Guide to Small Business Startup Loans

Guide to Small Business Startup Loans – SmartAsset

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It takes money to make money and virtually any small business will require some startup capital to get up and running. While the personal savings of the founders is likely the most common source of startup funding, many startups also employ loans to provide seed capital. New enterprises with no established credit cannot get loans as easily from many sources, but startup loans are available for entrepreneurs who know where to look. Here are some of those places to look, plus ways to supplement loans. For help with loans and any other financial questions you have, consider working with a financial advisor.

Startup Loans: Preparing to Borrow

Before starting to look for a startup loan, the primary question for the entrepreneur is how much he or she needs to borrow. The size of the loan is a key factor in determining where funding is likely to be available. Some sources will only fund very small loans, for example, while others will only deal with borrowers seeking sizable amounts.

The founder’s personal credit history is another important element. Because the business has no previous history of operating, paying bills or borrowing money and paying it back, the likelihood of any loan is likely to hinge on the founder’s credit score. The founder is also likely to have to personally guarantee the loan, so the amount and size of personal financial resources is another factor.

Business documents that may be needed to apply include a business plan, financial projections and a description of how funds will be used.

Startup Loan Types

There are a number of ways to obtain startup loans. Here are several of them.

Personal loan – A personal loan is another way to get seed money. Using a personal loan to fund a startup could be a good idea for business owners who have good credit and don’t require a lot of money to bootstrap their operation. However, personal loans tend to carry a higher interest rate than business loans and the amount banks are willing to lend may not be enough.

Loans from friends and family – This can work for an entrepreneur who has access to well-heeled relatives and comrades. Friends and family are not likely to be as demanding as other sources of loans when it comes to credit scores. However, if a startup is unable to repay a loan from a friend or relative, the result can be a damaged relationship as well as a failed business.

Venture capitalists – While these people typically take equity positions in startups their investments are often structured as loans. Venture capitalists can provide more money than friends and family. However, they often take an active hand in managing their investments so founders may need to be ready to surrender considerable control.

Government-backed startup loans – These are available through programs administered by the U.S. Department of Commerce’s Small Business Administration (SBA) as well as, to a lesser degree, the Interior, Agriculture and Treasury departments. Borrowers apply for these through affiliated private financial institutions, including banks. LenderMatch is a tool startup businesses use to find these affiliated private financial institutions. Government-guaranteed loans charge lower interest rates and are easier to qualify for than non-guaranteed bank loans.

Bank loans – These are the most popular form of business funding, and they offer attractive interest rates and bankers don’t try to take control as venture investors might. However, banks are reluctant to lend to new businesses without a track record. Using a bank to finance a startup generally means taking out a personal loan, which means the owner will need a good personal credit score and be ready to put up collateral to secure approval.

Credit cards – Using credit cards to fund a new business is easy, quick and requires little paperwork. However, interest rates and penalties are high and the amount of money that can be raised is limited.

Self-funding – Rather than simply putting money into the business that he or she owns, the founder can structure the cash infusion as a loan that the business will pay back. One potential benefit of this is that interest paid to the owner for the loan can be deducted from future profits, reducing the business’s tax burden.

Alternatives to Startup Loans

Crowdfunding – This lets entrepreneurs use social media to reach large numbers of private individuals, borrowing small amounts from each to reach the critical mass required to get a new business up and running. As with friends and family, credit history isn’t likely to be a big concern. However, crowdfunding works best with businesses that have a new product that requires funding to complete design and begin production.

Nonprofits and community organizations – These groups engage in microfinancing. Getting a grant from one of these groups an option for a startup that requires a small amount, from a few hundred to a few tens of thousands of dollars. If you need more, one of the other channels is likely to be a better bet.

The Bottom Line

Startup businesses seeking financing have a number of options for getting a loan. While it is often difficult for a brand-new company to get a conventional business bank loan, friends and family, venture investors, government-backed loan programs, crowdfunding, microloans and credit cards may provide solutions. The size of the loan amount and the personal credit history and financial assets of the founder are likely to be important in determining which financing channel is most appropriate.

Tips on Funding a Startup

  • If you are searching for a way to fund a business startup, consider working with an experienced financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • One way to minimize the challenge of getting startup funding is to take a “lean startup” approach. That approach could be especially helpful to baby boomers, who are “aging out” of their careers and living longer than earlier generations but still need (or want) an income. Learn how many of them are turning their retirement into business opportunities.

Photo credit: ©iStock.com/Andrii Yalanskyi, ©iStock.com/teekid, ©iStock.com/Thithawat_s

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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Guide to Small Business Loans for Women

Guide to Small Business Loans for Women – SmartAsset

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Women-owned businesses have more difficulty getting loans than companies that are majority-owned by men. Female-led firms applying for loans are more likely to get turned down and less likely to get all they requested. While there are no lending programs that are exclusively for women-owned companies, some sources of financing are more likely to approve a loan application from a woman-led business than others. A financial advisor can help you with any loan or other questions you have.

The annual Small Business Credit Survey by the Federal Reserve quantifies the problems female business owners face when applying for a business loan. The 2019 edition found that loans were the main method of financing for all firms. But while 50% of men-owned firms had their funding needs met, only 43% of women business owners had the same experience.

The Fed survey said women-owned businesses were denied credit more often because they had a low credit score or too much existing debt as reasons compared to other businesses. However, women applicants were less likely to be denied for reasons such as insufficient credit history, insufficient collateral and weak business performance.

Despite the apparent need for more credit for women-led companies, lenders cannot have business loan programs that are restricted to women applicants. The federal Equal Credit Opportunity Act bars creditors from discriminating when granting loans or on any other aspect of credit on the basis of sex, as well as gender, among other borrower characteristics.

Loan Sources for Women-Owned Businesses

However, women-owned businesses obtain loans every day. And there are some sources that have better records of lending to female-led companies than others. Among such sources are government agencies, for-profit organizations and nonprofit entities.

Federal government – Small Business Administration-backed loans are made through a network of participating financial institutions in amounts ranging from $500 to $5 million. Programs such as the main 7(a) loans and streamlined Express Loans are open to all businesses, including women-owned ones subject to size limits and other requirements like having been denied loans from other sources. The 8(a) program specifically targets disadvantaged businesses. SBA-backed loans generally have costs comparable to other loans but offer lower down payments and easier qualification.

Banks and credit unions – These are the primary source of business loans, used by 55% of companies the Fed surveyed. Banks and credit unions offer a variety of repayment terms and loan amounts as well as competitive interest rates and fees. But when it comes to women-owned businesses, not all banks are created equal. Based on the Fed credit survey, about 58% of women applications to large banks are approved, while that number rises to 64% when small banks are looking at the applications.

