Our friends at Guidant Financial had some great tips about using retirement funds or Rollovers for Business Start-ups (ROBS) to finance a business.  The concept isn’t new, yet it is unfamiliar to many entrepreneurs. As a result, there are a lot of misconceptions about the use of ROBS that may be stopping would-be business owners from pursuing their dreams.  Here's a summary of Guidant's truths about ROBS.

"ROBS involve using money from an eligible retirement account to finance the purchase of a business or franchise. To make a long story short, a corporation is formed, and that corporation then sponsors a 401(k) plan. Funds are rolled from an existing retirement account into the new 401(k) without triggering a taxable distribution. This new 401(k) purchases (or invests in) shares of the corporation, which can then purchase a business or franchise.

In essence, ROBS allow you to take control of your finances and invest in yourself. Here’s the truth behind the most common ROBS myths:

1. It’s not tax avoidance.  Using the ROBS structure isn’t a way to evade taxes by any means. The Employee Retirement Income Security Act of 1974 (ERISA) was set up explicitly to encourage investment in small businesses – businesses that pay taxes.

2. ROBS are an investment, not a loan.  With ROBS, you’re investing in your new business or franchise, not taking on debt. This means you won’t have to make monthly loan payments or incur interest, and you have the opportunity increase the value of your investment.

3. You can use ROBS to diversify your nest egg.  You don’t have to take every penny from your existing retirement fund for ROBS to work. Many people only use a portion of their retirement assets, leaving the remainder in their existing 401(k) or IRA to be invested traditionally. What’s more, the ROBS arrangement can be used in conjunction with a small business loan or other financing option, so you can diversify your investments even further.

4. ROBS are not for absentee business owners.  If you’re hoping to use ROBS, you must be a bona fide employee of your new business. As a guideline, Guidant recommends you work at least 1,000 hours per year to be considered a bona fide employee.

5. ROBS cannot fund an LLC.  To meet the compliance requirements of Rollovers for Business Start-ups, the business must be a C Corporation. A Limited Liability Company (LLC), Partnership or S Corporation don’t meet the necessary requirements.

6. Getting funded using ROBS can take as little as three weeks.  Depending on the state in which you’re filing, and how fast you’re able to file the necessary paperwork, funding can take as little as a few weeks.  Most are completed in less than 30 days.

7. ROBS are not the same as Self-directed IRAs.  While it’s possible to finance a business with both self-directed IRAs (SDIRAs) and ROBS, there are some major differences between the two. If you use an SDIRA, the owner may not work for the business they invest in or take a salary. The investment amount is also potentially liable for the unrelated business income tax (UBIT), which can get very expensive. With ROBS, the 401(k) owner must work for the new business, and the UBIT doesn’t apply.

8. ROBS can be used to fund start-ups.  As the name suggest, Rollovers for Business Start-ups are a great option to finance not only start-ups, but also purchases of existing businesses and franchises.

To some, the ROBS process can appear to have complex rules and regulations. But if you have a qualified retirement plan with a balance that’s sufficient for your start-up needs and work with an experienced company to support its formation, it can be a great option to start or recapitalize your business debt-free. Ready to get started?"

If you want more information about how to use your retirement money to fund a new small business, leave me a comment.

This was information was provided with permission from Guidant Financial, Bellevue, WA.

Here’s a review of the top three free credit report websites:

The three truly free credit reporting sites are Quizzle, CreditKarma, CreditSesame, and WalletHub.  There are many other credit reporting sites that say they provide a free credit report, but often you have to buy a credit monitoring service to get the “Free” credit report or you have to provide a credit card number….so what makes this free?  Although Quizzle, CreditKarma, CreditSesame, and WalletHub do provide credit reports for free, they each have their own nuances and unique features that you will want to know about.

