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Small Business Financing: Becoming A Better Borrower

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As a young business owner I had a CPA friend who used to say, “Cash flow is king.” Of course he is right. One of the things any lender wants to know when a business owner applies for a small business loan is whether or not he or she will be able to repay the loan. James Good, of Small Business Payments Company, makes a great argument for why a simple way for small business owners to forecast their cash flow needs over the coming days, weeks, or months and the ability to successfully address those needs is critically important but difficult for many business owners. I couldn’t agree more. What’s more, addressing that need is not only crucial to running a business, but it could improve the odds of success when approaching a banker for a loan.

Small Business Payments Company isn’t a Lendio customer, but when I first heard about their Small Business Workbench, I wanted to hear more. Good and his colleagues come to the table with a banking background; and Acxsys Corporation, the parent company of this California-based startup, is owned by the eight biggest banks in Canada. I think it makes sense for small business owners to pay attention to something bankers feel will make a difference in the financial health of a small business—particularly if it helps make them better borrowers. Small Business Payments Company has a pretty impressive banking pedigree so I was paying attention.

With a foundation in cash management and small business, the Small Business Workbench sets out to make cash flow management less challenging for small business owners who aren’t formally trained as accountants or bookkeepers. “A big thorn in the side of almost every small business owner is the challenge of good cash management,” said Good. “Most small business owners didn’t start their businesses to become accountants and most of the tools previously available are very complicated and difficult to use for the uninitiated, or too basic to be of much value.”

Small business owners with the ability to accurately forecast their future needs with something simple to use makes it a lot more likely they’ll be on top of their cash flow. The more cumbersome and challenging to use, the less likely a business owner will. And, the greater the odds the control of their cash flow could spiral out of control.

I have to admit, my CPA’s advice fell on deaf (or at least muted) ears when I started my first business. I thought I knew what I was doing and understood the importance of managing my cash flow. I wish I didn’t need to say the lessons I learned were painful—and expensive. I wasn’t an accountant and made most (if not all) of the common mistakes every new business owner makes. Something like the Small Business Workbench would have been a great help.

Having faced the need to scramble to meet payroll or accurately forecast an upcoming cash shortfall would have been a great benefit to my business. Although there are numerous apps available that will help a small business owner with payroll, accounts receivable and payable, as well as inventory management, it’s the core functionality that enables a business owner to forecast cash positions that appeals to me the most.

A wizard walks you through a setup process, which then allows you to look into the future as far as you’d like. It makes planning for payroll, tax payments, and big purchases pretty simple. It also helps create an action plan to help adjust when meeting those obligations becomes problematic. The ability to see into the future is very appealing. If all a tool shows is what’s already happened, it’s not really providing the value it needs to.

That said, the way the apps offered within the Workbench sync with the forecasting tool, making forecasts that include things like payroll much more accurate.

It was obvious to me they took the time to design a tool that was pretty easy and straightforward to use. The Workbench seamlessly syncs with online banking data or accounting software which means there is no need to manually input a lot of information from your accounting software to get the most out of the tool.

I’m convinced this cloud-based tool is something that will help any small business owner get a better handle on his or her cash flow, help them understand what’s going on within their business, and ultimately make them a better borrower. What’s more, a small business owner can access this information at the desk or on a smart phone.

When so many small business owners are unsuccessful at the bank when looking for a loan, I’m a big fan of anything that will help make the situation better.

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Millennials Choose Cash — And Why That's Not So Great

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Some two out of five Millennials—39%—prefer cash as the long-term investment for money they don’t need for at least 10 years, according to a new Bankrate.com report, roughly three times the number who chose the stock market. That’s a perilous pick, considering that cash will actually lose value over time due to inflation, while the S&P 500 has gained 17% in the last 12 months.

“What we are seeing is that Millennials actually get the importance of saving,” says Greg McBride, senior vice president and chief analyst at Bankrate. “They’re just not willing to take risks with it, particularly with regard to long-term savings.”

One thing that may explain the lean toward greenbacks is that Millennials came of age during tumultuous financial times. “When you look at the events of the last 10 to 15 years, with the financial crisis and the tech bust, young adults had a front row seat for one or both of those events,” McBride says. “Even if it didn’t impact them directly, they saw the impact it had on their parents and other family members and friends.”

Millenials prefer cash for long-term savings. (Photo credit: 401(K) 2013)

That’s certainly the case for Alisha Nicole Washington, 22, who recently graduated from Vanderbilt University and started work for an advertising firm in Atlanta. “I prefer to keep my savings in cash,” she says. “Growing up, it seemed like that was the forefront of every media outlet—how poorly the market was doing. The images and reports definitely left a lasting impression.”

Watching the stock market tank and their parents struggle has left many Millennials with a poor appetite for risk—which is ironic, since they’re the age group with the most ability to be risky. Since Millennials have decades to go until retirement, they have plenty of time to recover from market dips. “Even with something as severe as the financial crisis, if you just hung in there and continued contributing throughout, you not only recovered your losses, but you came out well ahead,” McBride says. “That’s not a perspective that someone who’s only been investing for a couple of years necessarily has.”

