Loan for Startups

If your new business is like most startups, you’re seeking somewhere between $5,000 and $50,000 to get it off the ground. After exhausting your personal savings and loans from relatives and friends, your first instinct might be to get a bank loan or an Small Business Administration (SBA) loan. Before you act on this instinct, let me tell you about three common misconceptions about bank financing for business startups.

1. If you need money, you can get a loan from the SBA. Type “SBA loan” into Google, and you’ll find hundreds of websites purporting to facilitate loans from the SBA. The fact is, the SBA doesn’t make loans. Visit the SBA’s website, and it clearly states that the organization is not in the business of making loans. Instead of direct lending, the SBA provides credit guarantees to banks and other institutional lenders who provide loans to business owners. The credit guarantee enables banks to make loans that are somewhat more risky than they would otherwise make. In the past year, there have been many new developments regarding SBA financing including the proposed elimination of the Microloan program for loans under $35,000. If you’re seeking a small loan, you should be aware of these developments by reading about this topic before approaching your banker to request a loan application. Typically, the SBA guarantee cannot by used by startup businesses without three years of sales history.

2. If you don’t score high in each of the four “C” of credit, you can forget about getting a bank loan. Forget about the four C’s of credit. In the past, banks made credit decisions based on a loan applicant’s credit history, cash flow, collateral and character. Today, most financial institutions ignore three of the four “C”. They tend to focus only on your credit history in evaluating your creditworthiness. There are several reasons for this shift, but perhaps the most significant is the increased automation of the underwriting process at banks. It simply takes too long and costs too much to assess the character of each loan applicant, while someone’s credit history is cheaper to obtain and may be a better indicator of the statistical likelihood of repayment.

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Strategies in Handling a Loan

1. Anticipate Failure

It may seem counterintuitive, but a great way to gain a banker’s trust is by discussing how your business could fail. Write down 10 things that will challenge your business-and the ways you’ll overcome those challenges. This list of potential pitfalls not only shows that you have thought through your business, but also gives your banker great ammunition for the tough questions his loan review committee will ask. Be sure to include the old standby which is the key-person risk. If you die tomorrow, how would you repay the bank’s money? Key-person risk is present in every business and can best be addressed only by substantial life insurance. Almost every borrower was required to have life insurance policies that would pay twice the amount of the loan. It’s morbid and at the same time expensive. But it shows you are thinking through all possibilities and helping the bank reduce its exposure to risk.

2. Plan Pessimistically

When a loan was closed, a borrower’s negotiations were just beginning. Spending the money was more arduous than getting it.

Mostly, the SBA loan is granted based on the projected expenses and revenue in a borrower’s business plan. When they began using the money, however, the bank expected expenditures to fit the original budgets. In many cases, as soon as the ink dried on the business plan, the borrower had to make adjustments. Each variance meant showing the bank why the costs were necessary. A thorough business plan with clear projections is vital to getting a loan approved. But projections that are too optimistic will get you in trouble. The glass always looks half full when you are going into these things based upon the claims of most borrowers.

3. Negotiate Smartly

Most borrowers say that careful planning and good relationships earned them rates and terms that saved them thousands in the long run. Start negotiations with what’s most important to you. Others may say, that was some protection from risk and they made it clear that home and retirement savings were off-limits as collateral. The bank agreed-and crafted special terms that protected them in a worst-case scenario.

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Setting Up Financial Goals

Setting your financial goals puts you in charge of your money and your life. Your goals can be short or long term, small or large, but they all need to be achievable. The first step to getting sorted is to work out where you want to be financially and what your priorities are.

Goal Setting

Goal Setting

How to set your goals:

Be specific, realistic, and write down your goals. Keep each goal simple and give it a timeframe and a dollar amount.
1. Set some big goals – like buying a home in the next five years or saving for your retirement. This could be your biggest goal of all.
2. Set some smaller goals to help you get there – like saving for a deposit or paying off your credit cards.