But before we get into the nuances of each service, it’s important to point out that the credit score you receive from free credit services is not based on the FICO scoring model.  FICO, a proprietary credit scoring model developed by Fair Isaac Company in the 1980’s, is used by the majority of banks and lenders in the US and is the score provided by the three national credit bureaus: Experian, Equifax, and TransUnion. The credit score you receive from the free credit agency is based on models developed by that credit agency and is only similar to a FICO score.  So, even though the scores from the free credit reporting services are not official FICO scores, they can help you monitor and improve your scores, if need be.  If you need to see your credit scores exactly like  lenders might, go to the official myFICO website.

Quizzle gives you a free credit report every six months along with a free credit score known as a VantageScore – a credit scoring process that was developed jointly by Equifax, Experian and TransUnion, and is widely used by lenders. There are differences in how the two models calculate scores.  For instances, VantageScores use a score range from 501 to 990, compared to 300 to 850 used by FICO. VantageScores also require a much shorter credit history than FICO, making it more likely to generate a score for people with very little credit. In addition, VantageScores assign a hierarchy to late payments, where a late mortgage payment will hurt your score more than a late credit card payment.  FICO treats all late payments the same. Because creditors may report different information to the three bureaus, FICO scores may be different between Equifax, Experian and TransUnion.

Quizzle also provides lots of “Credit Builder” tools such as a credit comparison, credit timeline, credit trending, and a score analysis that are very helpful in determining how certain activities might impact your scores.  If you want to pay for their services, Quizzle offers packages with additional benefits beyond what you get for free.  For example, the Quizzle Pro Plan provides you with a monthly credit report, credit score update, and 24/7 monitoring for less than $10 per month.

Credit Karma offers a free credit report and scores anytime, not just limited to one every 6 months, and you can also sign up for free automatic credit alerts, email alerts when important changes occur, and identity theft tracking and protection.  Credit Karma offers several simulators and calculators on their website so you can manage your credit better.  Credit Karma tracks your credit using information from two of the three credit reporting agencies, TransUnion and Equifax. However, Credit Karma does not provide your actual FICO scores rather the VantageScores.

Credit Sesame provides a single bureau credit score on a monthly basis and tools that can help you monitor your credit. You can also sign up for daily monitoring alerts that inform you of day-to-day changes to your score or credit profile.  The credit score you get through Credit Sesame is called the "Experian National Equivalency Score" and is not commonly used by lenders, though it is available to them. Scores offered through this method vary from 360 to 840, compared to 300 to 850 for FICO scores.  In addition to offering a free credit score, Credit Sesame also provides suggestions and advice that could help you improve your score over time.

WalletHub gives you a single credit score based on the TransUnion VantageScore. WalletHub updates the credit score and credit report daily and provides tailored advice about how to improve your score.  They also provide tools to help you save money for future plans such as buying a house or car. 

So which credit reporting site is right for you?  You don’t have to pick just one. If you want all of the benefits that these services offer, and a representation of your credit score from the three credit bureaus, you can easily sign up for all three because there is no cost to you.  The most important thing is to stay on top of your credit profile, which means checking your credit regularly or getting some type of credit monitoring service. Also, remember that the scores you see on these free sites are only approximations of what your lenders might see.  Whether you use just one site or all three, they all provide crucial data to you. Since all three of these sites offer this important information for free, you have no excuse not to sign up for at least one of them.

Whether you’re just considering a new business idea or already act as a sole proprietorship or general partnership, you may wonder if incorporating your business is right for you. Discover why the benefits of incorporation can outweigh any downsides.

The Pros

• Secure your assets, gain tax breaks. Corporation owners enjoy limited liability protection, and are typically not personally responsible for business debts. So creditors can’t pursue your home or car to pay business debts. Another plus: corporations often gain tax advantages, writing off such things as health insurance premiums, savings on self-employment taxes, and life insurance.
• Grow your corporation for now—and the future. Incorporating bolsters credibility, and may help you reach potential new customers and partners. And while you can’t live forever—your corporation can. Even if an owner dies or sells interest, the corporation still exists.
• Easy transfer and faster funds. Corporation ownership can be easily transferable (with some restrictions on S corporations). Capital can be raised more easily through the sale of stock. Another advantage is that many banks prefer handling loans with incorporated borrowers.
• Ready for retirement. Retirement funds and qualified plans, like a 401(k), can be easier to establish.  

