There are different types of debt financing for businesses. Financing for small businesses can become a challenging process as many startups lack cash flow, credit history, or don’t have assets. Luckily there are lenders out there that can help startups bridge the gap to meet customer purchase orders or pay their employees. In this blog, we will discuss the different types of debt financing.
Cash Flow-Based Loans
Cash Flow Based Loans allow businesses to receive financing based on the historical cash flow and the projected future cash flow analysis. So, companies use generated cash flow to pay their loan. Cash flow-based loans are best suited for companies with positive margins that generate high month-over-month sales but do not have assets to use as collateral. For example, this type of loan is suitable for service companies.
One of the cash-flow-based financings is Merchant Cash Advances. This loan is mainly used by businesses that could not qualify for other business loans. The payback is bounded to the revenues, which secure the company when it suffers from low incomes. However, the disadvantage of this loan is that sometimes APR for this loan can reach even 100%, which makes it one of the most expensive loan types.
SBA is another type of loan for small businesses that may meet specific qualifications like solid financials and good credit history. Certain SBA loans are best suited for companies that have been doing business for a few years. SBA loan amounts can reach up to $5 million and usually have an APR from 7% to 25%.
Asset-based lending is a prevalent way of receiving financing for startups at an early stage. An early-stage startup cannot provide sufficient cash flow or assets to approve the loan. In this case, the company can use land, building, equipment, accounts receivable, customer purchase orders, inventory, or other assets for financing.
The main difference between asset-based and cash-flow-based loans is that the risk for the lender is high due to the little liquidity of the assets. The loan is riskier than others; therefore, the amount to be received will be less than what the assets are worth. The interest rate will still depend on the asset used and the asset’s generating cash flow. Also, other variables, such as credit history and business operation period, affect the interest rate. The most common asset-based borrowers are early-stage startups to more mature small businesses with physical assets to use as collateral with poor cash flow.
One of the options for this form of loan is Equipment financing. Business owners receive enough money to purchase the equipment and pay the loan at a 4% to 40% interest rate. It typically does not require a high credit score.
Another popular asset-based loan type is Invoice Financing. Businesses use it to cover payroll, rent, and other operating expenses. For the lender, the unpaid invoices act as collateral for the advance. It can cover up to 100% of the invoice value charging around a 3% processing fee.
Some lenders will be able to finance against a percentage of customer purchase orders and a percentage of open accounts receivable. The formula to calculate this availability will be influenced by many factors: how fast the accounts receivable is collected and the number of open POs.
Types of loans that are offered to small businesses.
Different types of startup loans vary by industry, loan purpose, and loan structure. Let’s explore some of the financing options that are the most suitable for startups and that we have worked with before:
PayPal Working Capital is a loan with a flexible payment system bound to sales settled with PayPal. It is a good finance option for e-commerce businesses.
PayPal Working Capital charges one affordable fixed fee and the payout is deducted as a percentage of PayPal sales. For example, the business can select the payment of 30% from the sales. This is a form of finance against your cash flow or revenue stream mentioned above.
Shopify Capital is another financing offered for e-commerce companies. It works similarly to PayPal financing. The remittance rate is charged daily as a percentage of the daily sales until the loan amount is remitted. Total owed amounts consist of two numbers: fixed borrowing cost (the fee) and the loan amount. The loan term has 60 days.
Flexport capital allows access to cash to cover supply chain or inventory purchase costs. This loan has extended payment terms for up to 120 days and can advance up to 80% of commercial invoices. 100% of the loan can be used to pay for customs duties. Flexport Capital pays suppliers directly with no additional fees to the borrower.
Clearco offers to fund marketing and inventory spending for e-commerce businesses. Loans varies from $10,000 up to $20 million. Clearco offers revenue-based financing, and the payments are made when the business generates sales.
Circle-up is a lending option that provides flexible capital for CPG businesses. Companies can use them to purchase inventory or increase marketing dollars. Circle Up offers both cash-flow-based loans and asset-based loans. They use open customer purchase orders and/or accounts receivable to determine the availability of funding. This type of loan is an asset based as mentioned above.