Online lenders – Women-owned businesses have more success with online lenders, such as peer-to-peer groups, than with banks. About 85% of loan requests by women-led companies were approved by online lenders. That’s a higher approval rate than for any other type of business, including those led by non-Hispanic white, African-American and Hispanic businesspeople. Online lenders tend to have higher interest rates and fees than banks, but may use different criteria to qualify borrowers, resulting in higher approval rates for borrowers such as women business owners.

Microloans – Small loans for amounts from $500 to $50,000 are also available to women-led companies. The SBA has a guaranteed microloan program but these loans are also available without guarantees from a number of nonprofit credit organizations. Although they aren’t suitable for borrowers seeking large amounts, microloans can work for service businesses and others with modest capital needs.

Angel investors and venture capitalists – Angels and venture capitalists primarily make equity investments, purchasing ownership in exchange for cash. However, they may also provide loans, especially in young, fast-growing companies.

Crowdfunding – These kinds of orgnizations connect business owners with individuals, each of whom is willing to put up a small portion of the required financing. Credit scores and other traditional credit qualifications are generally not relevant with crowdfunding. What matters more is making a convincing presentation and having a product that connects with potential crowdfunders.

Family and friends – As is the case with crowdfunding, loans from family and friends are not likely to turn on credit history or the existence of collateral. However, this source of funding requires having family and friends with adequate financial resources. Also, if a business funded this way fails, it could strain important personal relationships.

Credit cards – A Fed survey found 52% of small businesses used credit cards, second only to 55% that used bank loans. Credit cards charge high interest rates compared to other funding sources, but the convenience makes up for it for many business borrowers.

The Bottom Line

While women-owned businesses have a harder time accessing credit than male-led companies, business loans are available. Some sources of financing seem more open to women-led companies than others, and female entrepreneurs can increase their chances of getting a loan by applying to the right lender. Finally, keep in mind that grants for women-owned businesses are also an option.

Tips for Business Borrowers

  • If you are a female business owner looking for business financing, consider working with an experienced financial advisor to guide you through selecting and applying for a loan. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • While there are no women-exclusive lenders, many sources of assistance tailored for female entrepreneurs can help women solve the funding puzzle. They include the SBA’s national network of Women’s Business Centers and the National Association of Women Business Owners. No matter where you choose to seek a loan, be sure to follow basic loan application guidelines.

Photo credit: ©iStock.com/Willy Sebastian, ©iStock.com/Kerkez, ©iStock.com/YinYang

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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Best States for Veterans – 2020 Edition

Best States for Veterans – 2020 Edition – SmartAsset

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How easily veterans adjust to their lives after service depends on many factors, not the least of which is their ability to maintain adequate finances to cover their home payments and daily needs. There’s good news for vets on that front, though: While about 37,000 veterans still experienced homelessness in January 2019, the homelessness rate among veterans declined more than 2% in 2019 and had decreased 50% since 2010, according to a 2019 report from the Department of Housing and Urban Development (HUD). Despite that marked improvement, not all places are equally suited to help veterans thrive. That’s why SmartAsset crunched the numbers in all 50 states and the District of Columbia to find the best places for veterans.

To do so, we looked at data across nine metrics: veterans as a percentage of population, veteran unemployment rate, overall unemployment rate, percentage of veterans living below the poverty line, housing costs as a percentage of median income for veterans, percentage of a state’s businesses owned by veterans, number of VA health centers per 100,000 veterans, number of VA benefits administration facilities per 100,000 residents and taxes on military pensions. For details on our data sources and how we put all the information together to create our final rankings, check out the Data and Methodology section below.

Key Findings

  • Veterans are less likely than the general population to live below the poverty line. Nationally, 11.1% of the U.S. population is living in poverty, according to 2019 figures from the Census Bureau. The average for this metric across this study is 6.7%, possibly because military benefits help keep some veterans afloat when they might otherwise face financial challenges.
  • More populous states may not be as suitable to veterans. The bottom three states in the study are California, New York and Illinois, which have the largest, fourth-largest and sixth-largest state populations, respectively. These states struggle in two metrics: the unemployment rate for veterans and housing costs as a percentage of median income for veterans. This may be due, in part, to their high populations, which increase both competition for available jobs and demand for housing.
  • Pension taxes vary. Each state chooses how to tax military pensions. All in all, 30 states don’t tax military pensions at all, including eight out of the top 10 states (Nebraska and Montana are the exceptions). Military pensions are partially taxed in 13 states, along with the District of Columbia, and they are fully taxed in seven states.

1. South Dakota

South Dakota, home of the Black Hills and Mount Rushmore, is the best state in the U.S. for veterans. South Dakota has 21.04 Veterans Administration health facilities per 100,000 veterans, which is the second-highest rate for this metric overall, meaning veterans in South Dakota should have relatively good access to health services. There are also 3.51 VA benefits administration facilities per 100,000 residents, ranking 10th. In addition, South Dakota does not tax military pensions.

2. Wyoming

Wyoming takes the runner-up spot. Wyoming has the highest number of VA health facilities in the country, at 28.99 per 100,000 veterans. It also does not tax military pensions. Wyoming finishes in the bottom half of the study in terms of the percentage of veterans who are living below the poverty line (coming in at 38th, with a percentage of 7.1%). However, the veteran unemployment rate in the state is 1.0% – second-lowest in the study – so veterans looking for work could do worse than thinking about the Cowboy State.

3. North Dakota

North Dakota is one of the least populous states in the nation, but it does well by its veterans. The Rough Rider State has the lowest unemployment rate for veterans in the nation, at 0.9%. Its overall September 2020 unemployment rate is also low, coming in at 4.4% – fourth-lowest in the nation. Housing costs make up 19.90% of the median income for a veteran, the second-best rate for this metric in the study.

4. West Virginia

West Virginia has housing costs that make up just 18.95% of the median veteran income, the best rate for this metric in the study. The Mountain State has the sixth-highest concentration of VA health facilities in the study, at 12.39 per 100,000 veterans, and the third-highest number of VA benefits administration facilities, at 5.78 per 100,000 residents. Military pensions are not taxed in this state. See more about retirement tax friendliness in West Virginia here.

5. Maine

Maine is one of two Northeastern states to be ranked in the top 10, and it gets there partially on the strength of its 1.3% veteran unemployment rate, ranking fourth-lowest in the country. Maine’s population is made up of 8.89% veterans, the eighth-highest percentage for this metric. Maine also has 5.13 VA benefits administration centers per 100,000 residents, ranking sixth-best. There are no taxes on military pensions in the Pine Tree State.

