3 Core Business Loan Components

3 Core Business Loan Components

Most business owners looking for financing don’t have time to research and learn everything they may need to know about the process. The reality is that most small business owners are quite busy running and managing their business. Getting help on the essentials is a good idea, however, especially if this is your first foray into the business loan process.

Preparation is the key to successfully navigating the maze of business loan applications. According to the U.S. Small Business Administration (SBA) you should be prepared to answer typical questions your lender will ask:

  • Why are you applying for this loan?
  • How will the loan proceeds be used?
  • What assets need to be purchased, and who are your suppliers?
  • What other business debt do you have, and who are your creditors?
  • Who are the members of your management team?

So what are the core components of a business loan? Here is a brief overview to help you understand the essential terms that describe these core components.

The Essential Elements of a Business Loan

1. Principal
The loan principal is the actual amount of money you have borrowed and hasn’t been paid yet. A simple example might be illustrated this way:

If you borrow $10,000 to purchase a car, that amount is your initial principal. After you have made your first payment of $500 on the principal amount, the remaining principal would then be $9,500. Keep in mind that the principal is only the amount loaned to you and does not include the interest charged on the principal.

Your loan principal determines how much interest and fees will be calculated on your business loan. Interest and fees are usually shown as a percentage of the principal and are the next two components we’ll look at.

2. Interest
Interest can be best understood as the amount of money a borrower pays the lender in exchange for the privilege of using their money. Interest is typically given as a percentage amount, for example: 10 percent. There are two types of loan interest to consider:

Simple interest, which is determined by multiplying the interest rate (10% in our example) by the principal over the number of periods of the life of the business loan. In other words, a $1000 loan that is to be paid back in one monthly payment would incur a simple interest charge of $100.

Compound interest, which requires paying interest on top of the interest already owed. A simple illustration would be if you borrowed $100 on Monday with 10% interest, compounding daily. If you repay the loan in full on Tuesday, you’ll owe $110. However, if you repay the loan on Wednesday, you will owe $121, that is: $110 + ($110 x 10%).

Keep in mind, too, that the larger the number of compounding periods, for example monthly versus annually, the higher the compound interest amount will be.

3. Fees
Fees on business loans can be charged in two different ways.

Fees charged upfront or at “origination” are simple, one-time fees that your lender will charge to cover the cost of evaluating and originating your loan. Be sure to ask about and be very clear what upfront fees you will be expected to pay. All lenders are not created equal and some lenders add additional fees.

Ongoing fees are incurred during the life of your loan or when you pay it back. Many lenders also charge a prepayment penalty fee to discourage borrowers from paying off their loan early. A prepayment penalty allows the lender to earn more money on interest by encouraging you to pay off the loan over the full loan period.

Being Prepared Is a Must

Now that you have a good understanding of the components of a business loan, you can move forward with finding a good lender. And once you are ready to look at loan offers, there is one more component that brings together all the others for any loan you’re considering. It is the Annual Percentage Rate (APR), and a good lender will help you calculate it and explain its significance.

Business Strategy: The Commander's Intent

Business Strategy: The Commander’s Intent

A common frustration among small business owners is the lack of execution or implementation of their business strategy and objectives. In fact, they may have clearly articulated their vision for their business – their Big Hairy Audacious Goal – as James Collins and Jerry Porras put it in their 1994 book Built to Last: Successful Habits of Visionary Companies. But too often they feel stifled when it comes to seeing their stated business strategy come to pass.

And they’re not the only ones who see it; their employees do, too.

Business Intent & Your Mission

Make it so. – Captain Jean-Luc Picard, Commander, USS Enterprise

There is a planning concept that is used in the military commonly referred to as “Commander’s Intent”, or CSI. It is the idea that the commander, be it a General, Admiral, or even a lower echelon officer in charge of a particular operation, will articulate a high-level summation of the intended operation. In a business context it is the equivalent of the owner’s Vision Statement or business strategy statement.

Wikipedia has an entry which explains it this way:

Commander’s intent (CSI) plays a central role in military decision making and planning. CSI acts as a basis for staffs and subordinates to develop their own plans and orders to transform thought into action, while maintaining the overall intention of their commander. The commander’s intent links the mission and concept of operations. It describes the end state and key tasks that, along with the mission, are the basis for subordinates’ initiative. Commanders may also use the commander’s intent to explain a broader purpose beyond that of the mission statement.

So far, so good.

The “commander”, the business owner, writes out a business strategy statement and imparts this vision to his leadership team, his management team, and his staff. Everyone is inspired, excited, motivated and ready for something great to happen.

Time goes on.

A few initiatives are launched. Some processes are developed. Maybe a few new hires or capital expenditures are made. A little traction, a little activity, and then life gets in the way. Customers need to be taken care of. Things happen. But the main thing – the Commanders Intent – falls by wayside.

And time goes on.

Business Strategy vs. Business Planning

The commander’s intent was based on good intentions, but something was missing between developing a strategy for business growth and the actual tools, resources and processes for making the intent a reality.

There was no plan.

The business strategy was there. The vision was clear. The troops were on board. But no “battle plan” was written down and no tasks were delegated and scheduled. So nothing much got done.

