In addition to being a great source of extra income, a side hustle makes an excellent stepping stone to running your own full-time gig. Still, even though this freelance gig or contract work may just be a part-time job, you can protect yourself from some costly legal mistakes by first ensuring your enterprise is compliant.
So, what does “compliance” mean for a side-hustle?
States and municipalities require that all small businesses — no matter their size — abide by specific laws and regulations. Yes, even a side hustle selling homemade soaps or jewelry needs to abide by laws. Failure to follow local rules and regulations can lead to fines or loss of privileges.
Why Business Compliance Is Vital for Your Side Hustle
Business compliance allows state and federal governments to maintain a sense of order. It’s intended to protect you, your business, and your customers. Most compliance involves filing and retaining paperwork, although there are some exceptions. To simplify the compliance process, you can break compliance down into 2 categories: external requirements and internal requirements.
External requirements include everything from filing and paying federal and state taxes to completing necessary paperwork. This is the category of requirements that most business owners are likely to remember because the consequences are more direct and familiar — think late filing fees or penalties.
Internal requirements can be a bit trickier. These include documents and records that you may be required to keep on file at your place of business, like copies of information sent to the federal and state government. You’ll need this information on hand if you ever decide to sell your business or apply for funding or loans.
Incidentally, good recordkeeping — of both internal and external requirements — will keep you safe with the government and safeguard you in case anyone decides to take legal action against your business.
Compliance documents do one more thing, too: they show you’re acting according to federal and state laws and following industry standards, which adds legitimacy to any organization.
Tips for Keeping Your Side Hustle Compliant
Keeping your side hustle compliant gives you the peace of mind of knowing you’ve satisfied all requirements so you can run your enterprise with confidence. While compliance requirements vary from state to state and business structure, there are some universal requirements you can expect.
Employer Identification Number (EIN)
Are you operating your side hustle as an LLC or corporation? Then you must have an EIN, which you can obtain from the IRS. If you went down a different road and chose to operate as a sole proprietorship, you can choose between using an EIN or your social security number.
Business License
No matter where you run your side hustle, most municipalities require that you have a license to practice business, whether in your city, county, or state. This holds true for sole proprietors, too. Business licenses generally need to be renewed yearly or semi-annually.
Franchise Taxes
If you run an LLC, corporation, or, in some cases, a sole proprietorship, you may need to pay a franchise fee or franchise taxes — even if your business isn’t actually a franchise (the term “franchise” has multiple connotations and/or meanings). This varies by state and is generally only required when you sell physical items.
Federal Taxes
As the saying goes, the only things certain in life are death and taxes. All businesses are required to pay federal taxes, including income and employer taxes. If you’re just starting your business, you may want to discuss your operating plans with a small business tax advisor or CPA.
Annual Report or Biennial Statement
If you operate as an LLC or corporation, most states require that you check in once a year or every two years. Luckily, the state should let you know when your annual or biennial reporting is due. Check the date carefully: the due date of your report/statement could be the anniversary of when you formed your business or it could be another date entirely.
When you file for the first time, you need to submit an initial report after you’ve incorporated as an LLC or corporation. There will generally be a deadline date for filing this first report, too.
Report or Statement Filing Fees
Biennial statements and annual reports also usually require paying mandatory filing fees.
Articles of Amendment
Making changes to your company, such as changing its name, adding officers, or updating its address? You’ll need to report these changes in your company’s articles of amendment and abide by any state requirements for notification, voting, and filing.
Certificate of Good Standing
Once you ensure that your side hustle possesses all of the required documents to run a business, consider obtaining what is known as a Certificate of Good Standing.This document verifies that your company is in full compliance with local and state laws and regulations. The certificate may be required when you open banking accounts, apply for financing and licenses, and executive contracts. You’ll also need a Certificate of Good Standing if you decide to sell your business.
Certificates of Good Standing contain your company’s official name, including any DBA. The document confirms that you are authorized to conduct business in your area by verifying that your company is current on fees and taxes and that you have filed all necessary reports.
LLC and Corporations — Special Requirements
Running a corporation means tracking additional compliance requirements including shareholder and director meetings and maintaining written meeting minutes. In general, corporations require complex management practices that might not be ideal for entrepreneurs taking their first steps with a side hustle.
Deadlines for Filing Certifications, Permits, and Licenses
It’s essential to keep current on any certifications, permits, and licenses that apply to your business. It’s advisable to check with your local government for applicable deadlines and add them to your calendar so you don’t miss a deadline. When you do, it usually means more work and possible fines.
What If Your Business Isn’t in Good Standing?
If your side hustle isn’t in good standing, you’re looking at several negative consequences. You could be responsible for fines, late fees, and other penalties. Worst yet, you could find it difficult, if not impossible, to open bank accounts, apply for licenses, secure financing, and execute contracts. If that wasn’t enough, lenders are unlikely to finance companies not in good standing.
Taking Your Side Hustle Full Time
At some point, you might find it’s time to make your side hustle a full-time gig. If you’ve been working your side hustle as a sole proprietor and want to make it your full-time job, now may be the time to apply for an LLC. It is also an excellent time to open a business banking account if you’ve been using your personal account, which will help separate your business and personal finances, too.
If you take this step, don’t risk administrative dissolution by being noncompliant. Dissolution will leave you personally exposed to company liabilities. The best way to prevent this is to address compliance issues ASAP. Plus, this will ensure your company is in good standing and lets you focus on running your incredible business.
The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
There are numerous ways to secure business capital, and debt financing is at the top of that list. With debt financing, your business borrows money from a lender—often in the form of a short term loan or business line of credit—and agrees to repay those funds plus interest in the future.