6. Alaska

Also known as The Last Frontier State, Alaska has a relatively small population, but one that is 10.74% veterans, the highest percentage for this metric across all 50 states and the District of Columbia. Alaska also comes in first for the metric measuring the percentage of businesses owned by veterans, at 11.60%. The state doesn’t do nearly as well, though, when it comes to employing veterans, as the unemployment rate among veterans is 6.3%, near the very bottom of the study. On the plus side, the state does not tax military retirement pay.

7. Nebraska

Nebraska had an overall unemployment rate of just 3.5% in September 2020, the lowest in the country, and that rate is particularly impressive amid the COVID-19 pandemic. Nebraska also has the fifth-best unemployment rate for veterans, at just 1.4%. Nebraska taxes some portion of military pensions, making it one of two states in the top 10 of the study where military pensions are not completely tax-free.

8. New Hampshire

Veterans in New Hampshire own 9.42% of the state’s businesses, placing the Granite State at 12th overall for this metric. The entire population of the state is 8.52% veterans, the 14th-highest rate for this metric across all 50 states and the District of Columbia. New Hampshire performs relatively poorly in terms of housing affordability: The average housing cost represents 36.25% of the median veteran income, sixth-highest in the study. However, Military pensions are tax-free in the state. Those who are seeking assistance with balancing all of these financial factors may wish to consult our roundup of the top 10 financial advisors in New Hampshire.

9. Montana

Veterans will find a built-in community in Big Sky Country, where the population is 10.28% veterans, second-highest in the study. That said, Montana taxes military pensions fully – the only state in our top 10 to do so and one of just seven to do so nationwide. Still, Montana ranks ninth for both of the unemployment metrics we measured, with a veteran unemployment rate of 2.3% and an overall September 2020 unemployment rate of 5.3%.

10. Hawaii

Hawaii places first in this study in terms of number of VA benefits administration facilities, at 6.64 per 100,000 veterans. It is important to note, though, that the Aloha State had an unemployment rate of 15.1% in September 2020, ranking last for this metric in the study. Furthermore, housing costs make up 39.41% of median veteran income, second-worst overall. However, only 5.8% of veterans are living below the poverty line, good for 12th overall. The state also has top-20 rankings for veterans as a percentage of the population, veteran-owned businesses as a percentage of all businesses and VA health facilities per 100,000 veterans.

Data and Methodology

To conduct the 2020 version of our study on the best states for veterans, we compared all 50 states and the District of Columbia across the following metrics:

  • Veterans as a percentage of the population. Data comes from the Census Bureau’s 2019 1-Year American Community Survey.
  • Veteran unemployment rate. Data comes from the Census Bureau’s 2019 1-Year American Community Survey.
  • Unemployment rate. Data comes from the Bureau of Labor Statistics and is for September 2020.
  • Percentage of veterans living below the poverty line. Data comes from the Census Bureau’s 2019 1-Year American Community Survey.
  • Housing costs as a percentage of median income for veterans. This is annual median housing costs divided by median income for veterans. Data comes from the Census Bureau’s 2019 1-Year American Community Survey.
  • Share of veteran-owned businesses. This is the percentage of all businesses in a state that are owned by veterans. Data comes from the Census Bureau’s 2018 Annual Business Survey.
  • VA health facilities per 100,000 veterans. Data come from the U.S. Department of Veterans Affairs and the Census Bureau’s 2019 1-year American Community Survey.
  • VA benefits administration facilities per 100,000 veterans. Data come from the U.S. Department of Veterans Affairs and the Census Bureau’s 2019 1-year American Community Survey.
  • Taxes on military pension. States were assigned a 1 if the state does not tax military retirement pay, a 2 if there are special provisions or other considerations for military pension taxes and a 3 if the state fully taxes military retirement pay. Data comes from militarybenefits.info.

First we ranked each state in each metric. From there, we found the average ranking for each state, giving all metrics a full weight except for the two metrics measuring unemployment, which each received a half weight. We used this average ranking to create our final score. The state with the best average ranking received a score of 100, and the state with the worst average ranking received score of 0.

Money Tips for Veterans

  • Financial help from someone who’s always got your six. Veterans, like everybody else, sometimes need help with financial matters. A financial advisor can provide that help and bring in reinforcements to set you on the right path. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • Don’t sacrifice continuing education because of costs. If you want to go to college after you serve, the GI Bill will help — but you may still end up with student loans. To discover how much you’ll need to pay, use SmartAsset’s student loan calculator.
  • Create a strong strategy for your budget. Use SmartAsset’s budget calculator to figure out how much you should be spending on different areas and you’ll make sure you have enough money for everything.

Questions about our study? Contact press@smartasset.com.

Photo credit: ©iStock.com/SDI Productions

Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.
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What Is a Certified Business Exit Consultant (CBEC)?

What Is a Certified Business Exit Consultant (CBEC)? – SmartAsset

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When owners of privately held companies are considering how to transition out of their businesses due to planned retirement, health concerns or other reasons, they often get expert help with the process. Valuing, marketing and preparing for sale can be complicated and professional assistance with this activity can be invaluable. A Certified Business Exit Consultant (CBEC) is a professional certified to help entrepreneurs plan to exit their businesses.

People who seek a CBEC certificate are usually professionals already involved in helping business owners with exit planning. They may be financial advisors, business brokers, appraisers, accountants, attorneys or business management consultants.

Holders of CBEC certificates have gotten specialized training on subjects of importance to business owners contemplating exit. These include counseling owners about exit options, estimating the value of the business, preparing the business for exit and tax considerations.

The CBEC is co-sponsored by Pinnacle Equity Solutions and the International Exit Planning Association, both of Canton, Massachusetts. Pinnacle offers business exit planning services as well as training for professional advisors. The International Exit Planning Association is a professional organization run by Pinnacle.

CBEC Certification Requirements

In order to receive a CBEC, planners have to complete a set of prerequisite courses and a set of certification webinars. They also have to pass a final exam and prepare an exit plan.

The prerequisites are self-paced online courses that teach the core concepts of exit planning. They consist of 10 hours of instruction delivered in 12 modules. The certification courses consist of nine webinars. After a two-day review, students can take the final exam either in person or via proctored web meeting.

The course material includes information on private capital markets, mentally preparing an owner for exit, business valuation, transfer strategies including employee stock ownership plants and methods for retaining key members of the management team through the transition.