Saving and paying off debt:

Financial goals are often about saving or paying off debt:

1. If you have high-interest debt, like credit card or hire purchase, your main goal should be to pay that debt off first and as soon as possible. This could involve re-structuring your debt into lower-interest loans.
2. Saving two to three months income for an emergency fund can help you and your family if anything unexpected happens. It’s a good idea to have this fund in a savings account separate from your normal everyday bank account.
3. If you have a mortgage and can afford to increase your repayments, your goal may be to save on interest by paying off your loan faster.
4. The earlier you start saving for your retirement the better. Even a small amount saved every week or month can add up to a lot over time.

Actions to achieve your goals:

Actions are the steps you take to reach your goals. Here are some examples:

1. If your goal is to save for a house deposit, your action may be to open a savings account by next pay day and save $50 a week into this new account.
2. If your goal is to save for your retirement (or to save for a deposit on your first home), your action might be to talk to your employer about joining KiwiSaver.
3. If you pay your mortgage monthly, your goal could be to change to fortnightly repayments of at least half the amount you were paying each month. This will pay off your mortgage faster and save on interest.

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Credit Cards Benefits and Cost Towards Merchants

Prior to credit cards, each merchant had to evaluate each customer’s credit history before extending credit. That task is now performed by the banks which assume the credit risk. Credit cards can also aid in securing a sale, especially if the customer does not have enough cash on his or her person or checking account. Extra turnover is generated by the fact that the customer can purchase goods and/or services immediately and is less inhibited by the amount of cash in his or her pocket and the immediate state of his or her bank balance. Much of merchants’ marketing is based on this immediacy. For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee (interchange rate).

Merchants are charged several fees for accepting credit cards. The merchant is usually charged a commission of around 1 to 4 percent of the value of each transaction paid for by credit card.The merchant may also pay a variable charge, called a merchant discount rate, for each transaction. In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases merchants may charge users a credit card supplement or surcharge, either a fixed amount or a percentage, for payment by credit card. This practice is prohibited by most credit card contracts in the United States, and is actually illegal in 10 states, although the contracts allow the merchants to give discounts for cash payment.

Merchants are also required to lease or purchase processing equipment, in some cases this equipment is provided free of charge by the Processor. Merchants must also satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant’s bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees. Finally, merchants assume the risk of chargebacks by consumers.

Parts of a Credit Card

Parts of a Credit Card

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The Decade-Long Battle with Prostitution

More than ever before, prostitution has become institutionalized, organized, and globalized. The streets around us we show the explosion in budget hotels which are so clean but not so good, the all pervasive sight of girly bars and the numerous high class clubs and establishments that seem to cater for so many well to do clientele. Different forms of prostitution thus exist: street prostitution, bars, brothels, akyat-barko, “massage parlors,” escort services, sex tourism, cybersex, local & international sex trafficking. Prostitution in the Philippines has become a de facto legal industry. Even back in the summer of 1982, Manila was depressingly tagged at the biggest brothel in Asia. There were 50,000 registered hospitality girls in the tourist entertainment in the early 70′s, and in 1987 there were 300,000 bar girls not to mention the unlicensed ones who were estimated to amount to a significant figure from the the national figure then. In 1998 it was estimated that there were at least 400,000 to 500,000 prostituted persons in the Philippines with 75,000 of these being children.

Prostitutes looking for clients on the street

Prostitutes looking for clients on the street

 

 

In one survey of those engaged in prostitution along Quezon Avenue in Quezon city, the main reason given by the respondents for being involved was Poverty. Prostitution is officially illegal in the Philippines. However, it is also “regulated” in some ways. For example, comfort women in establishments are required to get regular health certificates to prove they are free of diseases. Other factors cited by NGO’s involved in anti-prostitution work include coming from dysfunctional homes, deception by recruiters, pornography, tourism that capitalizes on Filipino women and a general apathy of the society and Church towards this reality. It is important to be aware of these so-called “push-pull” factors. People who work in ministries seeking to rescue and rehabilitate prostituted women will tell you that they have never met a woman who wanted to be a prostitute. Instead they will recount countless stories of young women, coming from poor backgrounds that often have a long history of prior physical and sexual abuse. Many young women are deceived by recruiters to leave the province, where work opportunities may be few and far between, to come to the big city with the promise of decent work. Arriving there, the vulnerable person is often tricked or even coerced into working in the sex industry.