And the troops got demoralized and disenchanted. The management got frustrated. And the Commander is not happy.

Plan your work. Write it down. Work your plan.

A business strategy is not as a plan. A plan is tangible. You can see it, touch it, read it, and pass it around. It takes your vision and your strategic intent, and makes it into a “project” and then breaks that project down into tasks. Big tasks, small tasks, short-term and long-term tasks. And even the task of managing and overseeing all the tasks.

A plan must be written down, but it must remain dynamic, not static. Just because you have a great battle plan doesn’t mean anyone told the enemy. And just because you have a superb strategic action plan for your business doesn’t mean anyone told your competitors. Or your customers, or vendors, or suppliers, or the weather, the economy, and so on.

You must be agile and flexible while retaining your “Commander’s Intent”. Even your business strategy and vision may need to evolve over time. But without a plan to guide you and your staff along the way, nothing will really happen.

Using Cash Flow Analysis To Find Cash In Your Business

Using Cash Flow Analysis To Find Cash In Your Business

It is said that cash is the lifeblood of a business. That is never truer than when your business is growing. The faster the growth, the more cash you need. Even if growth for you is getting better rather than bigger, it still takes cash. Cash flow analysis is a vital component that is often overlooked. But doing so may cost you money that you already have.

Using Cash Flow Analysis

Finding hidden cash in your business requires looking at your business in a different way. Accounts receivable, inventories, accounts payable, and other assets are can be seen as “pools” of cash that can be tapped if you need them.

Along with the pools, your revenues and your operating expenses are like “streams” of cash flowing through the business. Some of the streams drain your cash out, and others bring it in. The key it reduce the drain increase the flow

Where’s the Money In Your Business?

Cash hides in two places in your business—in your assets and in your operations. Finding hidden cash in your business requires looking at it in a different way. And you only need to understand a few basic ideas about cash flow analysis to find it.

Your accounts receivable, inventories, accounts payable, and other assets are essentially “pools” of cash waiting to be tapped if done properly. Your revenues and your operating expenses, on the other hand, can be looked at like “streams” of cash running through your business. Some of the streams are draining it although you can reduce the drain, while others are nourishing it and you can increase the flow.

In physics, momentum is a function of both velocity and mass. The larger an object is and the faster it moves, the greater its momentum and its power. And that’s the same principle of the cash in your business: the more cash you have at your disposal and the faster it moves through your business, the greater your financial momentum and the greater your cash power.

In other words, you can increase your company’s cash power when you release more cash from the “pools”, or stocks, of cash that appear on your balance sheet, or when you move cash through your business more quickly.

Identifying hidden cash in your business is not overly complicated. You just need to know where to look and have the right tools. Here are eleven places you might find unexpected reserves of cash:

  1. Accounts Receivable: By decreasing the amount of time it takes to get paid from your customers, you will increase the amount of cash you have on hand.
  2. Inventory: If yours is like many other businesses, you have excessive amounts of money tied up in inventory. Work on having “just-in-time inventory” and you will improve your cash situation.
  3. Equipment and Facilities: You may have money tied up in outdated, inefficient equipment. You could save money over time by simply upgrading them, or you may be able to free up cash by leasing back assets.
  4. Accounts Payable: You may be able to stretch out your payments to your creditors over a longer period of time, or take advantage of early payment discounts where possible.
  5. Debt: Sometimes, it makes sense to take out a loan for some expenses such as large purchases. But, if servicing the loans is especially costly, it can better to pay off those loans early. Get creative with your financing options.
  6. Revenues: Besides raising prices or selling more goods, finding ways to decrease variable or direct costs could increase the flow of money into your business.
  7. Expenses: Small reductions in your monthly expenses can add up to big improvements in your cash power. It pays to review these very carefully. Also, changing the way non-cash expenses are accounted for can help.
  8. Purchasing: Always negotiate the most favorable terms possible with your suppliers. Review your current contracts and look to improve the existing terms, if possible.
  9. People: Do you have the most cost-effective and productive balance of full-time, part-time or seasonal employees for your business operations?
  10. Business Systems: If you haven’t already, systematize your business operations. By becoming more efficient and productive you cannot help but to improve your cash situation over time.
  11. Bank Accounts: Talk with your bank and try negotiating more favorable rates or terms, and looking to take advantage of any special programs at your financial institution.

Know Your Financials

In practice as well as in your financial forms, cash is really an indicator of the way you run your company. If cash moves quickly and productively through your business, and generates a good profit, then your business is most likely working well.

If, on the other hand, your balance sheet is lop-sided with unneeded assets and crippling debt, is an indicator of issues that need to be addressed. And, if your income statement is bleeding cash and are hindered from making a decent profit because of unproductive systems, then that, too, must be worked on.

Fortunately, most businesses do have hidden cash they can access. By looking at these 11 potential hiding places we have described here, you may find unexpected sources of cash that you could really use.

Optimizing Your Financial Management Resources

Optimizing Your Financial Management Resources

You know that running and building a business isn’t easy. There’s much that goes into the work of each day, details to take care of, and all the important strategic work, like planning for growth, improving your product or service, and achieving a competitive position in your market.

