May 19, 2020

The 'Wisdom' of Borrowing for Small Business

business tips
business growth
money matters
Business Banking
Bizclik Editor
5 min
The 'Wisdom' of Borrowing for Small Business

Written by Victor Green

Borrowing money is often a necessity for a growing and expanding a new business, but it’s also one of the least understood parts of business management. So, what is the best way to go about it?
 
First, use some common sense. (Unfortunately, the first lesson you’ll find in business is that “common” sense is often rare.) Only borrow money that is well within the means of the business. In other words, can you afford the repayments and the interest over the length of the loan? It may seem obvious, but it’s an important consideration to take.
 
Once you’ve decided to take a loan, maximizing on your assets and taking the largest loan possible is not the way to go! Here’s why: let's assume you have assets of $1 million and you borrow 70 percent ($700,000) against this. This heavy leverage will require a large repayment schedule.
 
All well and good - but only if you can more or less guarantee that you have, and will continue to have, continual cash flow into your business, and are making profits that will last the length of the loan. Today no one knows this for certain so let’s look at the risk of this loan situation.
 
For the sake of this exercise, let's say the interest rate is 6 percent, fixed over 10 years. The interest will be $42,000, plus capital repayments of $70,000 over the 10-year period of the loan. Capital repayments, plus interest in year one is $112,000 or $9,333.00 each month. (In reality, the interest payments will decrease each year because of the annual reductions of capital, but these figures are a good starting point.)
 
If your planned business expansion – the reason for borrowing this money – is good and if you increase sales and profit using this loan you should be able to afford the repayments. However, that’s two big ifs. There is always a danger when you take a large loan and get stretched by the repayments.
 
The other downside to this loan scenario is that you have maxed out on your assets, and collateral, and have no financial movement. To me, this could be a slow, self-inflicted punishment of an over optimistic businessman.
 
I would prefer to utilize a smaller amount of my assets and make the business grow within my control. This way, I would not be putting all of my eggs in one basket. If I had $1 million in assets, I would use $250,000 against a loan, still leaving me with some assets to use if needed. If things do go wrong, you can you handle it with the remaining equity and the business you still have. Keep your cash flowing into your hands, not those of the lender!
 
When you are maxed-out, the rates offered by the banks are usually off the chart. The bank will pressure you into reducing your debt and you will be forced to sell an asset when the market is low. You will achieve a price less than you expected.
 
When one of my businesses failed, and I was indebted to the bank, I could demonstrate that I had a way of paying them back, even though it was over a longer period. No big deal for them, as they got more interest. The point was to convince the bank that I could meet the commitment to them. How did I do this?
 
Having your assets free of loans, or with small loans against them, gives you better borrowing power. Being able to offer a mortgage free building against a loan, or one that has little debt, puts you in the driver’s seat. If you have a valuable asset, you can go to any bank and negotiate. Much different to being told, “This is our offer, take it or leave it.”
 
Some final tips:
  • Try to build up as many tangible assets as possible. Real estate, for example: get it paid off or with a minimal loan. You then have something to use when you need cash to expand and grow your business.
  • Don’t make the tax deduction carrot the reason to borrow and get in debt. For me, paying tax is a treat. The more I paid, the happier I was!
  • If you use up all of the equity in your property, you lose leverage and control of your assets and become vulnerable where someone else can ring your bell.
  • Above all else, remember that borrowing money does not make a bad idea a good one!

Sure, fortune favors the brave. I believe success in business is about taking risks – but only ones that you can calculate. Make sure you assess the risk of borrowing carefully and consider the full extent of financial problems if things go wrong. When in doubt, invest in tangible assets and remember: having a business heavily mortgaged is like driving a car with the brakes on. Many smart people have ruined a good business because they are over geared.

About the Author: Victor Green, author of How to Succeed in Business by Really Trying, has a long record of founding and growing businesses in a variety of industries. Now retired, he lectures and mentors small business owners and new entrepreneurs in conjunction with SCORE and the US Small Business Administration. Above all else, he encourages his clients to 'invest in common sense.' For more information, visit: www.howtosucceedinbusiness.com.

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Jun 8, 2021

Six issues at the top of tax and finance leaders’ agenda

Tax
Compliance
financeleaders
Deloitte
Kate Birch
4 min
As businesses accelerate their transformation journeys, tax leaders are under increasing pressure to add strategic value. Deloitte reveals six tax trends

New Deloitte research reveals that tax leaders are under increasing pressure to add strategic value as companies accelerate business model transformation, from undergoing digital transformations to rethinking their supply chains or investing in green initiatives.