The right business loan or line of credit can come with many benefits. Business financing might enhance your cash flow, provide you with working capital, or give your company the financial flexibility it needs to expand.
Yet it’s also important to understand what your business will be agreeing to repay when it borrows money, and how that new debt relates to what your business already owes. Therefore, it’s wise to calculate the cost of debt before you seek new business financing.
What Is Cost of Debt?
When a lender or debt holder extends credit to a business, it’s making an investment on a future return. In other words, the lender expects to receive compensation for the risk it’s taking at some point in the future.
Cost of debt is the term that describes how companies repay the lenders and creditors from which they borrow money. Cost of debt is the effective interest rate a company pays to creditors—also known as debt holders or lenders.
Others may want to know your company’s cost of debt figures, because it can help them assess the risk of doing business with your company. For example, if your business is trying to attract new investments or apply for certain types of financing, investors or lenders may want to know your company’s cost of debt to assess the financial stability of your business.
As a business owner, you may want to calculate cost of debt as well. Knowing your cost of debt can help you make sure your current business debts aren’t putting your company under too much pressure and can help you to determine whether or not it’s wise to borrow additional money for your business.
How to Calculate Cost of Debt
Before you calculate the cost of debt for your company, you will need to gather some information. Here’s what you need to get started:
A list of the outstanding debts your business owes.
The APRs your business owes on each of its debts.
You may have to estimate some of the figures above, since the debt your business carries throughout the year may fluctuate. This may be especially true if you have business lines of credit or business credit cards with revolving balances. Your overall debt figures may also experience some variations depending on whether you have fixed or variable interest rates.
Next, it’s important to understand that there are multiple ways to calculate cost of debt. Two of the most common approaches to the cost of debt formula are to calculate the after-tax cost of debt and the pre-tax cost of debt. Below is a closer look at the cost of debt formula for each option.
Pre-Tax Cost of Debt
To figure the pre-tax cost of debt for your business, start by adding your total interest expenses for the year. Then, divide that figure by your total number of business debts.
Total Annual Interest Expense / Total Debts = Pre-Tax Cost of Debt
Here is an example.
Imagine your business has three debts:
Business Loan A: $50,000 at 4% APR
Business Loan B: $50,000 at 7% APR
Business Loan C: $100,000 at 5% APR
In this scenario, then, your total debts would equal $200,000.
Next, assuming the loans above all have fixed interest rates, you would calculate the total annual interest expense as follows.
$50,000 X 4% = $2,000
$50,000 X 7% = $3,500
$100,000 X 5% = $5,000
Add up the three interest amounts for the debts and your total annual interest expense would equal $10,500.
Finally, you input all of the figures above into the cost of debt formula.
Total Annual Interest Expense ($10,500) / Total Debts ($200,000) = Pre-Tax Cost of Debt (0.0525 or 5.25%)
In the example above, the pre-tax cost of debt—also known as the effective interest rate—that your business is paying to service all of its debts throughout the year would equal 5.25%.
After-Tax Cost of Debt
Now let’s consider the after-tax cost of debt. The after-tax cost of debt is how much your business pays for its debts after you factor in the cost of taxes.
Many interest charges are tax deductible for businesses. (Note: You should talk to a reputable tax advisor for advice on any specific tax-related matters.) So the after-tax cost of debt calculation is the more common figure that business owners, lenders, and would-be investors will likely want to review.
To calculate the after-tax cost of debt, you will need to use the following formula.
Effective Interest Rate X (1 - Tax Rate) = After-Tax Cost of Debt
As you can see, this formula picks up where the pre-tax cost of debt formula left off. In other words, you must use the first formula to calculate the effective interest rate before determining the after-tax cost of debt.
Below is an example of an after-tax cost of debt calculation to help you visualize how the process works.
Building on the example above, let’s still assume that your business has an effective interest rate of 5.25%. Since tax rates vary for different businesses, for the sake of this exercise, let’s also just assume that your business is paying a 9% corporate tax rate.
Now, let’s take a look at how the numbers align in this hypothetical after-tax cost of debt calculation.
Effective Interest Rate (5.25%) X (1 - Tax Rate) (1 - 9%) = After Tax Cost of Debt (0.0477 or 4.77%)
So, in the example above the after-tax cost of debt is 4.77%.
Why Does Cost of Debt Matter?
Choosing the right financing solutions for your company can have a meaningful impact on its bottom line. Avoiding financing can stall business growth and cause you to miss out on valuable opportunities for growth and expansion. Yet, if you overextend your business financially and its cost of debt grows too high, that can create problems of its own. Therefore, it is important to take the time to do some careful research before you seek financing and find the right balance that works for you.
Cash flow analysis is essential for effective business management. It helps you recognize opportunities to improve profitability, anticipate periods of low cash inflows, and use your funds strategically when they’re limited.
Conversely, ignoring your cash flows can lead to significant liquidity problems, one of the leading contributors to business failure.
Here’s what you should know about performing cash flow analysis to optimize your business decision-making and avoid working capital issues.
What is Cash Flow Analysis?
A business’s cash flow refers to its capital receipts and disbursements during a given period. In addition to the cash earned and spent in day-to-day operations, it includes funds gained and lost through investing and financing activities.
As a result, cash flows are distinct from revenues and expenses, especially for businesses using the accrual accounting basis. For example, you could close a deal on net 30 terms and generate sales, but not receive any cash for weeks.
Cash flow analysis requires that you organize the inflows and outflows from your business activities into a statement of cash flows—one of the three primary financial statements—along with the income statement and balance sheet.
Next, it involves applying analytical techniques to the assembled data to extract beneficial insight, such as seasonal cash flow trends, opportunities to reduce expenses, or signs you need additional financing.