The main criteria while choosing the loans typically are:
The purpose of borrowing money.
Qualifications for the loan.
Annual Percentage Rate (APR).
APR gives the actual costs associated with the loan, which considers fees and payments. There are many loan payment calculators that businesses can use to estimate loan APR, but the general calculating formula for APR is:
APR = ((Fees+Interest/ Principal/ N) x 365 ) x 100
Where interest is the total interest paid over the loan life, the principal is the loan amount, and N is the number of days in the loan term.
Startup Tandem CFO helps startup owners understand their working capital needs and creates an analysis of possible solutions to choose the best suitable option. We will look at your current cash burn, develop a plan to help you meet your customer demands, scale the business or even pay your employees. We have worked with many debt lenders that can help you obtain the cash needed for your business plans. contact us to know more!
Business valuation is essential when a company wants to sell a portion or all of the business, merge with another company, or acquire another. It is a process of determining all aspects of the business, from its current worth to projected growth, revenue, debt, and other crucial areas, by applying objective measures. Usually, an investor or a potential buyer evaluates the company’s value by looking at its business valuation outcome.
Why is it important?
A proper valuation is crucial to ensure the company is headed in the right direction and mitigate the risk of underselling a business. It gives a detailed overview of the business’s health and sustainability in the long run. Choosing the suitable valuation method is vital as each entity has a unique business model, which will help precisely interpret the business value.
The valuation methods
A valuation usually includes the company’s capital structure, a thorough analysis of the management, future earnings prospects, and the current value of its assets. The method used in valuation could vary among analysts, evaluators, industries, and even the size of a company. The primary or common approach is reviewing the financial statements, using discounted cash flow method, or making a similar business comparison. Below are six standard forms of business valuation which widely used across industries:
Market Capitalization: This method is the most straightforward and fastest. It is derived by multiplying the company’s per-share price by the outstanding number of shares. The result will show the current market cap size of the company. Most of the time, this number is compared with previous years to analyze how much the company has grown in its value, and it might give a rough projection of future growth potential.
Times Revenue: Under times revenue, a series of revenue generated over a certain period is applied to the associated industry multiplier, which will also depend on the current economic situation. The industry multiplier plays a significant role in determining the value of the business within the same industry.
Earnings Multiplier: This method will create better value for a company than the time’s revenue model. It is because the profits earned by the company are more reliable as it is based on the financial success of the company. A company that decides to acquire another entity usually prefers to use this method because it closely reflects the financial soundness of the business.
Discounted Cash Flows: DCF use projected cash flows in the future, which are adjusted to calculate the company’s present value. The current inflation rate is an important factor when using this valuation option. Usually, a company presently low on cash flows but expecting more business activities in the future might benefit from this method.
Book Value This is one of the quickest techniques to evaluate a company. It is done by simply subtracting the total liabilities from the total assets. These numbers can be found on the balance sheet of a company.
Liquidation Value This means how much a company is worth if it liquidates its business and pays off its current liabilities. Getting a positive net asset value is favorable, especially if the company wishes to sell the business in its entirety.
How could a startup company benefit from having one in place? And what is the best valuation method?
A startup entity is almost always low in cash flows and probably has little to no revenue during the initial stage of the business. So, if a startup wishes to sell its business or participate in M&A, it has to show a reasonable business valuation to attract investors and partnerships. Out of the six methods above, I think the best way to evaluate the company is by using DCF. As mentioned before, this model creates fictitious future cash flow values based on the business projection, which is done using the basis of current plans and patterns of operations. A comparison with a similar company will give a better picture of the company’s growth and sustainability in the future. Analyzing the expected future cash flows will provide a clearer picture of the company’s present value.
Having a valuation in place will also help the business owner navigate the business better while considering the factors leading to its value
How can a startup increase its valuation?
