Practices

There are a lot of lenders out there looking to take advantage of small business owners. Some may employ the following tactics:

• Hidden fees: Some lenders may advertise loans with good rates only to hit you with stiff fees after you sign on the dotted line.
• Misleading terms: Lenders may not discuss all of the term details as you negotiate your loan. Then, after you’ve signed the agreement, they may leverage a clause hidden deep in the fine print to increase the interest rate.
• High-pressure sales tactics: If a lender is pressuring you to complete the loan process, that’s a red flag. The agreement may have more upside for them than you, so you should look elsewhere. In some cases, a broker may simply be after a commission—one that you have to pay when you close.
• Daily or weekly auto-drafted payments: These are typically used by merchant cash advance companies and can have disastrous effects on the cash flow and profitability of a company.

Find Multiple Financial Partners

Most financial institutions are not one-size fits all providers. Most business have a banking relationship with a local bank, bank branch, or credit union and rely on them for checking, savings, and credit or debit card access. Some of these also provide small business loans or lines of credit. But it can be very helpful to a small business to have a couple of financial partners on which to rely.

When it comes to equipment financing, Keystone Equipment Finance Corp. can serve as a financial partner. We can provide the funding to help you pay for the machinery and vehicles you need to make your business excel. Whether you’re just getting started or have been in business for a considerable time, Keystone Equipment Finance Corp. can guide you through your options, helping you choose the one that best fits your budget. Reach out today to see how.

Additional Resources:

Small Business Tax Obligations: Payroll Taxes

Small Business Tax Rate: What to Know