Financing Your Small Business

January 11th, 2019 by admin

If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can’t over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.

Are You Sure You Want To Raise External Funds?

For start-ups, it’s understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can’t do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.

FINANCING TYPES

Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn’t need to be returned like loans unless your partner wants to withdraw.

Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.

Sources of Finance:

You can choose finance sources depending on your circumstances and the amount required.

1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.

2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn’t lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.

3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business’s worth is made before the deal is done.

Financing a business shouldn’t be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.

How to Avoid Holiday Debt

January 5th, 2019 by admin

Well the winter holidays are here, and with that comes the added burden of shopping for Christmas presents. With the economy in its current state, most of us already are trying to cope with a substantial amount of debt without having to feel obligated to spread a little holiday cheer by getting a loved one that special something that they’ve been hoping for.

Fear not! You can still have a Merry Christmas and be able to give presents without driving yourself further down the home finance debt hole. First I’ll share some basic tips on avoiding holiday debt then I’ll help you plan a Christmas budget that will get you through to the New Year. Key points will be on what to look for and what kinds of sales/offers to avoid at all costs.

How To Avoid Holiday Debt (Or At Least How Not To Increase Your Existing Debt)

Take a good look at your current financial situation and decide whether or not you can avoid having to rely on a credit card to make your way through the desired purchases this holiday season. If at all possible, try to either not use your credit card at all or limit your purchases to a pre-determined dollar amount! I know that may seem like a pie-in-the-sky idea, but by carefully cutting out some of the Christmas “add-ons” this year, you might be able to get by without having to add any more burden on your credit card debt. If you must use a credit card in order to make holiday purchases, determine a dollar amount ahead of time that will be your holiday budget ‘cap.’ Once you’ve determined what this dollar amount will be, DO NOT GO OVER IT! This will take planning, and a good amount of self-control, but will ultimately help you get out of debt in 2009.

So by now you’ve hopefully determined how much you’re willing to add to your credit card debt (or if you’re lucky, at least know how much you can afford to spend this holiday season without having to dip into the plastic reserve). Now it’s time to take that budget ‘cap’ and map out a Christmas budget.

How to Plan a Christmas Budget

  • Make a list. There’s a reason why jolly ‘ole St. Nick makes a list and checks it twice – it keeps you on budget and out of debt. Everyone understands the current market conditions, especially your friends and family, so try not to overcompensate for a poor economy (or bad luck) by giving out lavish gifts this holiday season. They’ll understand if you cut back on gift-giving while you try to sort out your own holiday debt mess! Remember: It’s the thought that counts!
  • Your first shopping destination should be online. A lot of times the big shopping centers (Target, Walmart, BestBuy, etc..) can offer deals online that you can’t get by visiting their local store. Another resource not to miss are the hundred of coupon or discount websites out there. Some even collect/aggregate discounts from multiple sources, letting you look through current online savings and hopefully knocking a few items off of your list for less than expected.
  • Stay FAR AWAY from those “big” sales. Most of the time they’re not even sales at all! It’s all marketing ploys to get you in their stores. Just because you can get half-off a second item when you buy the first at full-price doesn’t mean you’re saving money, you’re still spending it on more than you should! Remember your list and try to stick to it as closely as possible.
  • No matter what though, leave your credit cards at home! Take them out of your wallet or purse before going shopping. The only exception is whichever card you’ve already pre-determined to be used with your Christmas budget. You’ll find that it’s a lot harder to charge up a lot of debt when you’re at the store but your credit cards are miles away. As said before (and will be repeated throughout this article), the most important thing is that you stick to your list as well as your budget. No ‘shopping for me.’ You’ve already given yourself a Christmas present of holiday debt so let’s focus on loved ones and work on reducing the number of creditors calling you asking for payment.
  • If you can’t afford it now, you can’t afford it. Period. Just because you can make payments over-time with a credit card does not mean that you can live outside your means. This is the whole purpose of the list, to stay in budget. Those monthly payments add up, and worse of all, so does the interest you’ll be paying on that purchase. By the time you actually pay off that expensive gift (if you can actually pay it off that is), you will most likely have paid for it twice due to the interest stacked up against you.