When a valuation is created by using any of the methods best suited to the nature of the business, it is more likely to effectively address the areas of a financial statement that need to boost. Identifying these elements will hugely impact the business processes and enable the company to run efficiently for better valuation in the future. Some of the common ways a company could increase its value are as follows:
To have a thorough and defensive growth plan: A business especially in the early stage will benefit from creating a vigorous and defensive growth plan for the next couple of years or more. This can be done by stating monthly projected growth, supported with facts and figures. Usually, this information will pique investors’ interest and help the business move in the desired direction.
Build a robust management team: For the sustainability of a company. A new entity must form a strong management team who can drive the company’s profitability and activities while holding on to the principal foundations of the company. This will add value and create a positive perception of the outlook of the overall management
Lead sources and revenue diversification A company should diversify its revenue and business lead sources to stay competitive and create barriers for competitors to take over the market. It usually can be done by having multiple market segments targeted, and business lead resources rather than heavily relying on a single avenue. Product and service diversification could open doors to a broader network of trade.
Create patents on intellectual properties This is common for a company with unique and distinctive products or services. Patenting the brand, image, or technology will reward the company in the long run and automatically increase its valuation. Investing in the upkeep and advancement of these intellectual properties will benefit the company and enable it to grow with the market progression. For example, Apple’s technology is unique and stands distinctive amongst its competitors, thus making them strong and nearly impossible to copy due to its patented properties.
To better understand the value of a business, choosing a suitable valuation model is essential. A company can have one in place to reference and compare with previous performance. The underlying information should be precise and thorough to achieve the best result, especially from the financial statement. Potential investors will first want to know the company’s worth and projected growth before deciding on investing or acquiring it. Besides that, it also helps when filing business taxes, as the IRS requires a company to show its current fair-to-market value.
Here at Startup Tandem Advisory, we will be able to assist you in advising and choosing the right way to perform a valuation. Firstly, we will study the industry and create appropriate benchmarks to compare a company with its competitors. Our advisory process includes research, analysis, and recommendations for what needs to be done and how. Secondly, we will be able to identify the areas to improve the financial statement and gather enough information to execute a business valuation accordingly. If needed, we will provide ongoing advisory services on growing and sustaining the current business operation to create higher sustainability, especially during market uncertainty like we are experiencing now. Visit www.startuptandem.com for more information, and we will be happy to support you.
As a new small business owner, you may not yet have an employee handbook of all your policies, procedures, and all other employment and job-related information employees need to know and acknowledge.
There are many reasons to have an employee handbook that new hires read over and sign immediately.
That it sets clear expectations for your employees
States your legal obligations
Defines their rights.
The handbook protects your business against employee lawsuits and claims, like wrongful termination, harassment, retaliation, and discrimination.
This blog will discuss steps to build your personalized employee handbook without adding too much information.
Step 1: Work Hours, Compensation, and Benefits
A fundamental expectation to set is when employees start/ come into the office and when they leave. Time tracking is also extremely important to protect the employee and your business.
There is even an obligation to that effect in California. This section should also include overtime policies, probationary period policies, and leaves of absence (sick, vacation, PTO, etc.) Be sure to research what is mandatory, both federally and state.
Although pay is covered in an employment contract, pay raises and bonuses can be outlined in the handbook if they are standardized. For example, employees may get a pay raise each year after a positive performance review. Or pay may increase with inflation. This is not mandatory but will give employees something to look forward to.
Be sure to research minimum wage and overtime laws. Also, check out exempt versus non-exempt employees and part-time versus full-time employees. Independent contractors and hourly or contract employees all have different privileges and responsibilities.
Step 2: Explain your Company Culture & How Employees Stay Aligned
First, include your Code of Conduct, which “lays out the company’s principles, standards, and the moral and ethical expectations that employees and third parties are held to as they interact with the organization” (GAN Integrity, 2020).
Performance Reviews and progressive discipline keep your employees in line and A-aligned with the culture. Performance reviews are an opportunity to look not only at performance but also at how closely the company’s values and mission align with the employees.
