Wednesday, April 25, 2018

No Business Checking Account? You’re Damaging Your Loan Approval Odds

If you’re a small business owner who needs a loan but doesn’t have a business checking account, you now have an excuse to open one on the double. According to a recent survey conducted by researchers at Nav, 70% of small business owners who don’t have a business checking account were denied a loan over the past two years.

Worse yet, 26% of small business owners with no business checking account considered closing shop altogether. They cited the amount of work required to manage bookkeeping on a daily basis. (You guessed it—a business bank account helps with keeping an eye on money.) For comparison, only 14% of small business owners with a checking account for their company considered closing up shop.

That’s a fairly grim outlook for companies that don’t have business checking accounts—especially in an economy when small business optimism has never been higher.

Half of all small business owners polled for Nav’s 2018 Business Banking Survey reported that they wanted to open a business checking account, but simply lacked the time to set one up. But it’s important to set aside the time to get it done—and, obviously, there are financial repercussions for your business that go well beyond not having ATM access.

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Why Business Checking Accounts Are So Important in the Business Loan Process

Why does having a business checking account affect your ability to get a small business loan?

Fair question, since there’s not a lot in common between a checking account, which you use to manage your daily finances, and a business loan, which gives you capital that you eventually repay to a lender. Sure, they’re both money. But two don’t appear to have much in common at first glance, so why should banks care about where you store your cash before they extend you a loan?

Prove You’re Not a Risky Borrower with Evidence of Your Company’s Financial Health

Small business lenders, regardless of whether they’re institutional banks or alternative lenders, aren’t in the business of handing out money to people who can’t repay their debts. With that in mind, the more proof you have of your company’s financial health, the better your odds are that a bank is willing to take a calculated risk in lending you its money.

By “financial health,” we mean that you’re generating revenue, making enough money each month to cover your overhead and other recurring expenses, and not coming up short for payroll, don’t have a ton of outstanding invoices, and things like that. If you’re not using a business checking account to track payments, expenditures, and purchases, your would-be lender has no way of knowing just how financially healthy your company really is. And as much as they’d love to go on your word, it just won’t cut it for small business financing.

What a Lender Can Understand from Your Business Checking Account

Your checking account contains a ton of information about the financial health of your company. Each month’s statement provides a snapshot of how much money your business takes in every month, how much goes out the door, and what it gets spent on.

Basically, checking accounts provide an accurate sense of your company’s cash flow—and provide a more comprehensive glimpse at your business’ financial health than even the best bookkeeping can.

Banks need to know what your business’ cash flow looks like in order to determine if you’ll be able to repay the loan. This helps banks determine risk—the all-important metric that helps determines how safe it is for them to lend you money with the expectation that they can recoup their investment in you (with interest, of course). Knowing how much money comes in, goes out, and where it gets spent helps banks assess your risk level.  

Cash flow is a hugely important metric for every business applying for a loan—but especially if you’re a seasonal business. Plow streets in the winter, or sell shaved ice in the summer? Your cash flow is going to vary dramatically throughout the year since you’ll make the bulk of your revenue in just a few months. For that reason, you’ll definitely want to be able to show a lender checking account statements during your high season, proving a hearty store of cash to get you through your quiet time.

Why You Might Get Denied for a Small Business Loan Without a Checking Account

Since a small business checking account provides a definitive record of your company’s cash flow, not having one could create a gaping hole in a lender’s ability to determine your creditworthiness.

But more importantly, many lenders require you to have a business checking account before even considering your loan application. Most ask for the about the last three statements from the account as well. This helps them glean a broader picture of your company’s solvency and overall health. If you can’t provide this information, odds are you will have a difficult time getting your loan application approved.

Let’s go back to that example of a seasonal business again. Say you run Mrs. Plow, a snow plow company in Springfield, Mass.. With public and private contracts, and one-off commissions, you make all of your money between November and April (those freak late-season New England snows keep things flowing!). If you apply for a small business loan during March with three checking statements from December, January, and February, you’ll be able to show your lender strong earnings—and they won’t have to second guess whether or not you’ll have the money to pay back your loan.

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Getting a Business Checking Account Is Way Easier Than You Think—and Your Credit Score Doesn’t Matter

There’s nothing stopping you from opening a business checking account. As long as you have some kind of cash to put in the account (even if you don’t have it right this minute), you can account open a business checking account in a matter of minutes.

Although many business checking accounts require you to open an account with a minimum balance, a handful will let you open an account without having to put funds in until later.

Others offer free business checking, which means that you can begin to establish a paper trail for your company’s cash flow without having to pay your bank for the privilege of holding on to your money. And best of all, there’s no need to have a stellar credit history to open an account. Credit scores don’t matter with regards to checking accounts, so you’re in the clear even if your credit history isn’t.

2 Business Checking Accounts You Open Online Right Now, So No Excuses

You need a business checking account. Why don’t you open one right now and get ‘er done? Here are two different kinds of options that’ll get you up and running:

Chase Total Business Checking

If you want to have the accessibility of a brick-and-mortar bank with decades of history, consider the Chase Total Business Checking account. This account offers 100 free monthly transactions, plus unlimited electronic deposits (aside from wire transfers). Plus, if you keep a minimum daily balance of $1,500, you’ll avoid a $12 monthly service fee—that makes this account free.

Also: Chase is also offering a $200 bonus for a limited time if you sign up now, which is a pretty sweet reward for getting your company’s financial fundamentals in order. You can see details here, or click above.

Azlo Digital Business Checking

If having a local bank branch near your business doesn’t matter as much to you, consider opening an account with Azlo—a feature-laden online bank for entrepreneurs and small business owners. Azlo offers free checking, fee-free withdrawals at participating ATMs, US-based live support via phone and chat, and digital invoicing solutions to help you make bookkeeping and finances less of a chore.

Plus, Azlo is backed by BBVA Compass and FDIC insured, so you’re completely covered with the foundation of a trusted bank.

Open a Business Checking Account and Get Yourself on the Path to Small Business Financing

If you don’t have a business checking account when looking for a loan, you’re at a clear disadvantage. So, at the risk of being too blunt, there’s no good reason not to open a checking account for your small business.

You’ll be setting yourself up for a major requirement for any future loans you may want to take out, and making your financial management a heck of a lot easier than keeping track of paper receipts and invoices.

The post No Business Checking Account? You’re Damaging Your Loan Approval Odds appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/business-checking-account-loan-approval

4 Easy Business Credit Cards to Get Approved for ASAP

If you’re a business owner, using a business credit card is a no-brainer: You’ll have access to a steady stream of working capital to finance your small business, and the potential to earn great perks and rewards. But if your credit is less than stellar, you may be concerned about whether there are easy business credit cards available—especially if you have bad credit and need to rebuilt it.

As you might know, the higher your credit score, the more business credit card options you’ll have available to you. If you have bad credit, on the other hand, your options will be limited—but not zero.

Because many consumers struggle with their credit scores. According to Experian, only 22.3% of Americans have excellent credit scores, and 21.2% have deep subprime credit scores. So, logically, there have to be a few easy business credit cards to service that 21.2% of the population.

And there are! The easiest business credit cards to get are those with a low, or no, minimum credit score requirement.

First of all, though, we’ll show you exactly how credit bureaus are looking at your credit. That’ll help you take control of your credit score, and help you get on the path to rebuilding it. Then, we’ll show you easy business credit cards to get (they’re different than the nest business credit cards for bad credit, FYI).

Although most of these cards don’t come with the best rewards programs, they’ll certainly give you the financing solutions your business needs. Plus, if you use these easy business credit cards responsibly, you can build your credit enough to level up to even better business credit cards in the future.  

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What Is Your Credit Score, and How Is it Calculated?

As a reminder, your credit score is a numerical gauge of your history with money. But you might be wondering how, exactly, that number is generated—and who (or what) does the creating.