Why You Should Limit Your Holiday Credit Card Purchases

Remember that presents bought on your credit card will always end up costing more. Add in months of finance charges on top of your pre-existing debt and it’s a recipe for disaster.

You also need to keep in mind that your precious credit score suffers when you have a high credit card balance. The more debt you have, the worse your credit score, and that important number will take years to resolve should you damage it. That’s why its also important to be aware of what your current credit score is. There are many services that can provide you with your credit score but the best ones should be free. Each of the three credit reporting bureaus provide you with one free report each year so find one that collects all three in a single, consolidated report (It will make it easier for you when contesting items & following up with the corrections). Getting your nephew that video-game system he’s been wanting won’t be worth it when you’re in the poor-house due to holiday debt. Stick to the plan, follow your list, and stay in budget this year.

By sticking to a few spending principles, you can limit your holiday spending while still being able to spread Christmas cheer. More importantly, you’ll stay out of holiday debt!

The US Government Debt: Objective Reality or Pyramid?

December 30th, 2018 by admin

With the beginning of the world financial crisis, remarks about necessity of a new world monetary system started to arise at G20 meetings in 2008-2009: the credibility of the U.S. economy had shaken. Have the international concerns about the U.S. future been serious enough and how to handle them? What would be recommendations for investors in this concern?

Let’s start with the sources. By the middle of the XX century the U.S. had about 70% of the world gold reserves. The Bretton Woods Monetary Management System was set up in July 1944 and primarily resulted in recognition of the U.S. dollar as the world currency, while the fixed relationship of dollar to gold was set up as $35 per ounce of gold. The countries participating in international economic relations could freely exchange dollars for gold at a fixed rate, and their currencies were pegged to the dollar. Such a system could function smoothly until the U.S. had enough gold reserves. However, by 60s the dollar reserves of countries’ central banks caught up with the U.S. gold reserves. As a result, when one or another country tried to exchange dollars for gold, the U.S. first exchanged and then restricted the exchange and devalued the dollar against gold. By early 70’s while the major world’s gold reserves were concentrated in Europe, problems with international payments raised as gold production could not keep up with the rapid growth of international trade. The U.S. lost their dominant position in the financial world, which, among other things, was complicated by the country’s balance of payments deficit.

As a result the Bretton Woods system proved to be inadequate. A new system of international settlements was established in 1973, the Jamaican Monetary System operating today. Since then, the currencies have not been tied to the U.S. dollar and the dollar has not been pegged to gold. Instead, the IMF introduced a new international reserve asset, the Special Drawing Rights (SDR). In addition to the SDR, the reserves could be held in gold, U.S. dollars, JPY, GBP, SHF, FRF and DM.

Today we can observe that despite the refusal to use the U.S. dollar as the main world reserve currency, about 85% of world’s foreign currency exchange transactions involve the U.S. dollars. Besides, more than half of the international reserves of countries’ central banks are held in dollars. Thus the dollar, although not secured by gold, has kept the status of the world reserve currency, for the following reasons: will of the U.S. government; the infrastructure created for dollar trade and risks hedging; the size of the U.S. economy (almost a quarter of the world economy). A choice of a currency for international transactions is a question of confidence: America had been trusted prior to the crisis.

Why does the international community question the U.S. economy? Let’s consider these complex reasons. Today globalization has spurred the rapid development of the international economic relations. Exports of the U.S. goods and services in 2010 were $1.83 trillion USD, import – $2.33 trillion and a similar pattern has been observed for a long time. However, trade deficit by itself is not a primer reason of concern of international investors.

A trade deficit (the excess of imports over exports) can be tolerated and last for an indefinite time provided that a country attracts enough investments and borrowings to compensate it; the country did not lose confidence; there is no capital outflow in form of withdrawals made by foreign investors or investors’ reluctance to lend. In this concern, the 2010 balance of payments data show the U.S. situation as stable: the country receives enough credits and foreign investments to compensate the trade deficit.