For example, variance analysis is a technique that involves creating an estimated cash spending budget for an upcoming period, then comparing it to your actual results.
That helps highlight aspects of your operation where costs were significantly different than you expected, giving you the chance to address the issues or refine your cash flow forecasting.
How to Do Cash Flow Analysis
Cash flow analysis is complex and encompasses several distinct processes. Here’s a step-by-step guide to give you a general framework for how it works.
1. Identify All Inflows and Outflows
The first step to analyzing your cash flows is to track them. If you already have an income statement and balance sheet, you can use them to back into your inflows and outflows. Otherwise, you can pull the information from your bank statements.
The cash flow statement generally separates these activities into the following groups:
Operating activities: These include the cash inflows you generate by selling your products or services and the cash outflows you incur as operating expenses.
Investing activities: Investing cash outflows include the purchase of investments like fixed assets and securities. Meanwhile, investing inflows refer to any returns they generate and the proceeds you get from selling them.
Financing activities: These refer to the cash flows associated with your debt and equity financing. The proceeds you receive are inflows, while repayment activities are financing outflows.
Every business has a unique combination of cash activities, so you may not have some that fall into every category. After all, some small businesses go without external financing or choose not to invest their excess capital.
2. Create a Statement of Cash Flows
Once you’ve identified all your cash activities for the period you want to analyze, you’ll need to organize them into a statement of cash flows. You can create the financial statement using the direct or indirect method.
The direct method of calculating cash flows is straightforward, but it’s often labor-intensive. It involves adding up all your cash inflows and subtracting all your cash outflows from them, using raw transactional data from bank statements.
The indirect method of calculating cash flows can be more complex, but it’s usually more efficient if you have a finalized income statement and balance sheet.
Generally, it involves backing into your cash flows by removing accruals and non-cash activities from the other financial statements. For example, you’d need to reverse any accounts receivable, accrued revenues, and depreciation.
3. Investigate Your Statement of Cash Flows
Whether you use the direct or indirect method, you should end up with the same statement of cash flows. With it, you can finally begin your cash flow analysis. Here are some sample techniques to give you an idea of how it works:
Calculate your cash runway: Your cash runway is the length of time you can support your current cash flow, usually expressed in months. It’s highly relevant to new startups losing money and trying to gain traction and equals your cash reserves divided by monthly net cash flows, assuming they’re negative.
Check cash flow ratios: Ratios can help you assess solvency, liquidity, and profitability. For example, the cash flow coverage ratio tells you if your operating cash flows are enough to afford your debt payments. If it’s greater than one, your default risk is low. It equals net operating cash flows divided by total liabilities.
There are countless ways to extrapolate information using your statement of cash flows. Which techniques are relevant to you depends on your goals, business model, and current stage of growth.
If nothing else, you can use it to determine whether your company is generating sufficiently high net cash flows over a given period. Without it, that’s not always obvious to businesses using the accrual method of accounting.
4. Use Insights to Inform Business Decisions
Cash flow analysis is only beneficial if you use the insight you gain to make better business decisions. As a result, you should monitor your statement of cash flows and review it before making significant decisions.
For example, businesses often benefit from ongoing financial forecasting. It involves creating projected financial statements, including the statement of cash flows, using historical data.
Updating these projections at the end of each calendar year helps you develop benchmarks and predict potential cash flow shortfalls. If you foresee that you’ll need additional working capital, you can start looking for financing.
Of course, you should examine your statement of cash flows further before accepting a credit offer to confirm you have enough cash flow to make your monthly payments.
Cash Flow Analysis Example
Let’s walk through an example to help you understand how cash flow analysis looks in practice. For the sake of simplicity, we’ll use the direct method to construct a manageable statement of cash flows.
Say you’re a small business owner in the construction industry and primarily take on landscaping projects. In January of your third business year, you have the following cash transactions:
January 3: $500 rent expense for landscaping equipment
January 7: $5,000 cash receipt as payment for an invoice
January 10: $200 payment toward an outstanding business loan
January 16: $1,250 payment to subcontractor
January 27: $50 gas expense to refill the company truck
January 30: $3,250 cash receipt as payment for a second invoice
January 31: $120 dividend payout from invested securities
Beginning Cash Balance
$7,000
Operating Activities
Invoice Payment 1
$5,000
Invoice Payment 2
$3,250
Subcontractor Payment
($1,250)
Equipment Rent Expense
($500)
Gas Expense
($50)
Net Cash From Operating Activities
$6,450
Investing Activities
Dividend Receipt
$120
Net Cash From Investing Activities
$120
Financing Activities
Business Loan Payment
($200)
Net Cash From Financing Activities
($200)
Total January Net Cash Flow
$6,370
Ending Cash Balance
$13,370
Fortunately, you’ve been performing cash flow statement analysis for several years. As a result, you recognize that your net operating cash flows are 20% higher than in January of the previous year.
In addition, you notice that your cash reserves have grown steadily along with your operating cash flows. This month, you’ll have $10,000 left after setting cash aside for taxes and personal expenses.
You like to keep enough cash to support four months of cash outflows without income. Since your total cash outflows in January are $2,000, you realize you don’t need more than $8,000 in cash reserves.
Based on your cash flow analysis, you use your excess funds to invest in a $2,000 commercial-grade lawn mower. It saves you $200 monthly in equipment rent, improving your operating cash flow.
Leverage Software for Cash Flow Analysis
Cash flow analysis is an essential part of financial planning for small businesses. However, building your cash flow statements in clunky spreadsheets is time-consuming, labor-intensive, and prone to human error.
Fortunately, you can manage your cash like a pro with Lendio’s cash flow forecasting software. It can track your activities in real-time, automatically generate cash flow statements, and provide personalized cash flow insights. Sign up for a free trial today!