The Cons
Corporations do have some potential disadvantages, including:

• Double taxation. C corporations are subject to double taxation of corporate profits when income is distributed as dividends. This can be avoided by electing S corporation tax status with the IRS.
• Ongoing fees. You must file articles of incorporation with the state, plus applicable fees. Many states impose ongoing fees—which are steeper for a corporation than for a sole proprietorship or general partnership.
• More record keeping. Corporations must follow initial and annual record-keeping requirements—which sole proprietorships, general partnerships and limited liability companies (LLCs) avoid.

If you are considering incorporating, have questions about company structures, or are ready to take the leap and form a legal business entity, check out Bizfilings for the answers.

Business financing is still challenging, but when the business in question is a home-based business, that endeavor suddenly becomes even trickier. Creditors and banks often don’t take home-based businesses seriously so they may be hesitant to lend to them. However, funding is available for home based business, if you know the steps to take and where to look. Here are the top 10 financing tips for home based businesses:

1. Make sure your credit is good and your personal finances are in order. 

2. Establish a legitimate business presence. 

3. Prepare a business plan.

4. Loan Yourself money. Use your own savings or retirement funds.

5. Look to family and friends. Mom and dad may require a little less due diligence than the neighborhood bank. If a good friend or family member wants to invest, that's great -- but be sure to draft a business plan and write up all the appropriate contracts.  

6. Partner with your vendors. If your business is already up and running, you may have vendors who believe in you and in your company. If your vendors have expressed an interest in investing in your business, draft a proposal and submit it to them.

7. Apply for microloans. Some banks, governmental organizations, and business groups offer microloans, which are exactly what the name suggests: very small loans that generally range between $100 and $25,000. Also, most microloans are issued based on your character and management ability rather than on an established credit history. Microloans, in turn, can serve as a springboard to additional financing, and financing establishes your company's creditworthiness.

8. Solicit government agencies. There are several sources of government funding to consider. The Small Business Administration (SBA) doesn't issue loans as such, but they do guarantee loans given by private lenders and banks. This reduces the risk that the bank assumes and makes them more likely to loan to your new business. Contact your local chamber of commerce for information on which government entities offer financing help.

9. Apply for grants. There are many different types of grants, and there could be one for your home-based business. However, it should be noted that grant requirements are strenuous, and there’s a great deal of competition for small and home-based business grants.

10. Talk to angels. Angel investors invest in fledgling businesses, generally because they know a good thing when they see it. They look for companies that exhibit good growth prospects, have a synergy with their own interests, or compete in an industry in which they have succeeded. If you are seeking equity capital from angel investors, you must be prepared to give up some equity -- and be answerable to your investor.
 

I came across a reputable video produced by the National Association of Realtors™ explaining the new closing and disclosure rules for mortgage transactions.  I wanted to pass this along to you because you are in or have expressed an interest in real estate.  You can access the video here.

Here are some key points made in the NAR video:

