Business Posts

Startup Basics: Cash Management

When starting a new business, it’s important to establish good cash management practices. A business doesn’t need to be generating revenue to open a bank account. In fact, it should be one of the first things a business owner does, even before they start selling products or services.

Opening bank and credit accounts on behalf of the business allow owners to keep business funds separate from personal funds. These accounts also allow business owners to easily keep track of expenses, manage employee pay, convey finances to investors, receive and deposit payments, and budget more accurately.

A business checking account should be used only for the business, never for personal expenses. It is also the account where payments from customers or clients are deposited; funds from this account are then used to pay for business expenses.

Like the business checking account, the business credit card should be used exclusively to pay business expenses. Credit card accounts can help a business make large startup purchases and help establish a credit history for the business. Many business accounts also come with a line of credit that can be used in the event of an emergency or for purchases such as equipment. Ideally, the gross revenue from the business’s sales will be used to pay off the credit card balance at or close to the beginning of each credit card billing cycle.

A business’s bank accounts form the foundation of its accounting system. The checking and credit card account statements can be used to prepare financial statements and tax returns.

While some business owners open a business account at the same bank they use for their personal accounts, rates, fees, and options may vary among banks. It’s a good idea to shop around and consider factors such as introductory offers, interest rates, and fees for transactions, early terminations, and minimum account balances.

Opening an account requires the following documents and information: the business’s federal Employer Identification Number (EIN), organization documents (eg, articles of incorporation or organization), and business license. Some banks may require additional documents. For more information about bookkeeping and accounting, as well as other aspects of business operations for new startups, visit our BizVids Tutorials or register for a NaperLaunch Academy workshop. NaperLaunch coaches and SCORE mentors are also available to provide one-on-one virtual assistance.

Monday, April 26, 2021 - 13:30

Startup Basics: Federal and State Tax ID Numbers

State and federal tax ID numbers (also known as an Employer Identification Number or EIN) are like a personal social security number for your business. They let your small business pay state and federal taxes.

A federal EIN is used by the U.S. Internal Revenue Service to identify a business entity. This 9-digit number is required to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.

An EIN is required for most businesses, including, but not limited to, those that have employees and those that operate as a corporation or partnership.

It's free to apply for an EIN, and you should do it right after you register your business. Business owners can apply for an EIN via an online form or by completing Form SS-4 and submitting it by fax or mail. Online applicants will receive an EIN immediately; applications submitted by fax or mail may take several weeks to process. The IRS recommends applying far enough in advance to ensure that the number has been issued before it is time to file a return or make a deposit.

All EIN applications must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner, or trustor. This individual, which the IRS calls the “responsible party,” controls, manages, or directs the applicant entity and the disposition of its funds and assets. (Unless the applicant is a government entity, the responsible party must be a person, not an entity.)

Generally, businesses need a new EIN when their ownership or structure has changed.

The need for a state tax ID number ties directly to whether your business must pay state taxes. Visit your state's website to identify whether you need to get a state tax ID number in order to pay state taxes. You will need your federal EIN in order to apply for the state tax ID number.

If your company regularly operates in Illinois or employs people who live there, you will need to obtain a tax ID number from the Illinois Department of Revenue. This ID number is used to pay Illinois income, sales, and use taxes, as well as the amounts withheld from employee wages for Illinois individual income tax and unemployment insurance. Illinois issues the ID number based on the information you enter on Form REG-1 (the Illinois Business Registration Application); businesses that pay specialized kinds of taxes (eg, cigarette, liquor, telecommunications) will be required to file additional schedules.

For more on these and other topics, consider registering for the NaperLaunch Academy Workshop series. In addition, business librarians, NaperLaunch coaches, and SCORE mentors are available for one-to-one mentoring sessions.

Monday, April 19, 2021 - 10:00

Qualifying for a Small Business Loan: The 5Cs of Credit

Besides bootstrapping, there are basically two ways to fund revenue growth in a business: take on debt or invite equity investors. In this blog post, we look at using debt to raise capital, and more specifically, what is required to qualify for a commercial loan.

All commercial lenders follow some standard underwriting principles and consider certain factors. This process is intended to build up a lender’s confidence that a business owner will repay the loan according to the loan provisions. In doing so, the lender generally considers what are known as the 5 Cs of credit.