These “hook” an employee at onboarding when the culture is strong and well-defined. Employees feel safe knowing what you’re doing, and they’ll be more likely to stay and perform well.
and state ones here: State Labor Laws. Some US states explicitly state the specific legal content you need to have in your handbook. For example, in California, the Department of Industrial Relations has instructional manuals and pocket guides to help you construct employee handbooks for various industries.
You probably want to consult a lawyer during or after writing your handbook’s legal section(s). Remember, your employees have a copy of the handbook and use it as a guide. Still, you can include a disclaimer such as, “I understand that this handbook is NOT a binding contract but provides guidelines for personnel concerning the company’s policies and benefits.” You can also state that the company “may change, rescind, or add to any policies, benefits, or practices described in the handbook at its discretion, without prior notice.” Finally, include the nature of employment, such as “at-will” in California, and have the employee acknowledge receipt by signing the last page to keep in their personnel file.
Implemented a new form: DE4 (Employee Tax Withholding for your company’s records, incorporating a new law: ABC (an employment status test), and made COVID-19-related changes to a tried-and-true form: the I-9.
This is by no means an exhaustive list of what to include. A more comprehensive list is here:
Equal employment opportunity (antidiscrimination)
At-will nature of employment
Code of conduct
General employment information
Safety and security
Pay policies such as information on paydays, timekeeping, overtime eligibility, meal and rest periods, etc.
Sick leave policy
Paid vacation policy
Family and medical leave — if a business has 50 or more employees, it often needs to have an FMLA policy
Assessment process for promotions and raises
Process for filing a complaint
Welcome letter from CEO or founder
Company’s mission statement
Annual office closures
Behavioral expectations including attendance and dress code if relevant
Standard operating hours including rules about employees being onsite outside of these hours
Review process and how to get a promotion/pay raise
Progressive discipline or policy when behavior doesn’t meet expectations
A form to sign saying they’ve read the staff handbook and agree to the terms (Square, 2021).
If you follow these simple steps, you can avoid lawsuits/claims like wrongful termination, harassment, retaliation, and discrimination. Also, you can set clear expectations with employees, which helps with trust and communication, and thus, job satisfaction and retention. Trust and communication help them perform better too! Startup Tandem provides human resources consulting services to help you write your employee handbook – or we can write it for you! We include policies to keep you compliant and away of trouble.
How to deal with Quite Quitting as a business owner
Last week we showed you how to make a hybrid model (or solely remote or in-person) work for your business. But with hybrid and remote work rising, so does the risk of extreme passivity. Disengagement, slacking, isolating, and withdrawal are all a little easier when you don’t have to face your boss.
People commend these behaviors and believe them to be a way to set boundaries and increase work-life balance or separation. Young people have coined this fad as “quietly quitting.” If you see these behaviors, your employee is not necessarily leaving. They’re just starting to say no to things they once did (“other duties as assigned,” overtime, happy hours/events, etc.) and, thus, passively setting boundaries.
While this looks pretty subversive, it is not always malicious or intentional. The good news is that this hidden danger is not something you need to worry about as a small business owner.
We will explore three steps in this blog to ensure you can recognize, address and even prevent “quiet quitting.”
Step 1: Recognize it
In a Forbes article published earlier this year, Robinson outlines six signs:
Minimum standard performance.
Isolation from other members of the team.
Withdrawal from any non-necessary conversations, activities, or tasks.
Attendance at meetings but not speaking/acting as much as usual.
Teammates report having to pick up the slack. (Robinson, 2022).
The easiest of these signs to address is withdrawal from the non-necessary, as this can appear on social media (Ellis & Yang, 2022). You might notice someone is hinting at separation or divorce if they share quotes about letting people go, charting new territory, etc. The same goes for quiet quitting. While Startup Tandem Inc. is not suggesting snooping at your employees’ TikTok accounts, we recognize that part of modern life is blurred work and life boundaries. Some employees might not realize it but share their feelings with you. While they’re not necessarily slowly quitting, they ARE communicating that they do not want to do certain aspects of their job.