The Value of Financial Management Systems

But taking time for essential strategic work when you have deal with the day-to-day details of your business can be a challenge. You can have that time, however, once you have effective financial management processes into place.

Financial management processes are “behind the scenes” tools that you use to move money into, out of, and around your business, and in the right place at the right time. You probably have some financial management processes such as a system for bank deposits, for ordering office supplies, and a payroll system, for example. And if they’re working properly, you probably don’t think about them.

This is where the value of financial management processes comes the forefront. Because these processes help your business run smoothly, they free you and your managers to concentrate on more strategic work. In addition, they create the link between your business activities and your accounting system.

Processes are Processes, Right?

What’s the difference between a financial management process and any other process in your business?

Most business processes, or systems, are focused on a result that your business needs in the key areas such as marketing, production, or fulfillment. These show up as advertising processes or your delivery systems, for example.

Financial management processes, on the other hand, involve the moving and controlling of money that all your other systems need in order to function. You can’t produce your product without money to buy materials and supplies. You can’t run your operation without money to pay the rent on your office space. You can’t advertise without money to place your ads. You can’t recruit new employees without money to search for qualified candidates.

Financial management processes support your other business systems by ensuring the right amount of money goes where it’s needed, when it’s needed. Consequently, it’s important to invest the time and effort needed to implement and maintain your financial management processes. With these systems in place, you’ll have a stable financial management foundation to support your future growth.

Managing Your Financial Processes

Keep in mind that, ideally, setting up financial management processes is not the job of the business owner or CEO. The truth is that, many business owners who set up their own cash handling, purchasing, payroll, and other systems find it challenging, at best. It can be somewhat like preparing your own legal documents, instead of hiring a lawyer.

If at all possible, your CFO should be responsible setting up your financial management processes, and your controller should then manage them. However, if you don’t have a CFO or even a controller, it’s wise to hire an outside expert such as a CPA, bookkeeper, or other financial consultant who has experience setting up these systems. It’s an investment that will easily pay for itself in the long run.

However, as the owner or CEO, you still have responsibilities for your financial management processes. It’s your job to give direction to your CFO about the type of financial management processes you want and to make sure that the systems that are in place are effective, well documented, and are helping you move the company closer to your vision for the business.

Delegation is not the same thing as abdication. In other words, while it is not your job to create and set up your processes, it is your job to determine the results you want and work with your team to make it happen.

As the business leader, it’s your job to set the expectations for how the financial management processes should run and to provide oversight of those systems.

Financial Processes Basics

No two financial management processes are exactly alike, but these fundamental practices will help ensure security and accuracy throughout your business. Here are some general guidelines you should be aware of when setting them up:

1) Make sure your source documents are accurate. Since your source documents are the “input data” for your accounting system, they must be complete and accurate. Otherwise, the errors or omissions will end up in your financial reports, creating false perceptions of your business health and progress – and you won’t be aware of it. You should automate the creation of source documents and store the information digitally. If they are not already, have your CFO and controller digitize your source documents when they set up your financial management processes.

2) Always have at least two people involved with financial processes. Two sets of eyes improves accuracy and reduces the likelihood of omissions and mistakes. Separate the approval for spending money from the actual money-spending activity, and the recording of sales from the deposit of money. If you don’t have a CFO or controller to act as a second pair of eyes, hire a third-party provider to help.

3) Use a business checking account to pay all company expenses. Never use cash or personal funds. Your company’s checking account is an effective financial control system that provides you with an automatic record of what happened to your money. While it’s common for business owners to mingle their personal expenses in with the business expenses, don’t do it!

Personal items paid for out of business funds impact the performance of your company. Many poorly performing companies are that way because the business owner is draining company funds for their personal needs.

4) Ensure that all data is forwarded to the accounting system. Your financial management processes become far less effective if the forms or other documentation generated are lost or misdirected. Digital document management systems, or ERP software, can automatically route information to the appropriate places, reducing time delays and the opportunity for human error. If you do use some paper documents, be sure everyone knows the routing process and timeframes for getting information to your accounting system.

5) Document your financial management processes in writing. The written documentation of your systems is what holds your entire operation together. Or it should be. If you’re dependent on “word of mouth” to make sure that people are following your systems, it will never be optimally efficient. Verbal directions are unreliable. And subject to forgetfulness, lack of clarity, misunderstanding, and misinterpretation.

Good documentation prevents your business from becoming overly dependent on a single employee. For example, if you would find it impossible to replace your CFO, controller, or bookkeeper because no one else has any idea what they do, you have a serious problem. Documenting processes and procedures in writing will ensure the success and health of your company.

Financial Management & Your Future

Once your processes are in place and working effectively, they should run almost seamlessly, behind the scenes. You won’t need to think about them on a daily basis. Instead, the reporting and monitoring systems that have been set in place will keep you apprised of your financial health. Ideally, you’ll be able to rely on your processes to allow you and your managers to focus on other vital aspects of your business.

With your financial management processes in place, working with your accounting system, you will be able to have accurate information when you need it, and put your time and attention towards more important matters like growing your business.

And that is where your time is the most valuable!