The CBEC certification course costs $2,500. Successful graduates are required to complete 10 hours of continuing education each year. They also have to maintain membership in the IEPA and follow the organization’s code of conduct.

CBEC Certificate Holder Jobs

Most CBEC holders are already working as financial advisors, consultants, accountants or attorneys assisting business owners with transition. The CBEC designation indicates that the holder has an interest in and has studied and passed examinations on concepts and implementation of exit planning strategies. CBEC designees don’t have any special powers or privileges, however.

The CBEC has been offered since 2010. It is one of the least expensive exit planning-related certifications available. It also has fewer prerequisites and course requirements than some other similar certifications.

Comparable Certifications

There are several other certifications for professionals involved in advising business owners on exit strategies. Here are some competitors to the CBEC:

The Certified Exit Planner (CExP) has been offered by the Business Enterprise Institute since 2009. Most CExP students already have professional designations such as financial advisor, accountant or attorney. The program calls for 100 to 120 hours of study, can take up to a year and costs from approximately $4,000 to $5,000 depending on whether study is done online or at in-person workshops.

The Certified Exit Planning Advisor (CEPA) certificate from the Exit Planning Institute has been around since 2007. The training consists of a five-day course that costs approximately $6,000 if done at in-person workshops or $3,000 if done online. Prerequisites include a four-year bachelor degree plus five years of experience working with business owners.

The Certified Merger & Acquisition Advisor (CM&AA) is overseen by the Alliance of Merger and Acquisition Advisors. Prerequisites for this certificate include a four-year college degree as well as a professional designation or an advanced degree such as an MBA or Ph.D. It costs $2,495 for the online version and $4,995 for in-person instruction.

Bottom Line

Like many professional designations, much of the value of the CBEC is in marketing, where it can be used to convince potential clients that an advisor is particularly well qualified to dispense advice on this topic, such as what the selling price should be. Most advisors working in the exit planning field don’t have any specialist exit planning certificate, however. The CBEC certificate is a relatively low-cost, undemanding way for an advisor to acquire credentials establishing his or her expertise in the field of business exists. People with this certificate have studied relevant topics including business valuation, financial preparation, transfer strategies and tax consequences.

Tips for Business Owners

  • A business owner considering the best way to exit the business can get great benefit from a relationship with a trusted and experienced financial advisor to make sure the transition does not handicap his or her personal financial plans. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Business owners should also make sure they are paying the right amount in property taxes. A free, easy-to-use property tax calculator can give you a quick read on what exactly you owe on your property.

Photo credit: ©iStock.com/Gwengoat, ©iStock.com/NicoElNino, ©iStock.com/Natee Meepian

Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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Most Livable Cities in the U.S. – 2020 Edition

Most Livable Cities – 2020 Edition – SmartAsset

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People choose where to live based on many factors – availability of jobs, location of family, and the weather all come into play for most folks. Something some Americans may not remember to take into consideration, though, is the livability of a city. While this can be hard to quantify, SmartAsset has tried to do just that, comparing cities across the country to find the most livable places to live in 2020.

We ran the numbers on 100 of the largest cities in the U.S. to see how they stacked up across the following metrics: walk score, violent crime rate, property crime rate, unemployment, housing costs as percentage of income, and the rate of housing cost-burden. For details on our data sources and how we put all the information together to create our final rankings, check out the Data and Methodology section below.

This is SmartAsset’s second study on the most livable cities in the U.S. Check out last year’s edition here.

Key Findings

  • The living’s grand in the Grand Canyon State. While cities from all over the country crack the top of the list, four of the top 10 cities are in Arizona – Gilbert, Chandler, Scottsdale and Mesa. Incidentally, these four cities are also in the top 10 of our study on the most affordable cities for an early retirement. They all rank within the top 25 of the study for relatively low housing costs as a percentage of income, low rates of residents being housing cost-burdened and low violent and property crime rates.
  • Consistency at the top. Arlington, Virginia ranks as SmartAsset’s most livable city for the fourth year running. It has perennially maintained low unemployment and crime rates. Additionally, two other cities have cracked the top 10 every year since we began this study in 2016: Plano, Texas and Madison, Wisconsin.

1. Arlington, VA

Arlington, Virginia, located right outside of Washington, D.C., is the most livable city in America in this year’s edition of our study. Arlington has been our most livable city since 2017. It has the second-lowest property crime rate (1,298 incidents per 100,000 residents) and the fourth-lowest violent crime rate (138 incidents per 100,000 residents) in our study. It also has a September 2020 unemployment rate of just 4.5%, the fourth-lowest rate in the study.

2. Boise, ID

Boise, Idaho saw just 283 incidents of violent crime per 100,000 residents in 2019, the 13th-lowest rate for this metric in the study. It comes in seventh for property crime, at just 1,595 per 100,000 residents. Only 28.0% of residents of Boise are burdened by their housing cost, making it the seventh-least housing cost-burdened city we analyzed.

3. Lincoln, NE

Lincoln, Nebraska had the lowest unemployment rate in our study for September 2020, at just 3.2%. Lincoln also ranks fourth for both of the housing costs metrics we tested, with housing costs representing 18.96% of income and 27.0% of residents being housing cost-burdened. That said, it isn’t the easiest place to access all your needs by foot, as it ranks in the middle of the study in terms of walk score.

4. Gilbert, AZ

Gilbert is the first of four Arizona locales to make the top 10 of this study. It has the lowest number of property crimes across all 100 cities we examined (1,200 per 100,000 residents) and the second-fewest number of violent crimes (96 per 100,000 residents). On the downside, the city ranks in the bottom 10 of the study for walkability, but Gilbert is relatively affordable, coming in first for both housing costs as a percentage of income (18.75%) and the percentage of residents who are housing cost-burdened (22.0%).

5. Plano, TX

Housing costs in Plano, Texas represent 20.02% of income, ranking eighth-lowest in this study. It also scores in the top 10 for its low rates in both of the crime statistics we considered. In 2019, there were 151 violent crime incidents (fifth-lowest) and 1,717 property crime incidents (10th-lowest) in the city per 100,000 residents.

6. Chandler, AZ

Chandler is the second city in Arizona to make the top 10 of this study. Like some of the other Arizona cities in the top 10, Chandler does not fare very well for walkability, ranking in the bottom quartile. However, it has the third-lowest percentage of housing cost-burdened residents among the 100 cities we analyzed, 26.0%. Furthermore, housing costs make up 19.87% of income on average, the seventh-lowest percentage in this study.