Moreover, the capital inflow to the U.S. is strong enough to keep gold reserves. For instance, as per U.S. Treasury report of February 11, 2011, U.S. reserve assets were $132.9 trillion. The U.S. model of international relations presumes high volumes of imports and consumption while creating a favorable investment climate. Such a model will exist as long as there is confidence in the country. The components of government policy in this model of “confidence” are currency stability, favorable foreign investments legislation, moderate taxation, transparency of economy, etc.

Let us consider the second aspect of confidence in the country, its domestic fiscal policy. In 2010, the U.S. budget revenues were $2.2 trillion, the expenses were $3.48 trillion, and the budget deficit was $1.28 trillion. Since the 1970, a budget surplus was recorded only 4 times, during 1998-2001, while during all the other years America had a chronicle short money supply.

Finally, we’ve come down to detect the main cause of anxiety of foreign investors, the U.S. enormous external debt. The website usdebtclock.org was purposely created to keep track of debt and to provide related statistics. By January 31, 2011 the U.S. Federal Government debt was $14.1 billion. Considering the debt structure, around 33% was held by foreign states while the rest was internal residents’ debt. The ratio Debt /GDP was 96.5%. Historically, this ratio reached its maximum in 1946, when it was 121.2% of GDP. If to look at the debt statistics, the U.S. debt had grown more for the period of ten years from 2000, than for the period of 60 years from 1940 to 2000 inclusively.

In the long run, is it any hope for the reduction of debt? The structure of the U.S. project budget for 2020 is as follows: expenses on social security, elderly health insurance programs, free medical aid to poor and interest on debt make up $3.56 billion which is equivalent to 81 % of the total budget revenues ($4.4 billion). That correlation was 61.4% in 2011. Defense and other government expenditures in 2020 will be financed by government borrowings.

According to the government forecasts for the next 10 years of 2011-2020, the total U.S. budget deficit will reach $10.6 trillion, meaning that the U.S. debt will reach almost $25 trillion (14.1 + 10.6, existing debt plus planned debt). The GDP forecast for 2020 is $24 trillion. To achieve this level of GDP the economic annual grow rate should be at least 5%. This value seems to be too high for a developed country.

Alternatively, the government budget forecast may underestimate the prospective social expenditures. On January 1st 2011 the first Baby Boomers will reach 65 years old. The ratio of retired workers versus active workers will grow steadily during the next ten to fifteen years, provided that the state demographic policy remains the same. The U.S. has undertaken colossal expenses related to special medical insurance programs for the retired. At the given rates of economic growth, tax structure and projected Social Security expenditures, the budget revenues would show negative dynamics if adjusted for social expenditures. The recommendations in this concern would be as follows: to raise taxes, although it could have a negative effect on the economical growth rate; or reduce the scale of social programs in order to cut social expenditures. In fact, the latter would be a challenge for most politicians. Need to note, that the issues discussed have not been resolved up to the present date. It seems that the projected medical insurance reform shall be seeking for related budget cuts first, instead of increasing the availability of medical services to Americans.

It is suggested, that the country’s debt can be analyzed better if to look at the Debt/GDP ratio, rather than consider debt separately. For instance, Debt/GDP ratio in Greece is 176.8%, in Portugal – 231.2%, in England – 428.8% and in Japan is over 200% for 2011 (source: CNBC). What is a proper benchmark for a secure level of debt? The ratio Debt/GDP in Germany and England is considerably higher compared to the ratio Debt/GDP of the U.S. Nevertheless, these countries continue to grow. Certainly, it is a matter of confidence. Nor Germany neither England act as global warrants or serve 85% of world currency transactions.

Comparing to Japan’s Debt/GDP ratio which is two times higher than the U.S. equivalent, it is notable that about 95% of Japan’s debt is owed to the country residents: local banks, households, pension and insurance funds, industrial enterprises. This defines a very low risk of foreign capital outflows. The U.S. situation is different, as 33% of debt is financed by foreign countries; China holds about 8.2%, Japan 6.3%, GB 1.9% and Russia about 1%.