Basically, lenders, including credit card issuers, send information about your credit activities to the credit bureaus (the three big ones are Experian, TransUnion, and Equifax). Then, the bureaus convert that information into a three-digit score, ranging from 300 to 850, or “bad” to “excellent.” Generally, those scores are categorized as follows:

  • Excellent: 750+
  • Good: 700-749
  • Fair: 650-699
  • Poor: 550-649
  • Bad: 550 and below

Every credit bureau uses their own, mathematical algorithm to generate your credit score. But they’re all variations on the FICO system, which is by far the most common credit-scoring system (of which there are many) out there.  

You might be a little unsure about which “activities,” exactly, the credit bureaus use to create your score. And they may not be the activities you’d expect: For one thing, creditors don’t report personal information like your marital status or personal income. Although if you were concerned about that information impacting your credit score, you’re not the only one: According to TransUnion’s recent survey on credit myths, 44% of consumers believed that marital status goes into your credit report.

Which is, in fact, a myth!

Rather, the credit bureaus are interested in the activities that directly indicate how well or poorly you manage your financial obligations, including:

  1. Payment history: Do you pay your loan bills in full and on time? If not, how late were those payments, and how much debt did you owe?
  2. Credit utilization: Are you keeping your balance low, or are you maxing out your credit cards? How much debt do you currently owe?
  3. Age of credit history: How long has it been since you’ve opened your credit accounts, and how often do you use your credit?
  4. New credit: Have you opened or applied to any new accounts recently? How many credit inquiries do you have on your credit report? When was your last hard credit inquiry?
  5. Credit mix: How many credit accounts do you have, and what types of credit accounts do you have?

What Makes a Credit Score “Bad”

Again, every credit bureau uses their own method to weigh these credit activities. However, it’s pretty much guaranteed that the bureaus will most heavily consider your payment history and credit utilization.

Everyone’s score starts at 850, and mistakes—like paying bills too late—take you down a few (or several) notches.

So, you have a lot of opportunities to prove that you’re responsible about handling credit. But you have just as many opportunities to lower your credit score, too.

And, the truth is, there are so many reasons why someone’s credit score may be challenged right now. Maybe they’re brand new to the lending world, so their credit history is merely limited. (It’s no mistake that consumers’ average credit score increases with age.) Maybe they splurged on a large purchase, increased their credit utilization ratio, and struggled to pay down their balance. Maybe they have a recent bankruptcy on their report, which can cause major damage to a credit score.  

But your credit score is important to lenders, including credit card companies, because that score is just one, handy way of showing lenders how well or poorly you’d be able to manage your loan.

So, if you have bad credit, lenders (or, for our purposes, credit card companies) may think that you could repeat those financial mistakes you’ve made in the past. And, in that case, they fear you won’t be able to pay them back what you owe them this time around, in full and on time.

If you’re applying for a small business loan, a bad credit score might disqualify you for a loan, or it may fetch you less desirable terms, like high interest rates and short repayment periods. And if you’re applying for a business credit card, a bad credit score will probably disqualify you from that card entirely.

So, those with bad credit will have less business credit card options available to them. But “less” doesn’t mean “none”! There are a few easy business credit cards to get for bad credit—they just may not look like the business credit cards you’re expecting.  

→TL;DR (Too Long; Didn’t Read): Your credit score is a measure of your history handling money, and any mistakes you’ve made in managing your credit accounts lowers your score. Since that number indicates to lenders how well or poorly you’d be able to pay back your loan, those with bad credit have fewer borrowing options, and they may be disqualified from certain business credit cards entirely.  

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4 Easy Business Credit Cards to Get for Bad Credit

Whether they’re secured, unsecured, or another type of card entirely (which we’ll explain in a bit), these cards will help you build your credit, earn you perks, make running your business a lot easier, or all of the above. And, importantly, they’re all relatively easy to qualify for, making these the perfect options for people with challenged credit.

Secured vs. Unsecured Credit Cards

For the most part, when people talk about credit cards, they’re talking about “unsecured” credit cards. A few of the easy business credit cards on this list, on the other hand, are “secured” credit cards.

So, what’s the difference between secured and unsecured credit cards?

Essentially, a secured credit card requires that the cardholder puts down your own cash as collateral. That cash deposit also acts as the whole or the majority of your credit line. Because the credit card company is armed with that collateral in case you default on your payments, they’re more willing to extend secured credit cards to high-risk borrowers—aka those with bad credit.

Unsecured cards, on the other hand, don’t require any collateral, and the credit issuer determines your credit line based on a few factors in your credit card application (including, of course, your personal credit score). However, unsecured credit cards come with perks and benefits, and secured cards usually don’t.

Secured credit cards are great options for people working with less-than-stellar credit, because they’re relatively easy to qualify for. And, importantly, they’ll help you build your credit. Most secured card issuers report information to the credit bureaus, so your credit score will benefit from responsible card usage. Keep in mind, however, that not all card issuers report to all three credit bureaus, so it’s best to read the fine print on your secured credit card to make sure.

Other than that cash collateral, secured credit cards function just like unsecured credit cards, so you’ll also carry a balance from month to month. Paying off that balance in full and on time, too, will help you boost your score.

Okay, now that we’ve got the jargon down, let’s move onto the easiest business credit cards to get for bad credit.

Secured Personal Credit Card: Capital One Secured Mastercard  

The first easy business credit card on this list is actually a personal credit card. Normally, we don’t recommend mixing your personal finances with your business finances, but there are very few secured business credit cards on the market. So, responsibly using a secured personal credit card strictly for business purposes could be a good way to start building your credit. That way, you can ultimately advance onto an unsecured business credit card.

The Capital One Secured Mastercard is one of the best secured credit cards you’ll find. First of all, the card issuer accepts credit scores below 550 to qualify, so that’s great news for those with challenged credit scores.

There are also no annual or hidden fees on this card. Which is also good news, since you’re already putting down cash to create your credit line, so you’ll probably want to keep the rest of your cash output to a minimum. And that cash deposit/credit line is flexible. The minimum required cash deposit is either $49, $99, or $200, and those with lower credit scores have a lower minimum required cash deposit. You’ll also have the opportunity to raise that credit line if you make your first five monthly payments on time.

On the downside, the Capital One Secured Mastercard doesn’t come with any perks. However, Capital One reports card usage to all three credit bureaus, so if you use this card responsibly, you’ll be able to to build up your credit score.

Secured Business Credit Card: Wells Fargo Business Secured Credit Card

The Wells Fargo Business Secured Credit Card is that rare secured business credit card we were talking about.

Since it’s secured, of course, the Wells Fargo Business Secured Credit Card is one of the easiest business credit cards to get. If qualified, you’ll create a credit line of any amount between $500 and $25,000.

Unlike most secured credit cards, the Wells Fargo Business Secured Credit Card does come with a few perks: You can choose to receive cash back or rewards points on all of your purchases.

And since this secured credit card is intended specifically for businesses, you can create up to 10 employee cards. You’ll also have access to Wells Fargo Business Online, so you can easily track and manage spending across all those cards.

On top of the cash deposit, you will have to pay an annual fee on this card. But, at $25, it’s much lower than most other annual-fee cards out there.

Here’s another reason why this is a great starter business credit card: Wells Fargo periodically reviews your account usage to determine whether you’re eligible to graduate to an unsecured business credit card. They’ll make that decision based on factors like timely bill payments, low credit utilization, and personal credit score—which is just more incentive to use your business credit card responsibly, and boost your credit score in the process.

Keep in mind, however, that only existing Wells Fargo customers can apply for their secured business credit card online. If you don’t have a relationship with the bank, you’ll have to apply for this credit card in person.