A commercial loan is a type of financing available to businesses. General commercial loans can be used for any business-related expense, from payroll costs to expanding to a new location. There are also specialized loans used for specific purposes, like buying equipment or acquiring another business.
Read on to learn more about how commercial loans work and how to choose a financing structure that best meets your business needs.
Commercial Loan Definition
So what is commercial financing? It's when a business borrows money from a financial institution. Here's how commercial loans work. The business receives a lump sum to be used at the owner's discretion. The funds are then repaid over time according to the conditions of the loan agreement. The lender charges interest that is added to the loan balance and included in the payments. Depending on the type of commercial loan, payments could be made daily, weekly, or monthly.
In order to qualify for a commercial loan, businesses apply using their credit scores (often including the owner's personal credit score), revenue, and time in business. Different lenders may have different requirements and request additional types of documentation. They may also request that you offer some type of asset as collateral for the loan.
4 Types of Commercial Loans
These are four of the most common types of commercial loans to consider as a starting point for your business financing needs.
SBA Loans
Government-backed SBA loans help connect businesses with financing opportunities for a number of different purposes. These types of loans are notorious for their lengthy application review periods, which can stretch out several months. Loan amounts go as high as $5 million, with competitive interest rates and repayment terms that can last anywhere between 10 and 30 years. Most SBA loan programs also require a 20% down payment on the loan so that you're heavily invested in the success of the business.
There are several different types of SBA loans to consider. A 7(a) loan is the most common one and the funds can be used for general purposes. Smaller 7(a) loans (under $25,000) don't require any collateral. SBA 504 loans are used to purchase a specific asset, like a building or machinery.
Term Loan
Term loans can either be short-term (lasting less than two years) or long-term (lasting as long as 25 years). In most cases, these loans come with a fixed interest rate and consistent monthly payments so you know exactly what you'll pay back each month. If you use an online lender, you can often get approved and funded in just a couple of business days, making these an attractive option for businesses needing fast cash. A term loan can also help you better predict cash flow since the payments are consistent each month.
The application process varies depending on the lender. A traditional financial institution, like a bank, may have a longer review process compared to an online lender. Also find out how long it takes to receive funds after your application is approved.
Commercial Real Estate Loan
Also called a commercial mortgage, a commercial real estate loan is designed to help your business purchase property. This could be an office building, retail store, warehouse, manufacturing facility, restaurant space, or other type of real estate. Loan amounts are typically large and the term length is extended to make payments more affordable.
In addition to purchasing a property for your business, you can also use a commercial real estate loan to refinance the terms of an existing commercial mortgage or renovate a property you already own. If you dream of owning or expanding space for your company, a commercial real estate loan can help you do that.
Business Line of Credit
Rather than giving your business a one-time injection of capital, a business line of credit gives you access to credit when you need it over a period of one to two years. It acts like a credit card in that you can draw on your credit line as needed and pay interest on your balance, rather than the entire available amount.
A business line of credit can be an ideal type of commercial financing in a number of scenarios. For starters, a line of credit can be used for financial emergencies, like broken equipment that needs to be replaced. It can also help cover ongoing expenses, like payroll, especially if your revenue is inconsistent throughout the year. Finally, a line of credit gives you agility to act on opportunities as they arise, without having to apply and wait for financing in the future.
Pros of Using a Commercial Loan
Business loans can be a great way to manage and grow your company. Here are some of the primary benefits of using a commercial loan.
Access to capital: When your business’ current cash flow is not enough to get through slow periods or ramp up for busy seasons, getting a commercial loan gives them access to the capital to do so. And because there are so many different types of business loans out there, you can find one that's structured for your business needs.
Faster growth: Taking on debt doesn't automatically mean your business is in trouble. In fact, many businesses often use debt to accelerate growth and take advantage of new opportunities to expand.
Retain full ownership: There are many ways to raise funds for your company, including taking on external investors. But with a commercial loan, you get to retain full ownership of your company.
Cons of Using a Commercial Loan
There are downsides to consider as well before you decide to apply for a commercial loan.
Application process: The application process can be intimidating, and there's no guarantee you'll get approved. Be prepared to put in a little elbow grease. But if your business financials are already in order, then you may not have much to worry about.
Interest and Fees: There's no such thing as free money, and you'll have to pay interest and fees on your borrowed funds. Weigh the benefits you expect to receive and make sure you can afford the payment terms, even in a worst-case scenario. Cash flow crunch: Making loan payments can be tough on your cash flow. Consider all the obstacles your business may face and how well you could maintain those payments before making a decision on your business loan.
Does commercial financing sound like a good fit for your business?
Re-entering the workforce can be difficult after serving jail time as a convicted felon. Not only do felons lose their ability to vote and serve on a jury, they can also have difficulty finding a job to support a new positive lifestyle. Starting a business may be an opportunity to start fresh, but there may be some roadblocks when it comes to scaling growth. Understanding small business loan opportunities for felons can make the path to successful financing much easier.
Small business loans for felons.
Felons will have a harder time finding loans they are eligible for, but there are still some limited options available through the SBA.
SBA loans
SBA loans are backed by the Small Business Administration, which incentivizes lenders to work with qualified borrowers. Felons aren’t automatically denied, but there is an additional form you’ll have to fill out to be evaluated by your lender. Keep in mind that not all lenders who offer SBA loans will work with felons, and those who do will have very strict requirements.
Qualification questions include if the applicant is currently facing charges (an automatic disqualification), if they have been arrested in the past six months, convicted of or pled guilty or no contest to a crime, or are currently on parole or probation. The applicant is then required to provide details regarding the charges and sentencing along with documentation that all fines and court conditions have been met.