Apprehended Prostitutes in Manila

Apprehended Prostitutes in Manila

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The Credit Card and its Detriments

Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions. In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount which is no longer prohibited in the United States, United Kingdom or Australia. The result is that merchants are induced to charge all customers, including those who do not use credit cards, higher prices to cover the fees on credit card transactions. The inducement can be strong because the merchant’s fee is a percentage of the sale price, which has a disproportionate effect on the profitability of businesses that have predominantly credit card transactions, unless compensated for by raising prices generally. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction.

A credit card’s grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary, but usually range from 20 to 55 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance. With most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement interest is applied on both the previous balance and new transactions. However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment. In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees and reduce the amount of cash on the premises. Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank.

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Some of the Credit Card Companies

Some of the Credit Card Companies

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Criticism about the Payday Loan

The likelihood that a family will use a payday loan increases if they are unbanked, or lack access to a traditional deposit bank account. In an American context the families who will use a payday loan are disproportionately either of black or Hispanic descent, recent immigrants, and/or under-educated. These individuals are least able to secure normal, lower-interest-rate forms of credit. Since payday lending operations charge higher interest-rates than traditional banks, they have the effect of depleting the assets of low-income communities. The Insight Center, a consumer advocacy group, reported in 2013 that payday lending cost U.S communities $774 million a year.

A report from the Federal Reserve Bank of New York concluded that, “We…test whether payday lending fits our definition of predatory. We find that in states with higher payday loan limits, less educated households and households with uncertain income are less likely to be denied credit, but are not more likely to miss a debt payment. Absent higher delinquency, the extra credit from payday lenders does not fit our definition of predatory. The caveat to this is that with a term of under 30 days there are no payments, and the lender is more than willing to roll the loan over at the end of the period upon payment of another fee. The report goes on to note that payday loans are extremely expensive, and borrowers who take a payday loan are at a disadvantage in comparison to the lender, a reversal of the normal consumer lending information asymmetry, where the lender must underwrite the loan to assess creditworthiness.

A recent law journal note summarized the justifications for regulating payday lending. The summary notes that while it is difficult to quantify the impact on specific consumers, there are external parties who are clearly affected by the decision of a borrower to get a payday loan. Most directly impacted are the holders of other low interest debt from the same borrower, which now is less likely to be paid off since the limited income is first used to pay the fee associated with the payday loan. The external costs of this product can be expanded to include the businesses that are not patronized by the cash-strapped payday customer to the children and family who are left with fewer resources than before the loan. The external costs alone, forced on people given no choice in the matter, may be enough justification for stronger regulation even assuming that the borrower himself understood the full implications of the decision to seek a payday loan.

Payday Loans

Payday Loans

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FICO scoring

The FICO score was first introduced in 1989 by FICO, then called Fair, Isaac, and Company. The FICO model is used by the vast majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion. Because a consumer’s credit file may contain different information at each of the bureaus, FICO scores can vary depending on which bureau provides the information to FICO to generate the score.

Makeup of the FICO score:

The approximate makeup of the FICO score used by U.S. lenders
Credit scores are designed to measure the risk of default by taking into account various factors in a person’s financial history. Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:

35%: Payment history: This is best described as the presence or lack of derogatory information. Bankruptcy, liens, judgments, settlements, charge offs, repossessions, foreclosures, and late payments can cause a FICO score to drop.

30%: Debt Burden: This category considers a number of debt specific measurements, and not just the infamous credit card debt to limit ratio, as is commonly misreported. According to FICO there are some six different metrics in the debt category including the debt to limit ratio, number of accounts with balances, amount owed across different types of accounts, and the amount paid down on installment loans.

15%: Length of credit history aka Time in File: As a credit history ages it can have a positive impact on its FICO score. There are two metrics in this category: the average age of the accounts on your report and the age of the oldest account.