Unsecured Business Credit Card: Capital One Spark Classic for Business

Secured credit cards are ideal for small business owners who want easy access to working capital, but whose credit scores disqualify them from traditional business credit cards. But, if you use your secured credit card responsibly, you’ll see your previously challenged credit score increase. And, ultimately, it just might increase enough to qualify for an unsecured business credit card.

If that’s the case, we’d recommend the Capital One Spark Classic for Business credit card as your first stop. That’s because, at 550, it has one of the lowest minimum credit score requirements you’ll find on an unsecured business credit card.

The Spark Classic has no annual fee, plus it offers 1% cash back on every dollar you spend, with no limit on how much cash back you can earn.

And, as an unsecured credit card, Capital One reports card activity to the credit bureaus—so this card can help you build or rehab your credit score, as long as you’re using it responsibly (by which we mean, for the most part, paying your bills on time).     

Prepaid Business Debit Card: Bento for Business Prepaid Mastercard

Technically, this list’s easiest business credit card to get isn’t a credit card at all. Rather, the Bento for Business is a prepaid business debit card.

Like a secured business credit card, you’ll load up your Bento for Business card using your own funds, and that amount works as your credit line. You’ll hook up your business bank account directly to your Bento card, so you can easily, and securely, fund your cards anytime you want. Then, you can use the Bento anywhere that accepts Mastercards.

Unlike a secured business credit card, however, you’re not paying monthly bills to a credit card company, which means you can’t build credit with this card. But that also means that Bento doesn’t check your credit score at all when you apply, making this a great option for credit-challenged small business owners.

The real benefits of the Bento card are in its solutions for small business owners who need to manage employee spending. First off, you can create as many employee cards as you need, and set specific budgets on each of those cards. You’ll get the first two employee cards for free, then pay one flat fee per account for all additional cards on a sliding scale.

Plus, the Bento can integrate into your business accounting software, so all card activity is readily available for you come tax season. Bento also has a mobile app and a dashboard, so you can track exactly which employees are using their cards—and where and how they’re using them—and manage their budgets accordingly.

Again, you can’t use the Bento to build your credit. (But, again, the Bento doesn’t require any minimum credit score to qualify, making this an incredibly easy approval small business credit card.) So, if you’re hoping to build credit, you’re best off using the Bento in addition to either a secured credit card, or the Spark Classic, once you can swing that 550 minimum credit score.   

→TL;DR: Restore bad credit with a secured credit card, a secured business credit card, or an unsecured credit card with a low minimum credit score requirement. In addition, use a prepaid business credit card for its employee-management perks. These are all some of the easiest business credit cards to get.

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The Easiest Business Credit Cards to Get, and How to Get Them

If you want to use a business credit card to help finance your small business, but your bad credit disqualifies you from most traditional business credit cards, know that you still have options.

Your best plan of attack is to use a business credit card that’s easy to get. These are three of your best options:

  1. Capital One Secured Mastercard
  2. Wells Fargo Business Secured Credit Card
  3. Capital One Spark Classic for Business

(If you do go for the Capital One Secured Mastercard, be sure to use this card strictly for business purposes, so you don’t risk mixing your business and personal finances.)

Use these cards to build your credit, so you can ultimately advance onto an unsecured business credit card with more, or better, perks and rewards. And, In addition to using a credit card, sign up for the Bento for Business Prepaid Mastercard if you need to manage employee spending. There’s no credit check required, so you’ll have a shot at qualifying for this card even if your credit score is challenged.

Not only are these easy business credit cards to get, but they’re easy to apply for, too: You can apply for all of these cards online. (With the exception of the Wells Fargo Business Secured Credit Card, which you’ll need to apply for in person if you’re not an existing Wells Fargo customer.)

Do keep in mind, however, that some of these business credit cards will make a hard pull on your credit score when you apply. Hard pulls ding your credit score a small amount—just about five points—but, if you’re credit score is already challenged, you’ll want to avoid further damage whenever possible.

Definitely do your research, and be as sure as possible that you’ll be able to qualify for the card you’re aiming for. Then, you’re ready to apply for a business credit card, use it responsibly, and watch your credit change from “bad” to “good.”

The post 4 Easy Business Credit Cards to Get Approved for ASAP appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/easy-business-credit-cards

Tuesday, April 24, 2018

TD Bank Business Checking Accounts: What to Know for Your Business

Your business needs a small business checking account—there’s no question about that. The question, instead, is which bank do you sign up with. If you’re looking into TD Bank business checking accounts with the hope of finding a fit for your small business, then you might just have a match.

Institutional banks can certainly be baffling for small businesses. There are fees and ways to waive fees; free transactions, but not all of them are free; and even something as simple as depositing cash comes with a charge after a certain amount. But TD Bank’s business checking accounts, made with small businesses in mind, have simplified a lot of these pain points.

The Canadian bank has grown from little more than a blip on the US radar into the 8th largest bank in the country throughout the past 10 years. That’s happened by sticking to its mantra of being “America’s most convenient bank.” Which is definitely a helpful feature in a small business bank account.

True, TD Bank currently only has locations on the US East Coast, with 1,300 branches stretching from Maine to Florida. But if your small business is HQ’d in that part of the country, then a TD Bank checking account could be the perfect place to set up your banking for your small business.

TD Bank is open every single day—even Sunday—and into the early evenings, too. The bank is also currently in the throes of substantially building out its small business offerings of TD Bank accounts including checking, savings, loans, and credit cards, too. Better yet: It’s built its success on catering to the average person, and small businesses that often fall under the radar of the biggest US banks.

Let’s take a look at how the TD Bank small business checking accounts stack up, plus other alternatives, and what to choose.

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Why You Can’t Choose Any Old Small Business Checking Account

Why should something as “simple” as setting up a small business checking account be such a big deal? It’s a totally reasonable question, especially if you’re a one- or two-person company, or a sole proprietor business entity like so many American small businesses.

For one, it’s just plain good business sense to separate your personal checking account from your business one. You’ll make accounting season easier, but also if you’re an LLC, S-corp, or C-corp, you’ll need the distinction to make sure your personal finances are protected in case of a lawsuit.

Next, you need to make sure you choose the right business checking account for the size and type of business you’re running. Otherwise, you could end up spending extra for things you don’t need—like deposits, transfers, or transactions—or not getting the best deal for the things you do need.

To know if TD Bank’s business checking accounts, or any bank’s business checking account suite for that matter, are the right pick, as yourself these Qs about your own shop:

8 Important Questions to Ask Before Shopping for a Business Checking Account 

  1. How many times will be you depositing and withdrawing from your business checking account? One or twice a month, or many times? If you don’t know, guess.
  2. How big or small will your business checking balance will be every month? Will it be consistent, or fluctuate a lot? If you don’t know, assume the number will probably be small, to err on the safe side away from fees.
  3. What about your average business checking and personal checking balances combined? Some banks will consider both each month to determine whether to waive certain fees.
  4. Are you running a business that deals with a lot of cash? Or can you easily do most of your transactions digitally?
  5. Will be making a lot of electronic transactions every month, or just a few?
  6. Will those electronic transactions involve a wire transfer of money from one bank to your bank? Will those happen both domestically and internationally, and how often would those wire transfers take place each month? Most banks charge an arm and a leg for wire transfers, but if you do expect to do a lot of these, there are some out there that will waive the costs of certain kinds.
  7. How far along in your business are you? Are you at a stage where your startup is really taking off and you’ll need cash management, payroll, and other services?
  8. Do you just need a business checking account? Or do you think you’ll also need to shop around for a small business loan, business line of credit, or business credit card in the future?

Once you have a reasonable idea of what your banking needs will be, you’re ready to move onto to the next part of the process: comparing one business checking account against the other.

11 Business Bank Account Features You Might Want to Compare Among Accounts 

Many business checking accounts, including the TD Bank business accounts, share similar features. As you go comparison shopping, keep some (or all) of these features in mind. Not all will be applicable to every business owner—or every account, for that matter. But they’re a good frame of reference!