7. Madison, WI

Madison, Wisconsin had an unemployment rate of 3.8% in September 2020, the second-lowest in this study. Madison also finished in the top third of the 100 cities on this list for every other metric but one (housing costs as a percentage of income, for which it ranked 41st). It had the 21st-lowest number of violent crime incidents overall (362 per 100,000 residents in 2019) and the 28th-lowest rate of housing-cost burden, at 31.7%.

8. Scottsdale, AZ

The third Arizona city to place in the top 10 is Scottsdale, where there were just 161 incidents of violent crime per 100,000 residents in 2019, the sixth-lowest rate of the cities we analyzed. Scottsdale also finishes 13th for both of the housing cost metrics we measured: Housing costs represent 20.54% of income, and 29.4% of residents are housing cost-burdened.

9. Raleigh, NC

Raleigh finishes in the top 15 for both safety metrics: It had 257 incidents of violent crime per 100,000 residents (12th-fewest in this study) and 1,795 incidents of property crime per 100,000 residents (14th-fewest in this study). Raleigh finishes 17th for its relatively low September 2020 unemployment rate (6.1%) and housing costs as a percentage of income (21.01%).

10. Mesa, AZ

The final city in the top 10 is the fourth Arizona city to make the list, Mesa. Mesa finishes in the top quartile of cities in every metric except one – walk score, for which it comes in 73rd place. The top quartile rankings, though, include a 13th-place finish for its low rate of housing cost-burden, at 29.4%, and its 15th-place finish in terms of property crime rate, at just 1,869 per 100,000 residents for 2019.

Data and Methodology

To find the most livable cities in the U.S., we analyzed data on 100 of the largest cities in the country. We examined each city according to the following seven metrics:

  • Walkability. This is calculated on a 0 to 100 scale. A lower number means the city is less walkable while a higher number means it is more walkable. Data comes from walkscore.com.
  • Violent crime rate. This is the violent crime rate per 100,000 residents. Data comes from the 2019 FBI Uniform Crime Reporting Database for all reporting cities. For non-reporting cities, data comes from neighborhoodscout.com.
  • Property crime rate. This is the property crime rate per 100,000 residents. Data comes from the 2019 FBI Uniform Crime Reporting Database for all reporting cities. For non-reporting cities, data comes from neighborhoodscout.com.
  • Unemployment rate. September 2020 data comes from the Bureau of Labor Statistics (BLS) and is reported at the county level.
  • Housing costs as a percentage of income. This is the median housing costs divided by median household income. Data comes from the Census Bureau’s 2019 1-year American Community Survey.
  • Housing cost-burdened rate. This is the percentage of households spending 30% or more of their income on housing. Data comes from the Census Bureau’s 2019 1-year American Community Survey.

First, we ranked each city in every metric. We then found each city’s average ranking, giving each metric a full weight. We used this average ranking to determine a final score. The city with the best average ranking received a score of 100 and the city with the lowest received a score of 0.

Tips for Finding Somewhere to Live

  • Get expert financial support. If you want to move to one of these cities, consider working with a financial advisor. Finding the right financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Rent or buy? Not sure if you’re ready to put down permanent roots down yet? Use SmartAsset’s rent or buy calculator to see which makes more financial sense.
  • Save up. Make a budget using SmartAsset’s free budget tool so you can start putting away money to buy a home in your dream location some day.

Questions about our study? Contact press@smartasset.com.

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Ben Geier, CEPF® Ben Geier is an experienced financial writer currently serving as a retirement and investing expert at SmartAsset. His work has appeared on Fortune, Mic.com and CNNMoney. Ben is a graduate of Northwestern University and a part-time student at the City University of New York Graduate Center. He is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance (CEPF®). When he isn’t helping people understand their finances, Ben likes watching hockey, listening to music and experimenting in the kitchen. Originally from Alexandria, VA, he now lives in Brooklyn with his wife.
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S Corp vs. LLC: Which Is Best for Your Business?

S Corp vs. LLC: Which Is Best for Your Business? – SmartAsset

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So you own a business and you’re looking to incorporate. Two of the most popular business structure are the S Corp and the LLC. Which is best for your business can depend on many factors, such as what you do for a living, your tax situation and more. We’ll walk through the key characteristics of the two, and how to decide between them.

Why Incorporation Is Important

In most cases, the best reason to incorporate is liability. When you create a corporation, you separate your personal assets from your company’s assets. If someone wants to collect a debt or, at worst, file a lawsuit, they can only do so against the company and any assets in that company’s name. In turn, your personal savings remain protected. Both LLCs and S corporations can effectively protect your home life from a downturn in your professional world.

What Is An LLC?

A limited liability company, or LLC, is a type of corporate entity. It’s one of the most basic business types, and chiefly serves to separate the assets of the business owner(s) from the business itself.

If you opt to create an LLC, you will have created an entity that exists entirely separate from yourself. Clients will do business with this entity, which will have its own assets, debts and liabilities. If someone collects a debt or sues the LLC, they cannot pass that debt on to you.

What Is An S Corporation?

An S corporation is a tax status that allows a company to pass all profits directly through to its owner(s). This allows a small business to distribute profit-based income without double taxation.

Under the standard corporate form, known as a C corporation, a company first pays its corporate income tax. It then pays its owners and workers, who in turn pay personal income tax on that salary. This works well when a company functions entirely separately from the people who own and operate it.

However, in many small businesses, owners will take the profits entirely as their personal income. This creates a problem of double taxation, because in this case a business owner’s corporate income tax and personal income tax are one and the same. An S corporation allows the company’s owners to pay taxes only once via their personal income tax forms.

S Corp vs. LLC: Similarities and Differences

It is important to note that, because one is a corporate form and the other a tax status, LLCs and S corporations can, and do, overlap. To be clear, an LLC can file for S corporation tax status. Conversely, if you have S corporation tax status, you can also incorporate as an LLC. These forms do share a number of similar features, though, including:

  • Asset Protection – Both S corps and LLCs protect your personal assets from debt, bankruptcy, legal liability and other possible losses incurred by the corporation.
  • Double Taxation – All corporate profits pass along to the owners of LLCs and S corps without incurring corporate income taxes. This helps you avoid being taxed twice.
  • Multiple Members – LLCs and S corps can each have anywhere from one to multiple members, though an S corporation caps out at 100 shareholders. Further, only U.S. citizens and legal residents can be members of an S corporation.

In practice, one of the largest differences between LLCs and S corporations lies in how they assign payment. Under a default LLC operating as a sole proprietorship/general partnership, profits and expenses pass entirely through to the taxes of the individuals involved. Each participant both deducts business expenses and claims all profits on their personal income taxes. The LLC itself does not have any tax filings.