10%: Types of credit used for installment, revolving, consumer finance, mortgage: Consumers can benefit by having a history of managing different types of credit.

10%: Recent searches for credit: hard credit inquiries, which occur when consumers apply for a credit card or loan, can hurt scores, especially if done in great numbers. Individuals who are rate shopping for a mortgage, auto loan, or student loan over a short period (two weeks or 45 days, depending on the generation of FICO score used) will likely not experience a meaningful decrease in their scores as a result of these types of inquiries, as the FICO scoring model considers all of those types of hard inquiries that occur within 14 or 45 days of each other as only one.

Logo of FICO

Logo of FICO

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How to Control Your Personal Debt

All Americans are loaded with credit card debts.

 

An average American household with one credit card has nearly $15,950 in credit card debt (in 2012), that’s according to CreditCards.com and the average interest rate runs in the mid- to high teens at any given time.

 

Some debts are good. If you’re borrowing for a home or for college, that usually makes good sense. Just don’t borrow more than you can afford  to pay and make sure to look for the best offers.

 

Other debts are just that, bad. Never use your credit card to purchase things that you consume quickly, such as meals and vacations and if you can’t afford to pay off your monthly bill in a month or two. That’s the fastest way to fall into debt. Instead, stash away some cash each month for these items so you can pay for them in full. If there’s something you want but it’s really very expensive, save for it in a period of weeks or months before charging it to your card so you can pay the balance when its due and thus avoiding interest charges.

 

Get a grip on your spending. A lot of people spend loads of money without giving much thought to what they are buying. Write everything down, all the expenses, and cut down or totally eliminate unnecessary things and start saving money to use to reduce debt faster.

 

Pay off highest interest –rate debts first.

 

 

Image from Practical Money Mastery

Image from Practical Money Mastery

Don’t fall for the minimum trap. If you do this, you’ll barely payoff the interest you owe, and nothing of the principal amount is reduced.

 

Watch where you borrow. It may be convenient to borrow against your home but it can be very dangerous. You could lose your home or fall short of your investing goals at retirement.

 

Build a cash cushion worth three months to six months of living expenses in case of an emergency. If you don’t have an emergency fund, a broken furnace or damaged car can seriously upset your finances.

 

Don’t be so quick to pay down your mortgage.

 

Get help as soon as you need it.

 

Using Credit Cards Effectively

It goes without saying that credit cards are useful for monetary transactions in this cashless society. Credit cards meet the needs of different people in different ways. It is thus important to choose the right card and use it effectively so as not to fall into a debt trap.

 

A card that offers interest free charges for longer, or one that has lower interest on purchases will suit a consumer who needs extra time in paying for his or her purchases every month. If you know that you can’t pay your balance on time, look for a card that offers a longer interest free duration.  Some banks offer no interest for up to 6 months or more, so this may be a good offer to take advantage of as long as you don’t overlook the date the interest rate charges commence.

Credit cards can serve as instant cash.  Image taken from: Gadoxo Graphy

Credit cards can serve as instant cash. 
Image taken from: Gadoxo Graphy

If you are planning to use your credit card for basic needs such as making rare online transactions and as an emergency backup paying for an annual fee will not be worthwhile. However, if you are a frequent user of the credit card and are after the rewards programs or redeeming your points for purchases, then the annual fee may be worth paying for.

 

It won’t always be a good idea to increase the credit limit of your card if this is offered by your bank.  By sticking to the minimum credit limit, you can be assured of not being lured by the temptation to overspend. Also, trying not to get too close to your credit limit is a good way of restraining yourself from unnecessary spending. Spend within your budget and only spend on what is necessary.

 

Some people tend to switch from card to card with the aim of saving money with balance transfer rates. Though this may sound practical, if you fail to pay the required amount on time, or to switch card again before the interest rate goes up, it may end up damaging your credit.

 

Keep your receipts in a safe place so you can keep track of your monthly expenses.

 

Credit cards can be an advantage if you can use them effectively.