  1. Monthly fee
  2. Balance you might need to maintain in the account each month to waive that fee
  3. Any other optional actions (minimum number of transactions, etc.) to waive that fee
  4. Number of free transactions each account offers each month (transactions being any deposit or withdrawal, written check, wire transfer you make)
  5. How much cash you can deposit before incurring a cost, and how much that cost is per amount of cash deposited thereafter
  6. How many locations and ATMs a bank has, especially if you think you’ll be using those a lot during the month, and your business requires you to be on the road a lot
  7. What a bank charges in out-of-network ATM fees, aka ATMs that aren’t the bank’s own if you can’t find a branch while you’re traveling
  8. What the bank charges for wire transfers and cashier’s checks
  9. If the bank charges for electronic transactions
  10. If there’s an overdraft charge, and what it is or if they offer overdraft protection, and what the details are
  11. If you think you’ll need payroll, cash management and other services, does the bank throw those into a small business checking account package for free, or do you have to pay extra?

Lots of banks have at least three and sometimes four different small business checking accounts to chose from, as well as a number of specialized accounts for different situations and industries.

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TD Bank Business Checking Accounts: What Their Accounts Offer

One of the great things about TD Bank—and this goes back to its core value of catering to the average person, plus both the smallest of businesses as well as the larger ones—is that it’s pretty upfront on everything it does and does not do. Not every big bank is super transparent.

There’s no need to go hunting for small print and reread legal jargon a hundred times to understand what you’re getting into—so, you’ll know what you’re paying for and what you’re not. That’s really good. (We’ll get to those details in a moment.) All accounts include TD Bank’s BusinessDirect online banking, which is a suite of benefits and support including:

  • Free mobile banking with Mobile Deposit (allows you to make single-item deposits account electronically via an app that scans in images of paper checks)
  • A TD Bank Visa Debit Card
  • Live customer service, 24/7
  • Longer opening hours of each branch than any other bank
  • Banking on the weekends
  • Payment options with BusinessDirect ACH (each ACH batch per statement costs $10.00)
  • Free bill pay
  • Free e-statements with check image
  • Business Overdraft Protection options (for a fee)

One notable difference with TD Bank vs. other big banks like Chase, Wells Fargo, or Bank of America, though, is that TD Bank doesn’t have thousands of ATMs. ATMs are free—which is big—but they’re all located in their branches along the East Coast.

So, if you travel a lot and need access to your business checking account via ATMs anywhere else in the country, you’re going to be charged $3.00 for each use. That said, if you’re in any city along the US East Coast, it’s hard not to run into a TD Bank branch.

Now, onto the accounts. TD Bank has three different kinds of small business checking accounts: TD Business Simple Checking, Convenient Checking Plus, and Premier Checking. It also has three specialized accounts: TD Business Interest Checking Plus, Interest on Lawyers Trust Account, and Interest on Realtor Account Trust. We’ll look at the first three for small businesses, and show you a contrast with Chase’s accounts for a frame of reference, too.

TD Business Simple Checking Account

The TD Business Simple Checking account is one of the best deals on the market if you’re just starting out, are a home-based one-person freelancer LLC, or if you’re not yet sure just how much revenue you’re going to generate each month.

  • $10 monthly fee
  • No minimum balance
  • 200 free transactions, $0.75 each thereafter
  • Up to $5,000 of cash deposits free per month, $0.20 per $100 thereafter

The list of fees are spelled out in this TD Business Simple Checking Account guide. But before you gasp, remember that most banks charge similar amounts for these things, although they might express it in different ways.

Take TD’s $2.00 charge for a monthly paper statement. Chase doesn’t say it charges for the paper statement, but instead says it will charge you a $12.00 monthly fee (compared with TD’s $10.00) rather than a $15.00 one, if you go paperless. So, in other words, you’re being charged $3.00 extra for a paper statement versus TD’s $2.00.

Here’s how it stacks up against Chase’s equivalent basic business checking account:

Chase Total Business Checking Account

  • $15 monthly fee ($12 if you go paperless)
  • Monthly fee waived if you keep a minimum daily balance of $1,500
  • Electronic deposits are free—excluding incoming wire transfers
  • 100 free debit and non-electronic deposits each month, $0.40 each thereafter.
  • Up to $5,000 cash deposits free each month

Chase is also offering a limited-time $200 bonus if you sign up here. You just need to complete a few qualifying activities: Deposit $1,000 or more in new money into your new checking account within 10 business days of opening it; and then maintain that balance for 60 days. You also have to make five debit card purchases—Chase QuickDepositSM, ACH (Credits), or wire transfers in that time. That’s pretty easy for most small business owners, and a simple way for you to get a cash bonus.

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TD Bank Business Convenience Checking Plus

The next step up in the suite of TD business checking accounts is Business Convenience Checking Plus. This is good for a small business that’s up and running and doing some volume, too. You can check out its full list of costs and fees. Here are the account details:

  • $25 monthly fee
  • Fee can be waived if you keep a $1,500 balance, which you can bundle with your personal checking to reach the level and get the waiver
  • 500 free transactions, and $0.50 each thereafter
  • $10,00 free cash deposits, and$0.20 for $100 thereafter

Chase’s second-tier account is a big step up from its basic offering, which you’ll see from the size of the minimum balance. If this one seems like a fit for your business, it’s a good pick. For an alternative at this level, look at the second-tier Wells Fargo small business checking account.

Wells Fargo Business Choice Checking Account

This is a great option for small businesses that are now experiencing a steady flow of incoming and outgoing transactions, and are earning enough revenue to handle a bigger minimum balance than what someone would need for TD Bank’s Convenience Checking account.

  • $14 monthly fee
  • Fee waived if you have a $7,500 minimum balance
  • Wells Fargo also offers a host of other ways to waive this fee.
  • 200 free transactions and then $0.50 thereafter
  • Up to $7,500 free cash deposits and$0.30 per $100 thereafter

The TD Business Premier Checking Account

TD Bank’s largest small business checking account, before going into specialized accounts, is the Business Premier Checking account. One of the best parts of this account is that you get free out-of-network ATMs—huge for those businesses based on the East Coast, but that have a need to travel.

  • $30 monthly fee
  • $40,000 balance, which can be reached by combining a personal checking account, or through a host of other measures that involve cross-selling of other TD Bank business offerings like TD Merchant Solutions, TD Digital Express, or if you take out a TD small business loan
  • 500 free transactions; $0.35 each thereafter
  • $30,000 of free cash deposits, $0.20 per $100 thereafter

This looks a bit more like Chase’s second-tier business option. If you can make the minimum combined with your business savings account, it could definitely be worth the extras.

Chase Performance Business Checking Account 

  • $30 monthly fee
  • Fee waived if you keep a minimum combined balance of $35,000 (combined with a linked Chase Business Premier Savings account)
  • 250 free transactions
  • Unlimited electronic deposits
  • Up to $20,000 free cash deposits
  • All incoming wire transactions and two outgoing domestic wires are allowed per month at no charge
  • Interest option available

The same $200 bonus is available with this Chase account, too, which is good news.

Is a TD Bank Business Checking Account Right for You?

It depends! TD Bank has a lot of good checking account options, especially for one to two-person micro-business or freelancers based on the East Coast. Their mid-sized option is especially good.

As with any small business bank account, you’ll want to do some comparison shopping, and also consider which financial institution you’re interested in building a long-term relationship with. Down the line, it could help you with small business financing if you’re in need of a loan!

The post TD Bank Business Checking Accounts: What to Know for Your Business appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/td-bank-business-checking-accounts

How to Learn Like Elon Musk (Infographic)

Elon Musk is an inspiring entrepreneur and pop culture icon with unprecedented career success in the tech world. He’s best known for building four multi-billion dollar companies in four separate fields by his mid-forties. His ability to create successful ventures across wildly different industries debunks the “jack of all trades, master of none” myth that is pervasive in the business world.