There are a variety of SBA loans to explore, which can be used for things like purchasing real estate, buying equipment, or expanding or purchasing a new business. Most SBA loans are designed for established businesses rather than start-ups.
Grants & other financial resources for felons.
In addition to taking out a business loan, it’s also worth exploring alternative options to raise capital for your company, including grants, investors, and crowdfunding.
Federal grants
Businesses owned by convicted felons are eligible for federal grants from Grants.gov. That’s because eligibility is based on the business’s background and proposals, not personal finances or history. Business grants are different from loans in that they don’t need to be repaid. Grants are listed on behalf of federal agencies, like the National Institutes of Health or the Environmental Protection Agency, to perform work or research on their behalf.
State grants
There are a number of state resources available through individual states. Most states have an economic development administration that receives federal grant funding to pass on to small business owners. Some of these may be specific to regional areas; for instance, you may find funding opportunities if your company operates in a designated rural region.
Entrepreneurship programs
Large corporations often sponsor programs to help launch and scale emerging businesses. They might provide grant funding or provide free products and services. FedEx, for example, hosts an annual program in which the winners are awarded a cash grant, plus services from FedEx.
Angel investors
Angel investors are private individuals who use their own wealth to fund companies, often in exchange for equity. They’re currently the largest source of business capital in the U.S. And while you may need to disclose your criminal history as part of your pitch, they’re typically more focused on your business concept and growth opportunities than your background. There are several online platforms that connect entrepreneurs with angel investors, and of course, it’s also good to network locally.
Crowdfunding
Two of the most common types of crowdfunding campaigns are rewards-based crowdfunding and equity crowdfunding. With the first option, you post a business idea and seek funding from individuals in exchange for a tiered system of rewards. With equity crowdfunding, you take money in exchange for partial ownership of the company. Most crowdfunding platforms require you to set a financial goal and won’t release any funds unless contributions reach that amount.
Resources for felons
HelpforFelons.org
HelpforFelons provides information and resources on how to find a job, housing, or start your own business when you have a criminal record.
Inmates to Entrepreneurs
Inmates to Entrepreneurs offers a free eight-week course to anyone with a criminal background who is interested in starting their own business.
freegrantsforfelons.org
This online resource provides information on housing, education, and jobs for felons.
If you’re looking to make a significant investment in your business, you might consider applying for a long-term business loan. These loans come with low interest rates and fixed repayment terms, so they’re a stable form of financing for companies of all sizes.
However, it’s important to understand the different types of long-term loans and long term financing available and the pros and cons of taking one out. This article will serve as a guide to finding and applying for a long-term business loan.
What Are Long-Term Business Loans?
A long-term business loan is a loan you’ll repay over a specific period of time. The average repayment term lasts between 5 and 7 years, but some loans come with terms up to 25 years.
Long-term loans are typically used to finance a major investment in the company—for example, for the purchase of real estate or equipment, or the hiring of additional employees. When you take out a long-term business loan, you’ll receive the money for such a purchase in one lump-sum payment, which you’ll then repay over time.
These loans are usually best for established businesses with good credit history. And the application process can be quite lengthy—when you apply, you can expect to submit the following documentation:
Social Security Number
Personal and business tax returns
Personal and business bank statements
Employer Identification Number (EIN)
Proof of business registration
Business plan
Profit and loss statement
Cash flow statement
Balance sheet
Long-Term vs. Short-Term Business Loans
Long-term business loans
Short-term business loans
Interest rates are usually low.
Interest rates are typically higher than those of long-term loans.
Repayment terms are typically between 5 and 7 years.
Repayment terms are usually less than a year.
Required documentation is usually extensive.
Application process is less intensive, because the loan amounts are smaller.
Only established businesses with excellent credit tend to qualify.
Startups and individuals with poor credit are more likely to qualify than with long-term loans.
Occasionally, your business may need a quick infusion of cash to help you get through payroll or manage your working capital needs. In this scenario, it may make sense to apply for a short-term business loan.
The biggest difference between short-term and long-term business loans is that long-term loans are designed for long-term investments. In comparison, short-term loans can help you meet your immediate financial needs.
Short-term business loans are usually available in smaller amounts and have to be repaid in less than a year. These loans also typically come with higher interest rates than long-term business loans.
However, the application and approval process is less extensive than that of long-term loans. And it may be easier for startups and borrowers with poor credit to qualify for a short-term business loan.
Types of Long-Term Business Loans
There are several different types of long-term small business loans available depending on your business’s needs. Here are four different loan types you can choose from.
SBA loans
An SBA loan is a business loan that’s backed by the Small Business Administration (SBA). Since the SBA partially guarantees the loan, this lowers some of the risk to lenders.
And these loans often come with low interest rates and lengthy repayment terms. SBA loans come in all shapes and sizes, with loan amounts between $500 and $5.5 million and repayment terms between 5 and 25 years.
However, SBA loans can be difficult to qualify for and the approval process can take a long time. If you decide to go this route, you should expect to provide your lender with extensive paperwork. And it may take several months for you to receive the funding for your loan.
Bank Loans
Another option is to apply for a term loan through a bank. Like SBA loans, bank loans come with low interest rates and lengthy repayment terms, making them an affordable way for small businesses to get access to financing.
However, these loans are best for established businesses with excellent credit history. You can expect to provide a lot of documentation when you apply, and the approval process will take longer than other types of loans.
Equipment Financing
Equipment financing is a form of business financing that’s used to purchase business-related equipment or machinery. These loans can be a good option for heavy equipment needs, like restaurants and manufacturing and construction firms.