Under an S corporation, the members assign themselves a salary that the company pays out of its operating budget. This income must be reasonable for their position and industry. Then, after the company pays all expenses, it passes along any additional profits as a distribution to its members.

Here’s an example that illustrates these differences. Sue is a freelance programmer. She currently has an LLC that she operates. Last year she made $100,000 in income and had $10,000 in business expenses. Here’s how her tax situation plays out under the two statuses:

  • Sole Proprietorship LLC – Sue would claim $100,000 of personal income on her income taxes. She would reduce her taxable income by the $10,000 in expenses she incurred, leaving her with $90,000 in taxable personal income.
  • S corporation LLC – Sue has determined that a reasonable salary is $75,000. She would report that $75,000 as earned income. Her corporation would then pay the $10,000 in expenses and pass the remaining $15,000 as a profit distribution to Sue, who would report and pay taxes on it as corporate profit income.

Operating requirements for a multi-member S corporation are also significantly more complex than they are for an LLC. An S corporation must adopt bylaws which meet IRS guidelines and must have a corporate governing body that includes a board of directors and officers.

How Taxes Affect S Corps and LLCs

Most Americans pay a FICA tax of 7.65% of their income under $132,900, encompassing contributions to both Social Security and Medicare. Their employer pays the same 7.65% on their behalf. The self-employed, however, pay both sides of this tax, creating what’s known as the “self-employment tax.” This combines the aforementioned rates to the tune of a 15.3% tax on all self-employment income beneath the $132,900 limit.

The self-employment tax applies to all pass-through income as well. It does not apply to corporate profit distributions, though. The profit distributions will likely be taxed as ordinary income, while you may be able to classify them at the lower dividend income rate. In the end, you will not pay any payroll taxes on them.

S corporation members do not pay self-employment taxes on their profit distributions either. As a result, these members usually try to minimize the income portion of their earnings in favor of profit distributions. This is entirely valid as long as your income remains within a reasonable range. If you attempt to reduce your income too much, you will likely trigger an audit.

Continuing our previous example, Sue’s LLC earned $100,000 and spent $10,000 in business expenses last year. Under the S corporation form, Sue would save herself more than $2,000 in payroll taxes. Here’s how things would shake out:

  • Sole Proprietorship – Sue will claim the $100,000 of income and the $10,000 of expenses herself. This will lead to her having $90,000 of taxable income. She will pay the 15.3% self-employment tax on all of it, leading to $13,770 in self-employment taxes.
  • S Corporation – Sue takes a salary of $75,000. Her LLC will pay $10,000 in expenses and send her $15,000 as a corporate profit distribution. Sue and her LLC will pay the full combined 15.3% tax on her salary earnings, coming to $11,475. She will pay no payroll taxes on her profit distribution.

Bottom Line

In most cases, if you do business as an individual or a partnership, you should consider forming an LLC. This corporate form is inexpensive and highly flexible. Unless you anticipate major growth involving external shareholders and outside investment in the future, an LLC is a good way to protect your personal assets.

For an individual operator, the choice to elect S corporation tax status is largely a matter of accounting. If you would save a meaningful amount of money in self-employment taxes, it is likely worth electing S corporation status.

For a partnership, consider the operating requirements of an S corporation carefully. Would it significantly affect your business to adhere to bylaws and corporate governance? Do you have few enough members, and will you likely keep that membership group small? If so, once again, consider whether an S corporation would create enough tax savings to justify the costs of filing and paperwork.

Tips for Managing Your Finances

  • In-depth budgeting is a worthwhile strategy to adopt if you’re looking to improve your long-term finances. It may, however, be difficult to build a budget if you have little to no experience doing so. To get some help, stop by SmartAsset’s budget calculator.
  • Many financial advisors specialize in financial and tax planning for business owners. You can find a financial advisor today using SmartAsset’s financial advisor matching tool. Simply fill out our short questionnaire and you’ll be matched with up to three fiduciary advisors in your area.

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Eric Reed Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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What Is a Serial Entrepreneur?

What Is a Serial Entrepreneur? – SmartAsset

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A serial entrepreneur starts several businesses one after another rather than beginning one venture and staying focused on it for many years like a more typical entrepreneur. Serial entrepreneurs may sell their businesses after they reach a certain level of maturity. They may retain ownership while delegating day-to-day managerial responsibilities to other people. Or, if the business is underperforming, they may close it down and move on to the next idea. Some highly successful businesspeople are serial entrepreneurs. Startups organized by serial entrepreneurs are generally regarded as attractive opportunities by knowledgeable venture investors.

It’s not uncommon for people to start businesses, experience failure and then try again. Serial entrepreneurs are generally seen as a different sort because of their track record of starting multiple successful enterprises.

There is no standard number of businesses that someone has to start to be considered a serial entrepreneur, but three may be a minimum. Nor do all the businesses have to succeed or produce profits. However, most people regarded as serial entrepreneurs have at least a couple of significant and enduring successes to their credit.

Pros and Cons of Serial Entrepreneurs

While each startup has unique characteristics, the process of beginning a new business does have some steps that are common to most if not all entrepreneurial ventures. Serial entrepreneurs learn from experience, sometimes the hard way by making mistakes, how to get an idea for a business in motion and off the ground. Along with developing skills, they acquire contacts among investors, talented employees and others who can help them with the next enterprise.

Venture capital investors have expressed a preference for backing companies founded by serial entrepreneurs because of the value the experienced startup leaders bring. This preference isn’t only for serial entrepreneurs whose past startups have all been successes. Failure can be a good teacher, according to this viewpoint, and past failure can pave the way to future success.

The practice of serial entrepreneurship can come with some limitations and risks as well as benefits. For one thing, a serial entrepreneur who builds and sells a startup that later achieves great success can miss out on the chance to acquire great wealth by cashing out too soon.

Another risk is that soon after starting a business a serial entrepreneur will be distracted by an idea for a new startup. That may lead the entrepreneur to fail to pay enough attention to the first business so that it flounders and is unsuccessful.

Examples of Serial Entrepreneurs

Many high-profile entrepreneurs have come to attention because of their long-term association with a single startup. Microsoft co-founder Bill Gates, who is not thought of as a serial entrepreneur, is an example of one of these. However, serial entrepreneurs have a special way of gaining public attention because of their repeated, sometimes spectacular, successes in a variety of fields.

One of the best-known serial entrepreneurs is Richard Branson, who has begun hundreds of  ventures in fields from airlines to soft drinks, all under the Virgin label of his first company, a mail-order record firm. Many of Branson’s new companies have been folded after failing to achieve traction. But Branson’s multiple wins in such diverse fields is one matched by few other serial entrepreneurs.