Arguably, one of the reasons that Musk has been so successful is because of the unique way he sees the world. He has an interesting strategy for learning new information that allows him to learn quickly, identify the fundamental aspects of a topic area, and apply these principles to new fields. This is an uncommon but powerful way of approaching new concepts that professionals across industries can also benefit from.

Those that admire Musk often look for ways that they can emulate him. From articles on what Elon Musk reads to think pieces on the reasons for his success, there is a lot of thought given to ways we can all be a little bit more like him. Whether you are a business owner or a young professional, consider implementing the strategies that Musk uses to learn new things as you encounter new information in your own career.

Check out this infographic below to learn 8 simple ways that you can learn like Elon Musk:

Sources: Forbes | Wired | IncMedium | Kick Resume Blog | Curiosity | Garin Kilpatrick

The post How to Learn Like Elon Musk (Infographic) appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/how-to-learn-like-elon-musk

Monday, April 23, 2018

Hiring Contract vs. Full-Time Workers: What’s More Cost Effective?

Putting together the right team for your growing small business can be a daunting task—it involves trust, time, and intuition. If you’ve been considering the possibility of using contract vs. full-time workers to take on some of your projects, the decision might be lucrative—but you’ll have to figure out if it’ll actually save you any money in the long run.

Independent contractors—often called “1099 employees”—are treated differently in terms of tax laws vs. W2 employees, and, in turn, will hit your bottom line differently. There are also different restrictions around the number of hours contract vs. full-time employees can work, and the scope of jobs they can do. In that regard, sometimes choosing contract vs. full-time workers isn’t the best cost solution.

To help resolve the confusion and help you choose the best hiring option for your business’s talent needs, we’ll clarify the differences between contractors vs. full-time employees, and help you figure out which will be the most cost-effective choice for your business.

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The Difference Between Contract vs. Full-Time Workers

The classification difference between contract vs. full-time employees is vital. Generally, you can think of a contractor as providing services for you, but who’s working independently and pays taxes on money they receive from you. An employee, on the other hand, is on your team—you’re their supervisor, responsible for their behavior, and also reporting their taxes.

Many businesses, both small and large, have made the mistake of misclassifying employees—and have paid the price in hefty fines, legal fees, retroactive payroll taxes as a result. Although the IRS has no absolute definition of either the independent contractor or the W2 employee, they do have a 20-point checklist to determine employee status.

Out of those characteristics, there are some generally agreed upon requirements for each, so let’s take a look at those:

Definition of an Independent Contractor (1099)

Think of an independent contractor as a separate business entity. The contractor provides a service for which you pay. You enter into a contract with the 1099 employee after agreeing on the parameters of the project and the fee for services rendered.

You can then expect that the contractor:

  • Pays all taxes on payment received from you—federal, state, and local, including Social Security and Medicare
  • Provides all supplies and equipment needed for the service provided
  • Works based on a short-term contract or project-by-project basis
  • Will invoice you and expect to be paid according to the terms of the contract—usually at the end of satisfactory completion of project

For simplicity’s sake, think of your independent contractor as just that—an individual who’s providing a service to your business (either one-time or ongoing), but who’s ultimately independent from your business and its day-to-day operations.

Definition of a Full-Time Employee (W2)

If the work that an individual does for your business—whether on a full-time or part-time basis—requires that you dictate when, where, and how they perform their duties, chances are that the IRS would classify this individual as a W2 employee.

This type of working relationship tends to be longer term, with you as the employer continuously supervising the team member, directing and overseeing how their work is performed.

Circumstances around taxes are different, too: When a worker is classified as a W2 employee, you as the employer are required to report and pay payroll taxes on the individual. This is one reason that the IRS pays close attention to employee misclassification.

Not sure whether workers on your team should be classified as employees or individual contractors? From a work product and process perspective, the IRS will consider:

  • Behavioral control: Do you dictate the worker’s method and schedule for performing tasks?
  • Financial control: Do you dictate hourly and/or salary pay rates? Do you handle payroll taxes including Social Security and Medicare? Do you control benefits available, such as vacation and sick days?
  • Relationship: Does this person’s job involve developing ongoing relationships with co-workers as well as customers/clients?

If you answered yes to one or several of these questions, it’s likely that, from the IRS’s perspective, your worker should be classified as a W2 employee.

→TL;DR (Too Long; Didn’t Read): Contract (1099) employees are not on your payroll, and are providing services for you. Full-time (W2) employees are on your payroll, and you’re much more responsible for how they do their job, plus supervising their work.

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Understanding the Costs of Contract Workers

With a good grasp of the IRS-defined differences between 1099 contract worker and W2 employees, let’s take a closer look at the cost factor of contract vs. full-time employees. Will a 1099 independent contractor actually cost you less in the long-run?

The answer is that it depends on your business’s needs.

Because, in reality, the hourly or flat-fee rate that you pay for an independent contractor will most likely be higher than you’d pay an employee to perform the same services. However, that’s mostly due to the additional costs you’d normally incur with an employee that aren’t required when you hire an independent contractor.

How Payment Works for Independent Contractors vs. Full-Time

Although quite different from the traditional payday-every-Friday model, the payment process for independent contractors is simple for the small business owner.

In general, independent contractors are paid a flat fee for services rendered. This fee is agreed upon by the business owner and contractor after they’ve both also come to terms on the specifics for the project, but prior to work kicking off. (You don’t want to get caught up in any miscommunication about either amount of money or scope of work—that’s for sure.)

Both parties agree on how the fee will be paid, but it’s usually paid at the end of the contract when all the work has been completed to the satisfaction of the business owner. Sometimes, a contract worker will request a deposit or a portion of a retainer. Most commonly, though, you’ll see an invoice from a contractor at the end of a project.

You can typically expect to pay more up front; however, keep in mind that contract workers are fully responsible their own expenses, including all taxes. This means you have no obligation for federal, state, or local taxes, social security or Medicare benefits, Worker’s Compensation insurance, or unemployment taxes. All tax filing is the responsibility of the independent contractor.

As the employer of a 1099 contractor, your only responsibility is to pay the contractor’s fees as invoiced, then supply a Form-1099 each January detailing payments made.

The Hidden Costs of Hiring Independent Contractors

Beyond the simple facts of when and how money changes hands, tax withholdings, and other surface-level costs, working with independent contract vs. full-time workers will involve additional management and opportunity costs that might be less obvious.

As you weigh whether contract or full-time workers will be the best choice for your business, don’t overlook the financial impact imposed by these realities of working with independent contractors:

1. The contractor’s timing may not match yours. By law, contractors have the right to dictate their own working hours. Many freelance independent contractors work part-time or non-traditional hours, and most work for more than one client at a time.  

For this reason, your time frame and desired schedule may not necessarily be achievable when working with independent contractors. It might be necessary to either adjust your project timetable (which could cost you time and money) or hire a different contractor to complete the full scope of work on a given project.

2. Contractors are legally limited to 1,040 hours of work annually. According to IRS and common law, an independent contractor can only work a maximum of 1,040 hours (equivalent to approximately four months of full-time work) annually for a single employer. 

To fulfill these conditions, you might find yourself spreading a single job between multiple workers, or even letting go of one contractor to hire another if you hit this limit is before the end of a given project. Imagine the time it takes to bring someone up to speed… and then having to do it again.

3. Contract workers will have less loyalty to your company. It isn’t unusual for an independent contractor to be working on projects for several clients at any given time. Frankly, they generally have to to make ends meet; simply by virtue of being independent, the contractor is likely to hold less loyalty for any single company.

When another client offers a better fee for the services being rendered, there isn’t a guarantee that your favorite contractor won’t leave you and go to your competitor for higher pay. As a result, there can be little to no expectation of a long-term working relationship with your contractor, and you will always need a plan in place for how you will proceed if the contractor becomes unavailable.