This business financing allows you to purchase the expensive equipment you need, and break the cost into manageable monthly payments. And since the equipment serves as collateral for the loan, equipment financing may be easier to qualify for.
Commercial Real Estate Loans
A commercial real estate loan is a loan used to purchase property for your business, like an office, warehouse, or retail location. These loans are offered by the SBA, banks, credit unions, and online lenders.
Commercial real estate loans can be used to purchase new property, renovate an existing location, or even refinance your real estate debt. These loans are available up to $2 million, and usually come with repayment terms between 5 and 20 years.
Pros and Cons of Long-Term Business Loans
A long-term business loan can help you finance a major business investment, but it isn’t the best choice for everyone. It’s important to understand the pros and cons of these loans before applying.
Pros
These loans typically come with lower interest rates and fixed payment terms.
Long-term business loans come with low fees compared to other types of loans.
Most lenders don’t put any restrictions on how you can spend the funds.
These loans can help you build your business credit.
Cons
These loans come with a lengthy approval process, especially if you apply for an SBA loan.
It may be hard for borrowers with poor credit to qualify for a long-term business loan.
Lenders usually prefer to give long-term business loans to established businesses.
You may be required to put down some type of collateral to secure the loan.
There are several types of long-term business loans you can choose from. The one that’s best for you will depend on where you’re at in your business and what you plan to use the funds for.
For instance, if you’re an established business and are looking for low rates and flexible repayment terms, you may want to consider a bank or SBA loan. If you need to purchase equipment or large machinery, then equipment financing may be the right choice for you.
Start the Application Process
Once you know what type of loan you need, you can start the application process. Depending on the type of lender you work with, you’ll either complete this online or in-person.
When you apply, the lender will ask for some basic information about you and your business. They will also check your credit score to determine how risky you are as a borrower. A low credit score doesn’t necessarily rule you out from qualifying for a business loan, but you may receive a higher interest rate.
Provide the Necessary Documentation
Next, you’ll have to go through the approval process and provide the necessary documentation. The exact documents required and timeline for approval will depend on the lender you’re working with.
For instance, online lenders tend to offer a shorter approval process and faster funding. Whereas if you’re applying with a bank or the SBA, you can expect the approval and funding process to take much longer.
Compare Your Options
And finally, you don’t want to just take the first business loan that’s offered to you—it’s a good idea to compare loan offers from several different lenders. Comparing your options will help you find the loan with the best rates and terms. You should also consider any fees those lenders charge, like origination fees, late fees, and prepayment penalties.
Comparing your loan offers is easier when you use a service like Lendio. With Lendio, you apply for a loan once and receive offers from multiple lenders.
The Bottom Line
A long-term business loan is a loan that’s repaid over a specific period of time. You’ll receive a one-time lump sum payment, which you can use to invest in long-term business growth.
If you’re looking for a way to compare small business loan options, you may want to consider using Lendio. We offer a variety of small business loans, including SBA loans, term loans, cash advances, and much more.
We offer a secure online application process, and you’ll receive loan options from our network of over 75 lenders. This will help you find the right business loan for your situation.
When it comes to construction projects, contractors usually eat what they kill. This means that if you get out there and actively bid on projects, you’ll keep your crew busy and your business thriving. Take a conservative approach to the bidding game, however, and your business will likely starve. There simply aren’t many projects that just fall into your lap.
At its core, a construction bid is a proposal. You’re telling a potential client what you can do for them and how much it will ultimately cost. Because your bid will include your expenses and profit, it differs from a simple estimate, which usually just accounts for the costs of the job.
“In some cases, the only thing that matters in the construction bidding process is presenting the lowest price to the owner; in other cases, the contractor’s qualifications are just as important—if not more important—than having the lowest dollar amount,” explains engineering and construction expert Juan Rodriguez. “Knowing how to bid construction jobs can make the difference between success and bankruptcy for a construction contractor. If a contractor does not know how to bid on construction jobs, they will have no chance of turning a profit.”
This bid is where a delicate balance comes into play. Cost matters to all clients, so you’ll want to submit one of the (if not the) lowest bids for any given project. At the same time, you need to protect your interests and ensure you’ll earn a solid profit. Neglect either side of the coin and your business will inevitably suffer.
Here is the typical lifecycle of a construction bid:
Solicitation: A client solicits bids on a project. They supply interested contractors with the relevant plans and specifications.
Due diligence: After reviewing the details of the bid, you’ll want to visit the site to conduct an analysis and make sure you understand the project’s scope.
Submission: Contractors review the project documents, contact subcontractors, and crunch the numbers. Then they submit their bids by the required deadline.
Selection: After receiving all qualified bids, the client chooses the winning contractor. As mentioned earlier, the decision often comes down to cost.
Formation of contract: At this point, the client and contractor collaborate to confirm all details.
Delivery of project: This stage is where the rubber meets the road. The contractor moves in with their crew and equipment to carry out the required work.
Making Your Construction Bid Truly Shine
Following the steps listed above will get you through a potential client’s front door. But your competitors are all using a similar approach. You’ll need to ensure that accuracy and efficiency shine through every aspect of your bid, helping it rise above the pack. While cost may be king, it’s certainly not the only consideration.
“Putting together a winning bid proposal, or even a competitive one, takes knowledge and skill,” says a construction bidding guide from iSqFt. “It’s a bit more complicated than just putting some numbers together and hoping for the best. Good bid preparation for general contractors requires a lot of time and effort and involves everything from reading and fully understanding the plans and specifications to accurately estimating costs for labor, materials, and equipment. Making even the smallest mistake can mean the difference between submitting a winning bid and missing out on a coveted and profitable project.”