Oprah Winfrey is another serial entrepreneur who parlayed an early success into the foundation of a diverse empire, this one focused on media. Winfrey has started prominent players in television production, cable television and magazine publishing.

A more recent arrival to the scene, Elon Musk, began as a web software entrepreneur, moved to online financial services and has since been upending industries from tunnel construction to space transport. However, he joined Tesla, the electric car company that may be his most prominent venture, after it was founded.

The Bottom Line

Serial entrepreneurs go from one idea for a new business to the next, starting companies and then selling, closing or delegating them to others to manage. While their track record may not be one of perfect repeated success, their hard-won experience and demonstrated diligence makes serial entrepreneurs attractive to some new venture investors.

Tips for Entrepreneurs

  • Starting even one business is a complex and uncertain process. Before taking it on, consider working with an experienced financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • Keeping close rein on a startup’s expenses is critical. There are four tips for doing that successfully. It’s also essential to squeeze every dollar spent to get the most out of it.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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What Is the SBA 8(a) Business Development Program?

What Is the SBA 8(a) Business Development Program? – SmartAsset

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The 8(a) Business Development program is a Small Business Administration initiative designed to level the federal government contracting playing field for small business owners who are socially and economically disadvantaged. Qualifying businesses can compete for contracts that are set aside specifically for members of the program. They also can get help from SBA experts on submitting government contract bids, connect with mentors and tap other helpful resources.

With annual purchases topping $500 billion, the U.S. government is the world’s largest customer. Federal law requires 23% of those orders go to small business sellers.  Other statutory requirements call for the various federal agencies to devote set amounts of their budgets to buying from women-owned businesses, companies owned by service-disabled veterans and others. The 8(a) business development program aims to make sure a fair share of those dollars go to business owners facing obstacles due to economic circumstances, race or ethnic background.

8(a) Benefits

The benefits of participating in the 8(a) program fall into two main categories. In addition to being able to bid on contracts set aside for them, they can use special SBA resources to help them navigate the government contracting world.

The most concrete benefit of 8(a) participation is getting exclusive access to win certain contracts as sole-source providers on government contracts. The sole-source contracts can be worth up to $6.5 million for manufacturers and up to $4 million for sellers of goods and services. For larger contracts, 8(a) participants can band together to form joint ventures and bid collaboratively.

The mentoring part of the 8(a) program encourages participating businesses to connect with larger firms so they can jointly bid on contracts that have been set aside for small contractors. The protégé small business can benefit from its mentor’s expertise as well as financial assistance. The mentor gets the green light to bid on contracts that it would not be able to go after without its protégé. Only small businesses that have never gotten a government contract can participate in this program.

Small businesses in 8(a) also can be assigned a business opportunity specialist, which is an SBA employee trained to help small contracts. SBA also puts on workshops on marketing, management and other topics for 8(a) businesses. And 8(a) participants can get access to surplus government property, SBA-backed loans and help with surety bonds.

8(a) Qualifications

To participate in 8(a), businesses must first fit SBA’s size standard for a small business.  This standard is generally measured by the size of annual revenues or number of employees. It varies according to the industry the firm operates in, as categorized under the North American Industry Classification System (NAICS). In the case of a manufacturer of office furniture, for example, a firm must have fewer than 1,000 employees to be considered small.

Next, the firm must be at least 51% owned by a socially disadvantaged U.S. citizen. This group automatically includes African-Americans, Hispanic Americans, Asian Pacific Americans, Subcontinent Asian Americans and Native Americans. This group also includes those who can show a social disadvantage because of coming from an environment isolated from mainstream American society.

Economic disadvantage also has to be shown. These requirements are straightforward. The owner has to have:

  • Personal net worth of $750,000 or less,
  • Average adjusted gross income for three years of $350,000 or less,
  • Assets of $6 million or less.

Small businesses can apply to participate in the 8(a) program online at the certify.SBA.gov site. Applicants have to include documentation of income, assets and net worth, as well as narratives describing how they have experienced social disadvantage.

The 8(a) certification is good for up to nine years. Participants have to submit annual updates to stay in the program.

Bottom Line

The SBA 8(a) business development can provide socially and economically disadvantaged business owners with valuable assistance in securing contracts with the federal government. To qualify, small business owners have to show they are members of disadvantaged groups and also have access to limited financial resources. Those that meet the standard can bid on sole-source government contract setasides. They can also set up joint ventures with larger firms to give both companies access to setasides and get technical assistance and training.

Tips for Small Businesses

  • An experienced financial advisor can provide invaluable help when applying to participate in the 8(a) program. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • If you have employees you’ll need to be sure you’re withholding the correct amount for federal income taxes as well as Social Security and Medicare. A free paycheck calculator can help make short work of this essential bookkeeping chore.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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What Is Financial Planning and Analysis (FP&A)?

What Is Financial Planning and Analysis (FP&A)?

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Financial planning and analysis (FP&A) is the process businesses use to prepare budgets, generate forecasts, analyze profitability and otherwise inform senior management decisions of how to implement the company’s strategy most effectively and efficiently. The FP&A functions can be accomplished by an individual or a team working alongside other finance professionals such as the controller and treasurer and reporting to the chief financial officer (CFO). While FP&A is often performed by people with an accounting background, it differs from accounting by focusing primarily on forward-looking information as opposed to historical data.

Typical members of an FP&A team include financial analysts and one or more FP&A managers charged with coordinating the work of the analysts. In larger organizations, a director or vice president of FP&A oversees the overall process and strategic direction and communicates with the CFO, CEO and members of the board of directors.

FP&A Functions

To fulfill its function of providing information and insight connecting corporate strategy and execution, FP&A performs a wide range of activities. These can be divided into a few broad categories including planning and budgeting, forecasting and management reporting.

The central output of the FP&A process consists of long- and short-term plans. The job requires using financial and operational data gathered from throughout the company. A key part of the FP&A process is collecting and combining a wide variety of figures from operations, sales, marketing and accounting departments to produce a unified view of the entire business that can guide strategy decisions by senior executives and board members.

Producing budgets is a big part of the FP&A planning function. Budgets describe expectations for the timing and amounts of arriving income, cash generation, disbursements to pay bills and debt reductions. Budgets may be monthly, quarterly and annually. Often FP&A creates a rolling budget for the following 12-month period that will be reviewed, adjusted and extended at the end of each quarter. FP&A also creates income statements and cash flow statements.