→TL;DR: As you calculate the cost effectiveness of hiring contract vs. full-time workers, don’t underestimate the impact of time delays, additional training or management time for multiple workers, or other disruptions to your business that maybe caused by these working relationships.

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Calculating the Costs of W2 Employees

As a small business owner, you have reasonable control over most of the expenses associated with your W2 employees. You control the pay scale and benefits offered, the work schedule, the supply requisition and purchasing, and the training budget.

Keeping these administrative controls in mind, let’s take a closer look at how a W2 employee may or may not be the best financial choice for your business:

How Payment Works for W2 Employees

Full-time W2 employees are paid in the traditional way. Hourly employees typically work a preset schedule, then punch a time clock or use a timesheet to log hours. Salary employees might be paid a set amount per period, regardless of the exact number hours they work. Either way, however, both employee types will receive their paycheck in accordance with a consistent weekly, bi-monthly, or monthly schedule.

With each paycheck, W2 employees will have a predetermined proportion of income taxes automatically withheld, as well as any other benefits for which they’ve authorized payment. For the most part, these employees won’t have to think about taxes again until filing their annual return each April, when employees might be entitled to a refund based on the amount withheld from their regular pay.

The Unexpected Extra Costs of W2 Employees

Just as with independent contractors, there are hidden costs that businesses incur as the result of W2 employees. Some of these are a little more obvious because they are actual expenses. However, all will factor into your decision as to the best type of workers for your business.

1. Providing supplies and equipment to operate efficiently. One of the biggest differences between independent contractors and full-time W2 employees is who pays for all the supplies. For the W2 employee, the business either directly pays for or reimburses the employee for all supplies needed to complete the job efficiently.

The business also provides necessary office space and equipment to ensure that the employee can be effective in his or her job performance, including furniture, technology, and other equipment needs. This is a required cost of hiring W2 employees regardless of whether employees work on-site or in a remote capacity.

2. Training and professional development. In order to stay current in the marketplace, businesses must grow and adapt to a changing landscape on a regular basis. Providing training or education stipends for new and existing employees is essential in giving them the best opportunity to be successful at their jobs over the long-term.

3. Maintaining a positive company culture. In the long run, most quality workers are motivated by far more than a regular paycheck (clearly—since so many workers ditch steady work to become independent contractors, or start their own small business). This means keeping long-term employees enthusiastic about the business is critical to ensuring that not only do they keep contributing—but that they stick around, period.

→TL;DR: Expenses like additional training on new trends and technologies, quality benefits for employees, and opportunities for team and culture-building activities are costs that business owners can’t afford to overlook.

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Choosing Between Contract vs. Full-Time Workers

Now, the big question: Should your business hire contract vs. full-time workers? Which is the most cost-effective choice? The answer could be either or both, depending entirely on your business’s needs at any given time.

To help you make this important business decision, we’ll go through some specific instances when you might choose independent contractors over W2 employees for your business, or vice versa.

When to Choose Independent Contractors

For projects or tasks that have a short projected completion time and don’t require much supervision, independent contractors work well, leave you with less long-term obligation, and tend to be generally more cost effective.

That’s because you only hire independent contractors when you actually need them, they tend to be more current on the latest technologies and trends, and they offer diverse work experiences.

After all, training any new worker requires time and funds—and these are two things small business owners don’t always have an abundance of on hand. In fact, you may not even personally have the skills to train an employee in the tasks required for your business. For this reason, independent contractors tend to be the best choice if you need specific expertise for a project in a short period of time.

Here are a few specific scenarios in which an independent contractor will likely be the more cost-effective choice for your business.

  • Expert competencies. Website design/development, online marketing, copywriting, data mining, software programming, etc.
  • Seasonal projects. Help with order fulfillment or customer service during particularly busy times for your business
  • Administrative or bookkeeping services. When you need someone to help with basic administrative or bookkeeping tasks for just a few hours per week. These job requires very specialized skills, can be done remotely, and typically don’t offer enough hours to be worthwhile for a part-time W2 employee
  • Building and equipment maintenance. Heavy-duty maintenance that must be done on equipment or facilities on an infrequent, as-needed basis

These are all good reasons to turn to independent contractors for help with fulfilling specific business needs.

When to Choose Full-Time W2 Employees

Choose W2 employees with an eye on the future of your small business. Of course you have a position to fill now and you certainly want to choose carefully to find a good fit. However, you also have to consider how this person will fit into the business model in the future.

One of the advantages to the W2 employees is that they tend to create a sense of community within the workplace. Long-term employees often feel they have a personal stake in the success of the company and become great word-of-mouth marketing tools.

As a small business owner, you’ll find that W2 employees are:

  • Especially helpful for success in local markets. When they already know the target market and could have important contacts they can leverage for business growth
  • Better for projects that require close supervision. Since W2 employees have regular pre-set hours, it’s far easier to use them for projects and operations that require timely reporting and close supervision
  • Essential when the need arises for developing relationships. As W2 employees are office daily, they’ll have a better feel for what’s happening within the business than an independent contractor who works remotely would

This knowledge gives the W2 employee the edge on nurturing relationships with customers/clients that can be invaluable in the long term.

Figuring Out Whether Contract vs. Full-Time Workers Are More Cost Effective

In the end, your best answer to the contract vs. full-time worker debate could be either one—or even a combination of both. Ultimately, the most cost-effective choice for your business is going to be the one that allows you to thrive in the current market while keeping an eye on the years ahead.

Carefully consider:

  • the current and future needs of your business
  • the cost-benefit of long-term relationships vs. short-term responsibility
  • legal liabilities of potential misclassification

You’ll need to scrutinize all of these insanely closely before choosing which type of workers to bring into your business.

The post Hiring Contract vs. Full-Time Workers: What’s More Cost Effective? appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/contract-vs-full-time-workers

Fix and Flip Loans: 8 Best Options for First-Time and Veteran Flippers

With a strong economy, thriving real estate sector, and channels tuned to HGTV everywhere, house flipping is a business on the radar of so many. It’s not an inexpensive pursuit, though—regardless of

Researchers from Attom Data found that house flippers renovated more than 200,000 homes in 2017, with an average profit of $68,143 per property. That’s a lot of houses—and a lot of money. Despite the popularity of house flipping, the biggest barrier to entry and success in this space is cash. This is where fix and flip loans can help. Without enough money, you can’t purchase the home, pay for renovations, or find a buyer for the property when the time comes to sell.

There are multiple options for fix and flip financing, allowing you to quickly purchase your property and get your project underway. Even with your first flip or your fiftieth, you can use fix and flip financing options to add to your portfolio and grow your business as a real estate investor.

Here’s what you need to know about eight creative fix and flip loans, how to choose the best one for you, and what to do before approaching a lender. We’ve also included info from house flippers who’ve successfully used fix and flip financing to grow their own real estate businesses.

An Introduction to Fix and Flip Loans

Every house flip starts with actually finding the property. We’re not here to talk about that, but read this link on how to find a house to flip if you’re not quite sure where to start. Once you find the property, you’re left with figuring out how to finance the project.

And unless you’re independently wealthy, you’ll have to borrow money to finance four parts of your house flip:

  1. The purchase price of the house (you’ll need to bring 20% to 45% of the purchase price as a down payment depending on the lender)
  2. The “holding cost” of the home (e.g. insurance payments, HOA fees, and other costs of owning the home while renovations are underway)
  3. Materials and labor for the renovation
  4. Realtor costs and closing costs to find a buyer and sell the property post-renovation

The first thing you should know before searching for financing is that getting traditional bank loans for fix and flip projects usually isn’t the best route.

As a house flipper, you’re essentially a real estate investor, and your income can be seasonal and irregular. So, most banks won’t give you a business loan for fixing and flipping properties. And even if a bank is willing to work with you, their loan product might not be suitable. Bank loans are generally long-term loans—and most flippers buy, renovate, and sell a property within a few months.