One of the big mistakes contractors make is failing to be judicious in their bidding. It can be tempting to seek out all kinds of projects, but this approach is like shooting a shotgun from your hip and hoping to hit a bull’s-eye 50 yards away. Only bid on projects that match up with your strengths, so you can correctly estimate costs and immediately put your talents to work if you’re able to land the project.
In the grand scheme of things, winning a job you’re not equipped for is worse than not getting that job in the first place. It puts your crew in a bad position, and you’ll struggle to control your internal costs, risking your reputation in the process.
For this reason, never worry about walking away from a bid. If your due diligence reveals that you aren’t set up to succeed on the project or your profits may be compromised, respectfully thank the client for their time and move on. A bad bid match is bad business for everyone involved.
How to Bid a Job
Here are some additional tips for improving chances for success with construction bids:
Follow the bid instructions studiously
Properly account for all your overhead costs
Only work with subcontractors who are skilled and reliable
Ask the client for clarification whenever necessary
Keep your information organized
Provide every detail necessary to state your case
Include testimonials from happy customer
Share relevant awards and certifications
Track your bidding results so you can improve your process
If all these considerations seem overwhelming, take heart in the fact that construction bid estimation software can shoulder much of the burden. The technology has improved dramatically in recent years and makes the entire process faster and easier. For this reason, it has grown in popularity among contractors of all stripes.
“This software was introduced over 2 decades ago and has had a major impact on the industry by making once difficult aspects of the process much faster and more efficient,” says Rodriguez. “But perhaps the biggest benefit of estimating software is the way it automates job costing. The software typically comes with a database of construction costs that are updated monthly by subscription. Builders can also keep their own database for job costing so that the software more accurately reflects local costs and price fluctuations in the market.”
By letting software complement your efforts, you’ll be able to prepare bids that align with the requirements, tout your company’s differentials, precisely capture costs, ensure profit, and stand out from the competition.
Consider Bidding on Government Projects
One of the best places for any small business to look for bidding opportunities is with government construction. Whether it’s a school, office, utility building, transportation center, or something else entirely, there are always government projects going on.
Government jobs can be particularly nice when the economy is dragging. Other jobs may dry up, but the government will always carry out designated projects. Some projects are even initiated with the specific goal of stimulating the economy.
“Each year, the government awards hundreds of billions of dollars in federal contracts to businesses to meet the needs of federal agencies and the military,” explains USA.gov. “The government’s goal is to award at least 23% of those contracts to small businesses. To sell your products or services to the federal government, your business must meet specific requirements. Although the contracting process can seem complicated and overwhelming at first, the government provides lots of information and tips to help you learn to compete as a federal contractor.”
So how does the government make decisions for bids? The process is much more heavily regulated than with non-government jobs. Mountains of paperwork are often required, so it’s important to allocate enough time to do everything correctly. Fail to attach the correct documents or provide all the necessary details, and your bid will be dead in the water.
It’s important to note that while these projects all fall under the government umbrella, they are administered by various agencies and organizations. So don’t assume the details will be the same across all government jobs.
Finding government projects to bid on isn’t too difficult. Start by visiting SAM.gov. The federal government created this free resource as a hub for contract opportunities. As the website states, “Anyone interested in doing business with the government can use this system to research active opportunities.”
The projects found on SAM.gov are all worth at least $25,000. You can use the convenient search tool to find projects based on keyword, solicitation ID, or individual federal organizations. Numerous filters will help you sharpen your search and locate the most relevant opportunities.
Once you find a potential project, simply click on the link to access scope documents. You will also find instructions for bid submissions and the deadline to take action.
Another free resource worth investigating is America’s Business Network, which is a portal curated by the North America Procurement Council. You’ll find all manner of bids, RFQs, and RFPs put out by government agencies or private organizations. You can search by state, date, or project details, though the functionality isn’t nearly as sleek as what you’ll enjoy on SAM.gov.
Plenty of other websites will connect you with bid opportunities for a fee. These paid resources often specialize in certain types of construction projects, potentially helping you sharpen your search and find bid targets faster.
Here are 6 resources that could be worth checking out:
Government Contracts and Bids: Using this website is as much about analysis as it is searching. With robust reporting and tracking, it helps you maximize your time and find the most profitable projects.
Onvia.com: While there are thousands of government projects listed, the real benefit with Onvia is that you can find informal opportunities that often aren’t broadcasted to the public.
Find RFP: In addition to aggregating potential projects for you, this website stores your preferences and sends alerts when possible bid opportunities arise.
GovernmentBids.com: This site is a great resource for construction, electrical, and road work opportunities. Create a profile within your industry and then find projects by state and region.
State and Federal Bids: The main focus of this website is bridge and road construction, making it a logical choice for construction companies with those focuses. Additionally, you’ll find projects for schools, water, airport authorities, and jails.
BidNet: By gathering RFPs from federal, state, and local governments, BidNet offers an impressive listing of opportunities. New projects are sent daily by email, with reminders of expiring term contracts.
Finding Lucrative Projects Outside of the Government Sphere
While government jobs offer unique benefits, they are hardly the only projects worth seeking. Many construction companies actually prefer to work in the private sector, as the competition isn’t as fierce and the processes can be more streamlined. If you’ve ever waited in line for hours at the DMV, you already have an idea of the negative side effects of government bureaucracy.
It’s true that non-government jobs are less procedural than government jobs, but that doesn’t mean you should treat your bidding any less carefully. Make sure you allocate enough time to do a thorough analysis of the project before submitting. Your bid should include every document and detail requested, with extra emphasis placed on your company’s differentials.
If you want to avoid the breadth of nationwide searches and instead want to focus on local opportunities, it’s worth checking out the jobs coming from your state’s procurement office. Once you create a profile, you’ll receive updates on upcoming work for which you can submit a bid.