To keep its international confidence, the U.S. as a global currency warrant should not accumulate debt. The U.S. is approaching the 100% Debt/GDP ratio. This situation has a negative psychological effect, bringing anxiety in the world. Moreover, as it has been already stated, the world community is concerned not only about the debt size, but also by its growth rate, which is being unprecedented in the U.S. history. To finance the budget deficit in the future, the U.S. will have to depend on foreign countries, primarily China. This situation may become dangerous due to the risk that China and other countries may eventually stop buying U.S. treasury bonds. This would result in sharp increase of interest rates, lack of means to finance debt and possible cascade of defaults on the U.S. treasury bonds of different issues.

Another reason of anxiety is that even if countries and institutions would continue buying U.S. treasury bonds despite an increased debt, the interest on debt may exceed the levels that the U.S. budget can afford. In the U.S. budget of 2011 the net interest payable is about 6,7% of the total budget expenditures, defense expenditures – 22.7%, social security expenditures (excluding medical programs Medicare Medicaid) – 19.6%. Based on this U.S. budget structure, we conclude that the current debt settlement expenses are not as burdensome as other expenditures. However, while about $250 billion is assigned for interest-on-debt payments in 2011, this amount will increase nearly fourfold to $912 billion in 10 years.

Thus, there is a probability that the U.S. interest rates will grow. Although inflation which influences interest rates dynamics can be handled by the U.S. without difficulties (deflation is a more apparent issue now), credit risk growth can be barely managed. The U.S. debt has been growing much faster than the economy has, so the investors may be unwilling to get interest revenues which do not reflect actual level of risk. Let us consider the dynamics in the U.S. cost of borrowing.

The U.S. interest rates have been decreasing since 1994. Thus the U.S. debt has become cheaper along with its overall growth. This proves confidence in the U.S. economy. At the end of 2008 when the financial crisis became apparent investors rushed to buy out American treasury bonds in hope to preserve their savings. That caused the rates of return to fall down to 2%.

The current U.S. dollar value has almost reached its historical minimum. Obviously, this means higher investment risks. The U.S. is a net importer meaning that its imports exceed its exports, and it finances the trade deficit by external borrowings and investments. One of the characteristics of a strong and opened for foreign investments economy is a strong currency. Weak dollar risk implies that the interest of foreign investors to the U.S. assets may diminish, causing the U.S. to lose important means of trade deficit financing.

Another current threat to the U.S. dollar is appearance of alternative world reserve currencies. In January 2011 the Bank of China began direct sales of RMB to the U.S., while the Chinese Yuan was traded on the MICEX in Russia December 15 of 2010. The fact that the Yuan has started to be subject of international transactions, shows that China has been implementing competent foreign and domestic economic policies. By promoting its currency, China has become more integrated into the world monetary system. At the same time, China has been shifting the core drivers of its economic growth towards domestic consumption (from exports and infrastructure). In 2010, it was actively discussed that China had overtaken Japan in respect to the size of its economy. If we take Purchasing Power Parity for calculations, the size of the U.S. economy is $14.62 trillion, the size of the Chinese economy – $10.08 trillion, the size of Japan’s $4.31 trillion, according to the International Monetary Fund data. Thus, in terms of real purchasing power, China’s economy has been ahead of Japan’s economy for a long time. Indeed, the Chinese GDP per capita is far lower than that of Japan. However, a country as a world leader and guarantor is not solely defined by the GDP per capita value, but by the absolute size of its economy and its ability to influence international relations. China has been realizing this strategy with honor, although the full convertibility of the Yuan’s has not been achieved yet. Another important competitor to the U.S. dollar is Euro, as the EU’s economy and the U.S. economy are comparable in size. Thus, the U.S. dollar is being stalked.

The question of choice of the most appropriate international reserve structure is being actively discussed by all countries. At present, more than a half of current reserves are denominated in the U.S. dollars. The theory suggests that a structure of reserves should depend on the country trade partners. For instance, given that 30% of the total country’s international trade and investments are made with China, 30% of reserves should be held in Yuan. This theory hasn’t found a practical application though for a number of reasons, like non-convertibility of currencies; political risk, etc. Reduction of the dollar-denominated reserves by countries would have dire consequences for the dollar, as the U.S. treasury bonds are included into international reserves of many countries.

Thus, we have considered the U.S. investment risk factors. They may not present any threat if taken separately, but create discomfort for the international community if taken altogether. The worst case scenario would be the U.S. default on its debt. Let us consider this scenario.