Since bank loans are hard to come by, flippers usually look for alternatives. First-time flippers can ask for loans from their own circle of friends and family. Others consider more creative options, such as tapping into home equity. Once you’ve built up a successful track record as a house flipper, loans from private investors and bank lines of credit become more of a possibility. More each of these options in a bit.

→TL;DR (Too Long; Didn’t Read): Fix and flip loans finance the cost of purchasing, holding, renovating, and reselling the home. You sometimes have to get creative to finance your first few flips, but more options open up as you develop a track record as a successful flipper.

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What to Do Before Applying For a Fix and Flip Loan

Real estate investment is one of those industries where you primarily learn by doing. The more flips you have under your belt, the more you’ll understand about what works and doesn’t work for you in terms of financing.

But, there are a few things that everyone should understand before they seek funding for a fix and flip. Understanding these things will speed up the borrowing process and give your lender more assurances that you have a good head on your shoulders.

1. Create a business plan for each flip.

Fix and flip lenders customarily lend money to rehabilitate properties in poor condition. But no one knows the specifics of a property better than you do. You’ll need to supply the lender with information about each property that you’re flipping.

This is where a house flipping business plan helps. You don’t need to create a 50-page booklet for every property in your portfolio, but you should write up a thorough analysis on each property that contains the following:

  • Exact address of the property
  • Analysis of the neighborhood where you’re buying the property
  • Sale prices for comparable homes in the neighborhood (also called “comps”)
  • Strategy, timeline, and financial projections for the renovation (flippers refer to this information as the “scope of work”)
  • Background on anyone who will assist you with the project (e.g. a partner, home inspector, or general contractor)
  • Backup plan in case the renovation doesn’t go according to plan (e.g. will you rent out the property while you search for a buyer?)
  • A professional appraiser’s current valuation of the property and estimated valuation after renovations

Addressing each of these points in your house flipping business plan will encourage lenders to take you seriously. It’ll also ensure that you get a large enough loan to cover all your costs.

2. Accurately estimate renovation costs.

Lots of flippers end up not borrowing enough money from their fix and flip lender. Your whole project can fail if you don’t have enough funds to pay your contractors. The best way to avoid this problem is by creating an extensive scope of work before applying for the loan. A scope of work is a detailed outline of all the repairs you’ll be conducting on the home, the cost, and the timeline.

To create a scope of work, you’ll need the help of an experienced appraiser and contractor. Together, these parties will walk through the property, research comparable projects, and give you an estimate of cost and timeline. They’ll typically quote cost and timeline along a range (e.g. 2 to 3 months) to account for unknown contingencies.

You should have a comprehensive scope of work before reaching out to a lender, or you won’t know how much money to borrow. The scope of work will also contain two other numbers that are important for fix and flip lenders: loan-to-value (LTV) and after-repair value (ARV).

LTV and ARV

  • LTV is a comparison of your loan size to the value of the property. The maximum LTV on a fix and flip loan is typically 90%. For example, if you’re eyeing a $100,000 property, a lender who provides 90% LTV will lend you $90,000. You have to provide the remaining $10,000 as a down payment.
  • ARV is an appraiser’s estimate of the home’s value after renovations are finished. Some lenders quote loan size based on ARV. For example, if a lender goes up to 70% ARV, they will lend a maximum of $140,000 on a home that will be worth $200,000 after repairs. You can usually borrow more money from a lender who bases their loan sizes on ARV.

3. Build up your network.

One last thing to remember before applying for your loan is that real estate is a profession where connections are important. Join your local Real Estate Investors Association (REIA) or club to meet other investors.

Many real estate investors are on both sides of the table—they borrow money for their own projects but also invest in other people’s projects. So, the people you meet could end up as partners or lenders for your next deal.

→TL;DR: Before approaching a fix and flip lender, do some homework on the property. Prepare a short business plan, a scope of work, and calculate its current value and after-repair value (ARV). Regularly try to meet other real estate investors.

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Fix and Flip Loans: 8 Best Options for New and Experienced Flippers

Once you’ve narrowed down a property and done some homework on the condition and the repairs you’d like to do, it’s time to consider your financing options. Some options are better than others, depending on your experience flipping properties and your credit profile.

Here are the eight best fix and flip loan options:

Option #1: Family and Friend Loans

Best for: First-time and experienced flippers with family members, friends, or acquaintances who want to invest in real estate.

Remember what we said about building your personal network? Personal connections are a great place to start for fix and flip financing. Your cousin, uncle, or friend of a friend could end up as your fix and flip lender.

Many people invest in real estate to get above-market returns and might be interested in your project. And since family and friends have a personal connection with you, they’re likely to charge the lowest interest rates.

There are a couple cardinal rules of borrowing money from family and friends. The first is to get the terms of any loan in writing. Specify the interest rate and the time it will take to pay back the loan. A written document protects the parties on both sides. The second rule is to follow all IRS laws and securities laws that apply to family investments.

The terms of the loan will vary based on your geographic market, the size of the loan, the specs of the property, your experience in flipping, and the lender’s appetite for risk. Usually, the borrower makes no payments while renovating the house but pays back everything with interest after selling the house. The house serves as collateral for the loan in case the borrower defaults.

Rae Dolan and her husband, owners of AMI House Buyers, financed some of their first fix and flips with money that friends lent to them. “My husband made a joke on Facebook,” says Dolan, “that if anyone had $100K to put behind my sheer determination, to let him know. A friend of ours messaged him. I met with our friend and their spouse, gave them a document that explained the lending process, answered FAQs, and showed some past projects we did. They thought about it for a few weeks and came on board. Once their first loan was paid back with interest, they were more than willing to repeat it and upped the available budget.”

Option #2: Bring a Financing Partner On Board

Best for: House flippers who have deep market knowledge and experience with home renovations and house flippers with a well connected personal network (to find a partner).

Many house flippers find themselves in a frustrating position: They have the market knowledge to know what makes a good flipping opportunity, but not the money to see the project through. This is where bringing on a partner can help.

Partners can share in the following tasks:

  1. Finding the flipping opportunity
  2. Planning and managing the renovation
  3. Supplying the financing

Based on what each partner brings to the table, they share in the profits. Usually, one partner supplies the funding, while the other finds the flipping opportunity and oversees the renovation. You might use the same partner for multiple projects or different partners for different projects.

Lucas Machado, president of House Heroes LLC, has completed upwards of 200 fix and flip projects. Of partnership financing, Machado says, “How much of a share the funding partner gets depends on what they are able to negotiate with the other partner(s), and whether or not they are bringing anything else to the venture. If the funding partner is only providing the funding, nothing else, they will typically end up with somewhere between 33% to 50% of the profit. But this isn’t a ‘can’t lose’ scenario for the partners that aren’t funding the deal, because if there’s a loss, rather than a profit, the partners also share the loss.”

For example, let’s say you spend $200,000 purchasing and renovating a home (with your partner supplying all the money). If the house sells for only $150,000, you and the partner will divide the $50,000 loss. If it’s a 50-50 partnership split, that means you would have to reimburse the partner $25,000 out of your own pocket.

As with family and friend loans, you should document all terms of a joint project with a written partnership agreement. While hiring a business lawyer can be helpful in complicated situations, DIY legal help sites like LegalZoom and Rocket Lawyer can also help you put together a partnership agreement on your own.

Option #3: Home Equity Line of Credit (HELOC)

Best for: Flippers who are homeowners and have at least 20% equity in their primary residence.

Another popular option for fix and flip financing is to tap into the equity in your personal residence. This is, of course, only an option if you’re a homeowner. A home equity line of credit (HELOC) gives you access to a certain amount of money, and you can draw on the money as needed. You only pay interest on the money that you use.