1.  The old “Truth In Lending” and “Good Faith Estimate” are now replaced by the new “Loan Estimate” (3 pages), which must be provided to a borrower within 3 business days after application.
2.  The “HUD-1 Settlement Statement” is now replaced by the “Closing Disclosure” (5 pages), which must be received by the borrower 3 business days PRIOR to closing.
3.  Transaction closing time will take longer, so add about 2 weeks to the time line.  Simultaneous or back-to-back closings will be difficult.  Complete the negotiations and schedule final walk-throughs several days before closing.
4.  Must re-submit a closing disclosure and wait another 3 business days, if interest rate increases more than by 0.125% for fixed rates or 0.25% for adjustable rate, changing loan type (i.e., fixed to adjustable or vice versa), choosing a new pre-payment penalty option.  Minor changes to the Closing Disclosure, not objected to by the borrower, can be corrected at closing or up to 30 days post closing.
5.  Borrowers’ Closing Disclosures are to be prepared by the lender, not closing agent, because the lenders have full liability for the disclosures and its delivery to the borrower. Closing agents will still prepare the Closing Disclosure for sellers.
6.  These new rules do not apply to all-cash transactions, commercial transactions, reverse mortgages, or residential investment property transactions (non-owner occupied properties).
7.  Lenders will need to for refund borrowers for discrepancies between Loan Estimate and the Closing Disclosure for fees associated with lender fees (origination fees, discount points, processing, etc.) and discrepancies could be a source of lawsuits by borrowers.
8.  New rules will not affect Realtor fees or commission disclosure.
9.  Small lenders may have the closing agent prepare the Closing Document.
10. New rules apply to lenders who provide owner occupied 1-4 family residential mortgages. Small lenders making less than 5 loans per year are not covered under the new rules.
11. Sellers providing financing for more than 5 transactions per year ARE covered by the new rules.

It used to be when a small business needed capital, the owner would go to his local bank to get a loan.  However, since the credit crunch that started in 2009, small business owners have had a difficult time receiving loans from traditional banks.  As a result, a new form of business lending, called peer-to-peer (P2P) lending, has come into existence. P2P lending has become viable in part because of powerful internet platforms, but also because private individuals, trying to diversify their investments away from the stock market, have money they can lend to needy small business. 

P2P lending is not be confused with Crowdfunding, which is not based on loans.  Instead, Crowdfunding uses an internet platform to raises capital in the form of donations from the “crowd.”  The money is not required to be paid back, but often special deals or promotions are promised to the donors in exchange for their donation.  The problem with Crowdfunding is that the business owner must raise 100% of the donation goal in order to receive any of the funding, so if the Crowdfunding campaign falls short of the goal, even by a few dollars, the business usually won’t receive any of the donations. 

P2P lending, also referred to by some as cloud lending, works by providing  an online lending platform that links investor, known as lenders on the P2P platform, with borrowers looking for a loan.  Borrowers complete an online application and they are provided with a quick loan decision.  Some platforms like OnDeck.com use a proprietary credit-scoring model to give applicants a loan decision within minutes.  The borrower can get funding in as little as one business day.  Other lenders like Kabbage.com, who specializes in online merchants and e-commerce businesses, claim to screen loans using real data, not just a quick score. Regardless,  the loans are made to the small business either by matching one investor per small business loan or by pooling the private money and then having the P2P lending platform make the loan.  (If you are interesting in becoming a lender, check the particulars on the lending platform to determine if you get to select which loans, whether your money is pooled with other investors, typically what the default rate is, and who performs the collection process.)

Although the interest rates and fees are often higher than a small business might get from a traditional bank, the ease of the application process and relatively high approval rates make P2P lending an acceptable option for fast cash for small business who have been turned down by other lenders.

When we lend to a rehabber who buys, fixes, and flips properties, we always ask for the rehab budget as one of the four initial pieces of information we use to screen a deal. (Check out our previous post to learn about the other things we request for screening a deal.)  However, if you have ever done a rehab project with a contractor, you probably know that once you start the project, the rehab budget may change. Recently, I asked a rehabber what he does to keep the changes to a minimum. Every contractor's first response to changes is to submit a change order because it is always easiest for him to ask for more money. Here's what Jeff does to keep costs and change orders under control:

1. He makes his contractors submit alternate plans rather than submit change orders -- that's harder for them than just asking for more money.

2. For every item that is added to the budget, he requires that something else must be taken out of the budget -- that's super-hard.

3. He tells his contractors that if they submit a change order, they won't get any more work from him, which forces them to reconsider asking for more money and instead to do some creative brainwork. On the other hand, he doesn’t make his repeat contractors competitively bid for their next job with him. This works when you are consistently doing lots of projects. Jeff tells his contractors that sometime they will make a lot of profit and sometimes they make less, but they keep consistently making money.