The 5 Cs is a system used to gauge the credit worthiness of potential borrowers. Weighing these five borrower characteristics—character, capacity, capital, collateral, and conditions—is the lender’s way of estimating the chance of default and, consequently, the risk of a financial loss for the lender. Make no mistake about it, lenders want to loan money—that is how they grow their business—but they want to do it with some security. Borrowers can take steps to make their loan application more appealing to a lender by focusing on continuous improvement of their business in each of the five areas discussed below.

  1. Character (Credit)
  2. To assess a business owner’s character (or credit worthiness) lenders may check credit history and credit score. A borrower can raise a credit score with some very simple internal controls and rules—making sure that all bills are paid on time and that any credit issues in the credit report are resolved and cleaned up well in advance of making an application for a loan.

    Character involves more than just a good credit score. It also encompasses reliability, being someone who does what is promised and follows through on all commitments. Another thing an owner can do is inform the business’s banker about significant achievements in the business. This builds the business’ reputation.

  3. Capacity
  4. A lender will measure the business’ capacity to repay the loan amount by evaluating the operational cash flow of the business. Poor management of accounts receivable could have a negative impact on the ability to qualify for a loan. Capacity to repay is also impacted by the amount of debt carried by the business. A high debt ratio puts the business in a more precarious position to repay its debts.

    Other factors that could impact capacity include revenue history and revenue growth. Without a lengthy track record of recording sales and increasing those sales figures over time, the capacity to repay is less certain.

  5. Capital
  6. Capital is the amount of money that has been invested in the business that becomes operating funds. It is a measure of two things: the amount of money invested by the owner and how money is available to keep the business functioning. Lenders prefer to extend credit to borrowers who have invested their own money into the business, as this demonstrates proof of the borrower’s commitment to the business.

    Borrowers with a large capital contribution in the business will find it easier to get loan approval because they present a lower risk of default. This works the same way as mortgage lending. Just as when buying a home, a borrower who has placed a down payment of 20% of the value of the asset can get better rates and terms for the loan, the business owner who has invested cash in the business is more likely to receive favorable terms.

    Without making a personal cash investment in the business, an owner will find that getting loan approvals will be very challenging, if not impossible.

  7. Collateral
  8. Collateral is usually an asset owned by the borrower that the lender will accept as security for the loan. Any real property, large equipment, or other assets can be used as collateral depending on the purpose of the loan. If the borrower defaults on the loan, the lender can seize the asset that was used as collateral.

    Service businesses often have very few assets of this type. A related approach is “factoring” a business’ accounts receivable, which may be a viable option in some situations. Some service contracts may not be fulfilled for several months, delaying receipt of the cash payments from clients. For a fee that is some factor of the total receivables, an accounts receivables lender can take over collection of the receivables and provide cash to the business immediately. Of course, such costs should be taken into consideration when prices for services are negotiated.

  9. Conditions
  10. The lender will consider various factors related to the borrower’s current situation and the specific conditions related to the loan application, including the purpose of the loan. Lenders will assess the need for the loan; obviously, raising funds to grow the business or to purchase a specific asset that will help the business grow will be more appealing to a lender than a loan to help bail out the business from losses, especially those stemming from poor decisions or lack of preparation for catastrophic events.

    Other conditions might be related to the extent of the owner’s experience or how long the business has been in operation, its profitability and productivity. A lender also must consider the amount of the loan, the interest rate, and expected payment amounts, each of which will have an impact on the business.

    To summarize, a business owner should consider how well the business’s history, financial standing, and operational success will appeal to the lender in each of the 5Cs before the need arises to take out a loan to fund growth. Being mindful of these commercial loan requirements can be a motivation in the way the business is managed. In fact, operating the business with the 5Cs in mind may be an excellent guide even for a business owner who has no intention of seeking a commercial loan.

For more information about or assistance with these and similar subjects we recommend one of three options:

  1. Register to attend the NaperLaunch Academy Workshop Series.
  2. Arrange to meet with a NaperLaunch coach.
  3. Arrange to meet with a business librarian.
Monday, April 12, 2021 - 10:15