The remaining signs are easy to address in performance reviews, which we encourage to hold at least quarterly.
While it shouldn’t be the employer’s responsibility to read between the lines of employees’ passive statements and actions, initiating appropriate and direct communication is essential. Don’t lose the chance to address their feelings about work, especially in a remote work setting. If they know you follow their account or even have a public account, managing these work-related videos and sentiments in a meeting is more manageable than if they don’t know you follow them. You don’t have to be critical – remain open and curious. For example, “I noticed that TikTok video about … can you tell me a little more about that?”.
If you hear about these passive anti-hustle sentiments through another coworker, remember the reporting party’s confidentiality is at stake. Instead of mentioning a specific incident, ask general questions about workload in one-on-one meetings. Some examples might include, “How do you feel about the amount of work provided? How do you feel appreciated? How do you feel best compensated? How do you like feedback? Do you enjoy your tasks? Do you receive the support (resources, training, etc.) needed to complete the task? Do you like the current workplace communication style? What would you change?”.
After this, check in with HR to revise company policies regarding overtime, external events, and other employees’ dissatisfactions. A consensus likely means the company’s very policies need to be adjusted. If the workplace mentality has become jaded, but procedures must remain intact, consider implementing true workplace change with a program such as the one outlined in The Heart of Change (Kotter & Cohen, 2012).
Maybe it is a relief for them to get this out in the open. For example, they might already be passive communicators.
But when it comes to purpose and meaning at work, ensure constant and clear communication. A SHRM survey found that workers would take a 23% pay cut for a job they find meaningful. Communication about a shared purpose is vital so that the employee is aligned and has appropriate expectations. Otherwise, there will be a lot of resentment and disappointment, and quiet quitting is more likely to occur. Compensation is not as crucial to modern workers, but it is much clearer regarding expectations (e.g., I work 40 hours a week and get paid xxx dollars).
If you follow these simple steps, you will recognize, address and even prevent “quiet quitting” – even in a remote team. Although it may take some tough conversations, ensuring your team is still loyal, engaged, and productive is imperative.
Startup Tandem provides human resources consulting services to help you develop and implement culture, compliance, and training programs that fit your specific business needs and budget.
Ellis, L., & Yang, A. (2022, August 12). If your co-workers are ‘quiet quitting,’ here’s what that means. The Wall Street Journal. Retrieved August 29, 2022, from https://www.wsj.com/articles/if-your-gen-z-co-workers-are-quiet-quitting-heres-what-that-means-11660260608
Kotter, J. P., & Cohen, D. S. (2012). The heart of change: Real-life stories of how people changes their organizations. Harvard Business Review Press.
O’Connell, B. (2021, July 6). The search for meaning. SHRM. Retrieved August 29, 2022, from https://www.shrm.org/hr-today/news/all-things-work/pages/the-search-for-meaning.aspx
Robinson, B. (2022, August 24). 6 signs that a ‘quiet quitter’ is among your employees and what to do about it. Forbes. Retrieved August 29, 2022, from https://www.forbes.com/sites/bryanrobinson/2022/08/19/6-signs-that-a-quiet-quitter-is-among-your-employees-and-what-to-do-about-it/?sh=1fede0a66619
Mortgage Lenders are Going Out of Business! How Does This Affect the Real Estate Industry?
This year we have seen rising interest rates and possibly another hike by the end of the year. The inflation rate has also been increasing rapidly, which leads the Fed to increase the interest rate to curb the rising inflation. As of August 2022, the 30 years US mortgage rate is above 6%, and the inflation rate as of June 2022 is 9.1%. This spike poorly affects the consumer’s spending power. Many businesses folded and directly increased the unemployment rates.
Why are mortgage lenders going out of business?
Recently there was news on some lenders who filed for bankruptcy and made margin calls. Most of these lenders are non-banks. They are independent lenders who offer risky loans, which a bank will frequently decline. The mortgage they provide is not government-backed, thus making it impossible for them to stay afloat in the current economic condition.