According to Phil Mills, Deloitte Global Tax & Legal Leader, to “truly deliver value to the business, the tax function needs to rethink its resourcing model and transform its technology infrastructure to create capacity and control costs”.

And the good news, according to Mills, is that tax and business leaders have more options at their disposal to achieve this.

Reflecting the insights of global tax and finance executives at global companies, Deloitte’s Tax Operations in Focus study reveals the six issues at the top of tax and finance leaders’ agenda.

Trend 1: Businesses seek more strategic counsel from tax

Companies are being pushed to develop new digital products and distribution channels and accelerate sustainable transformation and this is taking them into uncharted tax territory. Tax leaders say their teams must have the resources and skills to give deeper advisory support on digital business models (65%), supply chain restructuring (49%) and sustainability (48%) over the next two years. This means redrawing the boundaries of what tax professionals focus on, and accelerating adoption of advanced technologies and lower-cost resourcing models to meet compliance requirements and free up time.

According to Joanne Walker, Group Tax Director, BT Group PLC, "There’s still a heavy compliance load today, but the vision for the future would be that much of that falls away, and tax people become subject matter experts who help program the machine, ensure quality control, and redirect their time to advisory activity.”

Trend 2: Tipping point for resourcing models

Business partnering demands in the tax department are on the rise, but 93% of tax leaders say their department’s budget is remaining flat or falling. To ensure that the tax function can redefine itself as a strategic function at the pace that is required, leaders are choosing to move increasing amounts of compliance and reporting to a combination of shared service centers, finance departments, and outsourcing providers that have invested in best-in-class technology.

Trend 3: Digital tax administration is moving faster than expected

in addition to the rising focus of the corporate tax department partnering with their business counterparts, transformative changes to the way companies share tax information with revenue authorities is also creating an imperative to modernize operations at a faster pace. Nine in 10 (92%) respondents say that shifting revenue authority demands on digital tax administration will have a moderate or high impact on tax operations and resources over the next five years—and several heads of tax said the trend is moving faster than expected.

"It’s really stepped up in the last couple of years," says Anna Elphick, VP Tax, Unilever. "Tax authorities don't just want a faster turnaround for compliance but access into a company’s systems. It's not unreasonable to think that in a much shorter time than we expect, compliance will be about companies reviewing a return that's been drafted by the tax authorities."

Trend 4: Data simplification and lower-cost resourcing are top priorities

Tax leaders said that simplifying data management (53%) and moving to lower-cost resourcing models (51%) must be prioritized if tax is to become more proactive at delivering strategic insights to the business. Many tax teams are ensuring that they have a seat at the table as ERP systems are overhauled, which is paying dividends: 56% of those that have introduced NextGen ERP systems are now highly effective at supporting the business with scenario-modeling insights. Only 35% of those with moderate to low use of NextGen ERP systems said the same.

At Stryker, “we automated the source P&L process for transfer pricing which took a huge burden off of the divisions," says David Furgason, Vice President Tax. "Then we created a transfer price database to deposit and retrieve data so we have limited impact on the divisions. We are moving to a single ERP platform which will help us make take the next step with robotics.”

Trend 5: Skillsets are shifting

Embedding a new data infrastructure and redesigning processes are critical for the future tax vision. Tax leaders are aligned — data skills (45%) and technology process experience (43%) are ‘must have’ skills in a tax department of the future, but more traditional tax specialist knowledge also remains key (40%). The trick to success will be in tax leaders facilitating the way these professionals, with their different backgrounds, can work together collectively to unlock lasting value.

Take Infineon Technologies, which formed a VAT technology and governance group "that has the right knowledge about how to change the system to ensure it generates the right reports", according to Matthias Schubert, Global Head of Tax. "Involving them early was key as we took a greenfield approach, so we could think about what the optimal processes would look like and how more intelligent systems could make an impact 

Trend 6: 2020 brought productivity improvements

Improved productivity (50%) and accelerating shifts to remote working (48%) were cited as the biggest operational benefits to emerge from COVID-19-driven disruption. But, as 78% of leaders now plan to embed either hybrid or fully remote models in the tax function long term, 34% say maintaining productivity benefits is a top concern. And, as leaders think about building their talent pipeline and strengthening advisory skill sets, 47% say they must prioritize new approaches to talent recognition and career development over the next two years, while 36% say new processes for involving tax in business strategy decisions must be established.

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