One of the performance reporting functions of FP&A is identifying variances when actual numbers reported by business units don’t match up to the budgeted amounts. In addition to identifying and quantifying variances, FP&A can offer recommendations for strategies that could be used to bring actual results in line with expectations.

Reports and forecasts from FP&A may be presented to the board of directors, to the CEO or other senior executives or to outside stakeholders such as lenders and investors. At a strategic level, decision makers use these analyses to choose how best to allocate the company’s resources.

Public companies reply on FP&A to provide shareholders and analysts with guidance on revenue and profits for upcoming quarters and fiscal years. The accuracy of the guidance supplied to the markets can have a sizable effect on stock prices.

Decision Support

Along with the ongoing responsibility to produce budgets, plans and forecasts, FP&A may also be called upon to support specific management decisions. For instance, it might analyze a merger or acquisition proposal to enable management to decide whether to pursue it or not. Other special projects delegated to FP&A could include analyzing internal incompatibilities and bottlenecks and making recommendations about how to improve the company’s processes.

Initiatives to find ways to trim costs and make a business more efficient are also likely to involve input from FP&A specialists. Because it is in constant communication with all areas of the company in order to gather data for its budgets and plans, FP&A is well suited to optimization efforts.

FP&A’s responsibilities could extend to nearly any department in the company, from operations to marketing to finance. For instance, FP&A may conduct internal audits, research markets or evaluate individual customer profitability. FP&A could also be called upon to provide risk management insights or assess the financial impact of tax policy decisions.

Bottom Line

Financial planning and analysis involves gathering financial and other data from throughout a business’s various departments and using that to generate projections, forecasts and reports to help executives make optimum business decisions. Annual and quarterly budgets and forecasts, profit-and-loss statements, cash flow projections and similar decision-making tools are all produced by FP&A.

Tips for Small Business Owners

  • Financial planning and analysis is a job best handled by an experienced financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • The 80/20 Rule can help businesses gain insight into issues and opportunities so they can respond more effectively and efficiently. By identifying elements contributing most to a given outcome, businesses can better target resources to remove obstacles and exploit openings.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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Guide to Writing a Financial Plan for a Business

Guide to Writing a Financial Plan for a Business – SmartAsset

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When writing a business plan, it’s important to put together a financial plan that projects future income, cash flow and changes to the balance sheet. The financial plan section often consists mostly of spreadsheets. It’s where the business owner presents a paint-by-numbers case that the business will continue to be profitable or, if it’s a startup, become profitable. The financial section is the part of a business plan that many investors turn to first, so it deserves extra attention.

A business financial plan covers a specific time period or, more likely, set of time periods. A typical plan provides forecasts for the next couple of years. It may go out further in time if the plan is being used to solicit long-term financing.

Forecasts should also be broken down into shorter periods. Often the first year will include monthly forecasts, while the second year will contain projections for each quarter. For later years, an annual forecast is likely to be considered sufficient.

Parts of a Business Financial Plan

The financial plan portion of a business plan typically has three parts covering these topics:

  • Income
  • Cash flow
  • Balance sheet

Income Statement

The income statement portion starts by listing all sources of revenue, including sales and interest or investment income, that the business anticipates receiving over the period covered by the plan. Next it describes all the anticipated expenses, which may include inventory, wages, rent, utilities, interest on loans and taxes. On the last line of the income statement is the net income figure.

Ideally, this bottom-line net income figure will be positive, showing healthy profits. However, for many startups it may be years before the red ink at the bottom of the income statement turns black. Amazon is one of the clearest examples of this phenomenon. So, it may be less important to avoid showing losses in the early going than to demonstrate a clear path to eventual profitability.

Cash Flow Statement

The cash flow statement monitors the anticipated flow of cash through the business over the covered time period. It is different from the income statement, which covers revenues and expenses but doesn’t describe where cash will come from or how it will be used. The cash flow statement starts with a figure for cash on hand and concludes with a projection for the amount of cash that will be on hand at the end. The end goal of the cash flow statement is to show that the business won’t run out of cash and be unable to pay its bills.

The cash flow projection starts by describing sources of funds. This may include cash receipts on sales that are forecast to be booked during the period as well as cash expected to flow in from sales recorded on the income statement during an earlier period.

The uses of funds section is generally more complex than the sources of fund sections. It shows how and when funds will actually be disbursed to acquire inventory, cover SG&A (sales, general and administrative) expenses, make loan payments, fund distributions or draws taken by the owners and pay other bills.

Balance Sheet

The balance sheet portion of the financial plan aims to give an idea of what the business will be worth, considering all its assets and liabilities, at a future date. To do this, it uses figures from the income statement and cash flow statement.

The essence of a balance sheet is found in the equation: Liabilities + Equity = Assets. It can also be expressed as Asset – Liabilities = Net Worth. The goal of a balance sheet forecast is to show that the activities of the business are creating value. This can be done by paying off liabilities, by increasing assets or, more likely, a combination of both.

If the amount of equity or net worth is increasing from one period to the next, the business is creating wealth. This is what investors, lenders and business owners are looking for.

Projection Techniques

Unlike historical income statements, cash flow reports and balance sheets, the plan section deals with the future rather than the past. In order to estimate figures used to populate the spreadsheet cells, planners use scenario planning.

One way to do scenario planning is to generate high, medium and low forecasts. A planner may, for instance, have one forecast with a high annual sales figure of $1 million, a medium sales figure of $750,000 and a low sales figure of $500,000. Similarly, the plan will include best, moderate and worst outlooks for expenses for expenses. Ultimately the financial plan will likely illustrate several potential scenarios combining high, low and medium eventualities.

Of course, little about the future is certain, especially when it comes to details. So, a business financial plan is necessarily somewhat vague. It’s best to avoid over-complicating the financial plan section by drilling down very far into the details. Complex formulas are also often avoided in order to give a clear picture of what the plan writer is trying to communicate.

Bottom Line

The financial plan section of a business plan is a look into the future of the business and its ability to generate profits, pay its bills and create wealth. Its main documents are income statements, cash flow statements and balance sheets. There may be several versions of these, each demonstrating the likely effects of various scenarios. Financial plans are important to business owners, people who are investing and lenders because they aid in evaluating the prospects of the business.

Tips for Business Owners and Investors

  • When you’re crafting the financial plan section of a business plan – or when you’re considering investing in a business – it’s an ideal time to get some financial expertise on your side. So, consider talking this over with an experienced financial advisor. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
  • A financial plan is the final part of a business plan. Be sure you know all 10 key components of a business plan.

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Mark Henricks Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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