Due to high-interest rates, many lenders failed to gather new loans, thus making it nearly impossible to acquire new investors. Usually, lenders will constantly collect new loans and bundle them with bonds to make them attractive to investors, so when there are no new loan activities, lenders are forced to obtain a line of credit to pay the interest due to existing investors. Lenders who actively collaborate with government-backed agencies like Fannie Mae and Freddie Mac are less likely to suffer. Usually, the lenders who work with these agencies offer less risky home mortgages. Major banks are also seeing some shrinkage in the mortgage business, leading to many layoffs to cut down expenses.
According to Bloomberg News, Wells Fargo is reducing their home loan business, and this trend will also be seen in other major banks. Unlike banks, independent lenders don’t have emergency funds to sustain their business. They usually rely on short-term credit lines, which depend on mortgage prices. So, when they are stuck with bad assets, they are forced to make the margin call and potentially fold their business.
When a lender goes bankrupt, as a part of the bankruptcy proceedings, existing customers will continue to make mortgage payments to a new lender to which the business has been sold. The terms and interest rates might vary according to the new entity’s mortgage program.
How does this affect customers who are seeking a mortgage loan?
Individuals seeking a mortgage loan now face many issues in securing the desired loan amount at an affordable price. Due to decreasing lenders in the market, options are very limited, thus making it a seller’s market. It simply means that customers are left with choices that might not be favorable. A little under three years ago, a 30-year mortgage loan rate was below 3%, which doubled in the current years.
Someone who could afford a $500k worth of loan three years prior could only be qualified for $250k or less now with the same level of income. The real estate market has been negatively affected and it has been a seller’s market due to low inventories. Property prices have skyrocketed in the last few years. A single-family home which used to be in the lower 300k price has now increased to the high of 500k, thus making it impossible for most home buyers to own a house. Even building a house is not an option as the prices of the materials have soared from lumber to concrete and everything else which is needed to construct a house.
Many small-time home builders or contractors are losing their business or finding it hard to make it thru the current condition, so there is also a decrease in the manpower available in the home construction field. Many potential home buyers are left with the choice of waiting until everything simmers down shortly, possibly extending or opting for rental homes.
Based on my experience, selling and owning a home in the current inflated economy has been lengthy. Finding an affordable rental has been like a race whereby you must act fast before it goes off the market in a matter of minutes. Many experts are projecting a slow recovery in the real estate market and expect it to stabilize by the end of 2023.
The right decision is to wait till the market stabilizes. The next option will be considered an affordable way to construct a home, like a barn dominium home. Building these types of dwellings costs way less than a stick build home. As we can see in the market, many are taking advantage of the soaring property prices and liquidating their homes for a higher value. They then purchase a motor home, move into a rental property, and sit on the excess equity until it is right to buy the desired house. Whoever has purchased a home with high-interest rates or planning to do might look into refinancing the mortgage when the rates go down to lock in a lower monthly payment with possible equity on the property.
To wrap it up, businesses and people at large are affected by the rising interest rates and inflation. It is a chain reaction where no one is spared from the impact. Small-time lenders are going out of business, and people are losing their affordability to own a home. This scenario is negatively affecting the real estate industry. It is a waiting game for the market to slow down and anticipate the Fed to reduce the interest rate, which is forecasted to begin sometime next year. The economy has been affected by several events, starting with the pandemic and geo-political issues, which have snowballed in the current years. It has been proven in the past years that the market will anticipate positive changes right after the mid-term election, as some of the uncertainties will be addressed. Being well-informed about current events is essential to weigh all the possible decisions for a better outcome.
How can Startup Tandem help you?
We here at Startup Tandem will be able to provide you with informative advice and recommendations based on your personal and business goals. We have a Finra-licensed professional who could provide consultations on the capital markets and other financial areas of a business that needs expansion, growth, or merely structuring the investment plan to achieve the desired business goals. Please visit Finance and Business Advisory | Startup Tandem.