Construction projects come with a wide array of internal costs, so extra funding may be required. This need is especially true when you account for the rising costs of equipment and materials. Many small businesses turn to equipment financing, as it is engineered specifically for these types of expenses.
“Whether you need to purchase computers for a growing team or invest in specialized machinery or vehicles, you’ll need to consider how you will pay for that equipment,” says the US Chamber of Commerce. “A business equipment loan can help you quickly obtain working capital to buy or lease the items you need for your business. You’ll be able to manage your cash flow seamlessly, as this financing will allow you to spread out your payments over a longer period of time.”
Equipment loans can have dollar amounts up to $5,000,000, with favorable interest rates starting at 7.5%. Plan on the repayment terms ranging from 1–5 years. You can use the money for nearly anything related to your project, including power tools, trucks, trailers, or materials.
Of course, you have other small business financing options if an equipment loan isn’t a great fit. Here are a few of the top contenders for your construction needs.
Term loans: With amounts up to $2 million, these loans can cover many different kinds of large expenses. The rates begin at 6%, with repayment terms of up to 5 years.
Short term loans: These loans are similar to term loans, but offer an expedited timeline. In some cases, you can actually get the money in just 24 hours. The tradeoff is that the amounts are lower, the interest rates higher, and the repayment terms shorter.
Business lines of credit: Like a credit card, this revolving financing connects you with a set amount of money that you can borrow from whenever you like. The dollar amounts go as high as $500,000, and the interest rates vary from 8–24%.
Rest assured that there’s a business loan for any need that may arise for your construction business. All that stands between you and an ideal financing product is due diligence. Although you may feel pressure to get financing in a hurry, taking a careful approach puts your business in the best possible position to score short-term wins and build long-term success.
Running a business is difficult, and the COVID-19 pandemic didn’t make it any easier for businesses worldwide. To mitigate damage to businesses as a result of the pandemic, the U.S. Congress, fortunately, passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. One key component of the CARES Act is the Employee Retention Credit (ERC). While many small business owners have acted to take advantage of the ERC to reduce their taxes owed or receive a much-needed tax refund, however, many are unaware that a portion of the ERC can be non-refundable.
To help you better understand and accurately anticipate how the ERC could benefit your business’ bottom line, let’s discuss how the ERC works and which portions are non-refundable.
The Employee Retention Credit
To incentivize companies to keep employees on the payroll during the coronavirus, the ERC allowed companies to take a 70% tax credit for up to $10,000 of an employee’s qualifying wages in each quarter of the first three quarters of 2021. Companies which started after February 15, 2020 and made less than $1,000,000 in gross receipts could also qualify for $7,000 in the fourth quarter of 2021. Companies could also take up to $5,000 in credit for the 2020 year.
The credit reduces a business’s total owed taxes. It does not lower its taxable income like a deductible.
The ERC was focused on more small businesses with fewer than 500 employees in 2021 or less than 100 employees in 2020. However, any business can qualify if the business meets the required criteria for the ERC. Find out more about the ERC and if you qualify. Companies can only qualify for the credit if they were subject to a lockdown or a significant loss of revenue.
In 2021, the ERC was also amended to help startup businesses, too. “Recovery Startup Businesses” are companies that were started after February 15, 2020, and had less than $1 million in revenue. Recovery startup businesses can apply for the ERC for Q3 and Q4 of 2021 and receive up to $50,000 in ERC per quarter.
What is the Non-Refundable Portion of the ERC?
It really comes down to some confusing definitions.
Most people think of a refund as money they’re getting back that they already paid. But in the case of the refundable portion of the ERC, if you qualify for the tax credit, you will most likely be getting more money back than you initially paid in payroll taxes.
That’s because the refundable portion of the ERC is meant to offset your total payroll expenses and is calculated on qualifying wages minus any remaining social security or medicare tax liability, depending on the quarter.
In IRS speak, the term “non-refundable” means that the amount cannot be used to increase a business’s refund or create a refund that wasn’t there prior. Most tax credits are nonrefundable.
With the nonrefundable portion of the ERC, you are credited up to, but not more than, the amount you paid in social security or medicare taxes for each qualifying quarter.
When your ERC is being calculated, your total tax credit will be a combination of these two portions.
How to Claim the ERC on Form 941-X
If you qualify for the ERC, but did not use the credit in previous filings and overpaid your taxes, you will need to amend your quarterly filings with Form 941-X.
Form 941-X requires a bit of information, including when you discovered the error (or in this case, when you discovered you qualified for the ERC), the monetary amount, and why you believe the mistake happened. Since the form can have some complicated pieces, it is best to work with someone with expertise in ERC.
If you’re filing a Form 941-X, you have 3 years from the initial filing to amend your taxes.
Can I Still Qualify for the ERC?
Good news! Businesses can still qualify and apply for the ERC. The Employee Retention Credit officially ended on September 30, 2021, but businesses have 3 years from that date to look back at taxes and apply for the ERC.
Even if your business received other assistance from a Paycheck Protection Program (PPP) loan, you might still qualify for the ERC.
Get Started on Your ERC
The ERC is a great benefit for businesses affected by the pandemic. If your business kept your team employed during the pandemic and you were affected by a lockdown or a drop in revenue, you may be eligible for the ERC. The non-refundable part of the ERC is based on the Social Security Tax of the employees. However, if you amend a previous Form 940, the Social Security Taxes may have already been paid, and the non-refundable portion is already settled.
Filing for or amending an Employer’s Quarterly Federal Tax Return to get the ERC can be a bit daunting for business owners. Working with a team who understands the ERC and how to file correctly will help streamline the process.
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