Thanks, Nathan Stalker from Banc of California, for providing this important update on the SBA 7(a) loan program. 

“If you are seriously considering submitting a SBA 7(a) loan, you need to make your move now" says Nathan.  "Once the authorized level of loans is reached no more loans can be made until October.  The program is estimated to be used up mid-August, but there will now be a rush for submitting deals, so the authorized level could be used up in the next 2 weeks.”

According to the National Association of Government Guaranteed Lenders (NAGGL): “Given the current rate of loan approvals, NAGGL is now projecting that the FY 2015 authorized 7(a) program level of $18.75 billion will be used up by mid-August causing the program to shut down for the remainder of the fiscal year.  
 
Even though the 7(a) program operates at zero subsidy – that is, no taxpayer dollars are necessary to support 7(a) loans –  the Congress still must provide an authorization level for the program each year. Once that authorized level is reached, no more loans can be made. As of July 11, gross loan approvals for 7(a) (i.e., the total gross dollar value of all loans approved by SBA before any cancelations) stood at $16.637 billion. Typically approximately 6% of all loan approvals are canceled before the loans are disbursed. This means that there can be approximately $19.875 billion in GROSS loan approvals this year. Even with that slight cushion, based on the current rate at which 7(a) loans are being approved, program authority will be used up by mid-August.
 
Congress can fix this problem by raising the 7(a) authorization level. But action to do that must be taken before the end of July when it adjourns for its August recess.  
 
For many months, NAGGL’s government relations team has been working to make congressional representatives aware of the strong possibility that the demand for 7(a) loans would exceed the available program level. When that possibility became a probability, NAGGL redoubled its efforts, culminating yesterday with a legislative fly-in with 30 NAGGL Board and staff members making visits to 66 congressional offices in Washington D.C. The purpose of those visits was simple – to make elected officials know about the imminent program shutdown, and to remind them of the critical role that 7(a) loans play in helping entrepreneurs start and grow their businesses in big cities, small towns, and rural areas across America. Generally, those visits were well-received; but receiving sympathy about the problem doesn’t solve it.”

 
 

Across  the U.S., small-business lending has been behind most other types of business and consumer loans. According to the Federal Deposit Insurance Corp., at the end of the first quarter, banks had $585 billion in loans to small businesses on their books, up 1% from September 2013, but still 18% less than the height of $711 billion in 2008.  
 
The Wallstreet Journal Online reported that the number of loans for $1 million or  less held by banks is down about 14% to $23.5 million since 2008. In nearly  one-third of all U.S. counties, small-business lending remains below 2005  levels, estimates PayNet Inc., a Skokie, Ill., tracker of loans by banks, corporations and alternative lenders such as finance companies.  In contrast, loans to businesses of all sizes totaled $2.48 trillion as of March 31, up 9% since 2008. The latest official survey of senior loan officers showed that banks have loosened standards more quickly for medium and large companies than for small ones.

What is the reason for the disparity between all business lending and small business lending?  Small business loans  have traditionally been made by small and locally owned and operated banks.  However, with the banking crisis of the  last recession, many smaller banks failed or were absorbed by larger banks.  After the bank failures and a drive by remaining banks to make underwriting standards more conservative, "relationship lending is gone," says Todd Anduze, director of the government-funded Small Business Development Center in Carrollton, GA, which advises small firms on financing and business planning. Local business owners used to be able to talk over their business plans with bank executives in social setting because they were all part of the same  community, but "now, if you don't fit into their box, you're not getting that loan."

The recovery for small business lending has taken a lot longer than most had  predicted.  Some business owners
have had to dig into their savings or retirement plans, turned to family and friends, or sought out alternative form of financing.  Many of these borrowers have good credit and at least 2 years of business history, but banks still don’t want to make them loans.  Luckily, the options available to these business owners are more plentiful than in years past, but many borrowers don’t know what their options are.

If you are a small business owner with questions about what your options are, please don’t hesitate reaching out to us here. We are in the business of providing solutions to your financing needs.