Equity is the difference between the market value of your home and your mortgage balance. To qualify for a home equity line of credit, you should have at least 20% equity in your home, ideally more depending on how much you want to borrow. You should also have good credit and enough monthly income to afford your mortgage payments and pay off the HELOC.

Most banks will let you borrow up to 85% of the value of your primary residence, minus your outstanding loan balance. For example, let’s say you have 30% equity in a $300,000 house. That means you still owe $210,000 on your mortgage. A bank would extend you a maximum HELOC of around $45,000. If this isn’t enough money to complete your fix and flip project, you can combine a HELOC with other financing methods.

Brady Hanna, owner of Mill Creek Home Buyers, started flipping properties with a HELOC. “We started out using equity from our HELOC. We had a 10-year term, and the rate was fixed at 4.99% for three years and then variable at 1.5% plus prime after that.” Although interest rates are rising currently, HELOCS still have some of the lowest rates you’ll be able to find.

Besides a HELOC, other options that let you tap into home equity are a home equity loan (HEL) and a cash-out refinance.

Option #4: Using Funds in Your 401(k)

Best for: House flippers who have a lot of retirement savings, either through an employer 401(k) or Solo 401(k) but not recommended for flippers who are close to retirement age.

Yet another option for financing your fix and flip is to take a loan or withdraw funds from your 401(k) account. These aren’t good choices for someone approaching retirement age. But for younger flippers, taking a loan from your 401(k) might be worth it if the rewards outweigh the risks.

Most employer 401(k) accounts let you take a loan of up to 50% of the account balance, or $50,000, whichever is the lower amount. Solo 401(k) plans for self-employed individuals also allow loans of up to $50,000. You do pay interest on the loan, but the money is yours, so you’re paying back the principal and interest to yourself.  

The advantages trumped the risks for Kevin Polite, owner of HausZwei Homes. Polite took an early withdrawal from his 401(k) to fund his first few flips. “My thought,” Polite says, “was that you are going to be taxed on your 401k later [when you withdraw money] so this was just a way of getting at those funds earlier with a slight hit with the tax penalty of 10%. I’m seeing returns of 15% to 30% on my fix-and-flips, and I have use of the money now and feel I made the right decision.”

Some people also take a loan from their life insurance policy to finance fix and flips, similar to taking a loan from your 401(k).

Option #5: Personal Loans

Best for: House flippers with good credit who need a relatively small amount of money.

An unsecured personal loan is a very flexible financing product. Just like personal loans for business, when you take a personal loan, you can use the funds for just about any purpose, including financing a fix and flip.

To qualify for a personal loan, you’ll need a credit score above 650. Rates on personal loans can be as low as 5%, and you pay the loan back in monthly installments over a 3 to 7 year term. The catch is that the loan amounts are relatively small, capped at $50,000. So, you may have to combine a personal loan with other loan options to finance your fix and flip.

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Option #6: Owner Financing

Best for: Transactions where the seller doesn’t mind structuring the sale unconventionally.

Owner financing, or seller financing, is when the seller of the home acts as the lender. Instead of taking a mortgage from the bank or a lending company, you ask the seller to finance the fix and flip deal. Most homeowners want the money from the sale of their house right away. However, it doesn’t hurt to test the waters and see if a seller is interested in owner financing.

Seller financing offers advantages to both the owner and the flipper. Let’s you have Sally Seller and Bob Buyer. Sally is retiring and selling her fixer upper for $100,000, and she agrees to extend a loan to Bob. They agree on a down payment of 5%, a 4% interest rate, and a maximum term of 6 months. Bob gives her the $5,000 down payment now, and a promissory note for the remaining $95,000. He pays interest monthly.

Bob spends $25,000 renovating the house and sells it for $150,000. After selling the home, Bob pays Sally the $95,000 balance and remaining interest. He also pays his contractors for the renovation. Accounting for interest and the cost of the renovations, Bob made nearly $24,000 in profit! And Sally is happy too because she got a nice return on the proceeds of her sale.

Usually, the flipper makes interest-only payments until they sell the property, at which point they pay off the seller in one lump sum. The seller can set a “balloon date,” a specific date by which the borrower has to pay back the loan. By that day, the borrower either has to sell the property or get a new loan to pay off the seller.

As with partner financing, you should have the terms of an owner financing deal in writing. Since the seller here is a third party (not someone who you know, as is typical with partner financing), it’s wise to have a lawyer draft up the loan papers.

Option #7: Hard Money Loans

Best for: Borrowers with struggling credit and borrowers who can’t arrange alternative financing methods.

Hard money loans are non-bank loans from private investors or individuals. Hard money lenders have lower qualification requirements and can approve fix and flip funding in just 1 to 2 weeks.

Since hard money lenders work with less qualified borrowers, they charger higher interest rates, in the neighborhood of 10% to 20%. And lenders usually tack on fees, making the total cost even higher. That’s why it’s better to consider other, more affordable options first before applying for a hard money loan.

A variety of private lenders and online platforms specialize in hard money loans for fix and flips. LendingHome is a popular online hard money lender. RealtyMogul, RealtyShares, Patch of Land are hard money crowdfunding platforms, so called because multiple investors pool their money to finance your project.

Hard money loans are designed to “tide you over” until you complete the renovations on your property and sell it. As a result, the average hard money loan has a 1 year term, although longer options are available. Hard money loans also require a relatively small down payment (usually just 10 %) because the lender cares more the potential in the property than the background of the borrower.

Hard money lenders are pretty “hands on” once they approve your loan. They generally extend the loan in parts. First, they’ll give you the money for the home purchase and the first set of renovations. Once the contractor completes initial renovations, you’ll get the money for the next set of renovations, and so on.

Option #8: Bank Commercial Line of Credit

Best for: Experienced flippers with a history of successful deals and regular income.

Once you’ve been flipping properties for a while, the possibility of bank financing sometimes opens up.

Traditional bank loans don’t work well for fix and flips, but commercial lines of credit offer more flexibility. With a commercial line of credit, you get access to a specific amount of money, but only pay for what you use. This works like a HELOC, but the difference is the amount of money at your disposal. Commercial lines of credit can go up to even seven figures, based on your business’s income and your portfolio of fix and flips.

You can apply for a commercial line of credit at your local bank. Bank of America, Chase, Wells Fargo, and smaller community banks all offer small business lines of credit. The interest rates on these are very low, but remember—to qualify for a commercial line of credit, you’ll need to have an excellent credit score (above 700), a decent amount of money in the bank, and a stable history of revenues.

→TL;DR: Novice house flippers should reach out to family, friends, potential business partners, and even the current owner for fix and flip loans. If these don’t pan out, consider a home equity line of credit, personal loan, or borrowing from your 401(k). Hard money loans are popular and fast, but they’re expensive, so try other arrangements first.

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If You’re Flipping Homes, Consider Fix and Flip Loans

Many people want to become real estate entrepreneurs or grow their portfolio of investment properties, but lack access to affordable financing. Fortunately, there are many options for fix and flip loans.

These are the things to keep in mind when applying for fix and flip financing:

  • Fix and flip financing starts close to home. Think about family members and friends in your personal network who might be able to lend to you.
  • Bring a partner or the current owner in on your deal.
  • A home equity line of credit, 401(k) loan, or personal loan can also be helpful, especially if you don’t need too much funding.
  • If other options don’t work out, try a hard money lender or crowdfunding platform.

Keep in mind that many flippers use a combination of the methods above to finance their projects. And as you complete more flips, you become more well known in the community, and lenders and investors will be more open to working with you.

And there you have it. There’s no need to be an HGTV star to successfully complete a fix and flip!

The post Fix and Flip Loans: 8 Best Options for First-Time and Veteran Flippers appeared first on Fundera Ledger.



from Fundera Ledger https://www.fundera.com/blog/fix-and-flip-loans