It is unlikely that anyone could see a point when American creditors may lose patience, say, a month prior to that. The famous investor Warren Buffett has confirmed that the system can remain in such a state for indefinite time. A factor triggering the U.S. default may be just “a spark” that would cause a domino effect, like, for instance, treasury bonds withdrawal by a large international creditor. Crises are likely to start when there is a circumstantial evidence of something being wrong, and to be triggered by a spark, causing a further cascade of events, including those of a psychological nature. For example, while the global oil demand fell by no more than 5% following the recent crisis, the price of oil fell by more than 3 times. This is the psychology of the market.

If the U.S. declared a default, the world would suddenly lose trillions of dollars. International reserves denominated in dollar would depreciate, while international capital flows would plunge into chaos until the situation is resolved. Today, the probability of the U.S. default is small due to the fact that nobody is interested in it. For example, China is the largest holder of U.S. treasury bonds and could lose more than half of its foreign exchange reserves denominated in dollars. At the same time, we can observe China has actively started to invest reserves in real assets: gold and securities of companies around the globe. China Investment Corporation was created to manage a part of the international reserves of the country. During the ten months of 2010, China imported over 200 tons of gold, which is five times the volume of purchases of the precious metals made by the country for the full year of 2009.

The consequences for the U.S. in case it declares default would also be sharp budget shrink; social programs cuts and falls of living standards of all layers of the society, especially those who are financially dependent on the state. The dollar would be devaluated and lose status as a world currency; investment in the country would sharply decrease. Outbreak of inflation would be possible, and the U.S. would do their best to preserve national wealth, even at an expense of growth. But in the long run, America will survive. The future of the global economy is Technology, and the U.S. Technology will persist even in case of default. Thus, even if it had lost the status of the world monetary power, America would have remained the technological power. Such scenario would stipulate a launch of a new era in the U.S. economical and political development.

The recommendations to investors, holding assets in the U.S. dollars, are as follows:

• Monitor growth of the federal budget deficit and national debt of the United States
• Monitor the dynamics of demand for U.S. treasury bonds from major foreign creditors, primarily China
• Track yield on the 10-year U.S. treasury bonds, watching for the rates to reach 5% or more
• Make investment portfolio diversification; invest globally by buying stocks and bonds of U.S. corporations, looking for international companies with the U.S. sales share which does not exceed 25-30%.

Finance Debt Consolidation- Contributions Released

December 24th, 2018 by admin

Days have become frightful and unpleasant for you, as the debts have abruptly deep-rooted, and with the amount with you is not sufficient to repay them. In such a situation, a person looking for external finance as support is quite a normal affair, and you are also seeking for a reliable and sparing finance. Among the various debt consolidation loan schemes, finance debt consolidation is preferred highly for its rational policies and the monetary aid that it provides to debtors. Finance debt consolidation can be regarded as the full stop to the phase of debts. The finance can be availed in an easy procedure and also can be borrowed with or without pledging property as collateral.

The policies of finance debt consolidation and the funds are released to consolidate the multiple debts. It enables or supports to dissolve the debts in a single amount which shows a positive effect. The consolidation of numerous debts and being obligated to a single lender not only subtracts the debt burden drastically but also provide relief of the mental stress arouse due to the debts. The advantages of finance debt consolidation are not limited to consolidating the debts but services are carried on to and show the path towards a stable solution. The provisions of finance debt consolidation is also rewarding when debtors are paying a higher rate of interest.

Finance debt consolidation prop debtors with good amount, but the amount that can derived depends fully on the pledging collateral ability. If the collateral has a higher equity then lenders consider applicants to acquire more amount. As every loan plan has a repayment term and is indispensable, finance debt consolidation also format the reimbursement schedule in a manner that debtors can easily repay. The practice of consolidating of debts has underwent a long passage and from the traditional method to the sophisticated technology. Applicants can approve the loans by furnishing details of credit profile accurately from home or office. In, the conclusion, it will be helpful to indicate that finance debt consolidation shower its benediction under different tags, like debt consolidation loans, easy debt consolidation loans, instant debt consolidation loans and such for the well being of the debtors.