Among other things, student loan debt may be hampering Millennials’ ability to think long-term. The average student loan debt now tops $29,000 per student, according to the Project on Student Debt, and many are borrowing two and three times that amount. Jenna Kusmierek, 30, manages to fund her Roth IRA in full each year, but the rest of her cash goes to her student loans. “I plan to proceed this way for the next 10 years until my $140,000 student loan bill is paid off,” says Kusmierek, who lives in Denver.

Then there’s convenience. For Jason Fisher, the 27-year-old co-founder of Waterway Financial Group in Myrtle Beach, SC, having quick access to his funds trumps saving money in a retirement account. “The reduced accessibility to cash is not attractive,” says Fisher. “Often, an investment for our age group tends to be much shorter term anyway. I think children, first homes, and other bigger purchases make having cash on hand more feasible.”

Unfortunately, Millennials are the generation that most needs to get aggressive with savings. “Today’s young adults have the biggest retirement savings burden of all time,” McBride says. “Their life expectancies are longer, their healthcare costs are going to be higher, they don’t have the pensions their parents did, and the future of Social Security is more uncertain than it’s been for any of their predecessors.”

In other words, Millennials need a bigger nest egg, and they’re not going to get there with cash in a savings account. “A key part of this is getting people to think long term, getting them to see the power of compounding over those longer periods of time,” McBride says.

Thankfully, not all Millennials are sticking to cash-only savings. “I keep a small emergency fund in cash, but beyond that, I invest everything I can,” says Kali Hawlk, 24, who runs the blog Common Sense Millennial. “The only way I’m going to grow the value of my nest egg is to invest it where it can earn reasonable returns.”

Of course, cash—in an interest-earning savings account—is the best way to save for emergencies and shorter-term needs. But for the long haul, the stock market is the better bet.

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A Peek Into Stephen Sheinbaum's Crystal Ball: A Look At The Future Of Small Business Lending

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Last week we took a look at all the news around small business lending and spoke with Merchant Cash & Capital’s (MCC) Stephen Sheinbaum to get his take. I’m convinced alternative small business funders are here to stay, and although I received an email or two questioning why I would be interviewing someone from the merchant cash space, I think Sheinbaum offers a great perspective on what’s happening in small business lending.

Since 2005, MCC has helped small business owners access more than $680 Million through a little more than 30,000 transactions. In other words, his company has interacted with a lot of small business owners.

Looking into the future, Sheinbaum offers some insight you might not get at a traditional lender, but small business owners, traditional lenders, and non-bank alternative lenders might want to pay attention. His predictions line up pretty well with what I’m seeing in the marketplace.

“Everyone in the space wants to get more money out on the street,” said Sheinbaum. “Traditional lenders, the SBA, and alternative funders like MCC. We’re all trying to make it easier and less expensive, we just go about it differently.”

Granted, merchant cash transactions are more expensive than a traditional small business loan, but provide needed capital to borrowers who want to take advantage of a short-term opportunity to increase profits or have a hard time finding capital through traditional channels.

“Most companies making inroads are using technology to streamline the process,” he said. “For example, it’s much easier to get a credit card today than it once was.

And, credit cards are one of the top credit vehicles a small business owner uses to access capital today. Sheinbaum predicts we’ll see even more automation over the next five years as lenders answer the need for accessing funds quickly. “Automating does not mean a degradation of loan standards or that lenders will be making ever riskier or more speculative loans,” he said.

What it does mean is that instead of taking weeks or months to underwrite a small business loan, lenders will be able to make decisions more quickly than they do today. “We’ll be using technology to gather more relevant information about a potential small business than ever before,” suggests Sheinbaum.

When I asked if he thought traditional lenders would eventually become irrelevant in the small business loan space, his answer was quick and to the point, “NO. There will always be a place where the best borrowers will find the best interest rates and terms. I think that will likely be at the bank. When compared to alternative sources of funds, banks have access to capital at a much lower cost, but unfortunately banks are just slow to innovate and change with market forces. You probably know the analogy of the big ship and the speedboat? It just takes too long for the big ship to change directions—most alternative lenders are much more nimble and are able to leverage technology to greater effect than a bank.”

He did suggest that traditional lenders who want to recapture market share lost to alternative financing options will either need to change the way they do business to meet market demands, or continue to lose that market share. I’d guess that’s why you see BBVA Compass and Wells Fargo becoming more aggressive in small business lending.

I’m sure Maria Contreras-Sweet at the Small Business Administration wants to make sure her agency remains relevant amidst the change in dynamic as well. The times certainly are changing—and for the better if you’re a small business owner who relies on borrowed capital to fund growth.

Because we both agree, alternative financing isn’t going away, I asked Sheinbaum how to make sure a small business owner is working with a good funder? Most of his responses are common sense. Particularly in light of the fact there are questionable funders mixed in amongst the rest:

  1. Deal directly when you can: The closer you can be to the source of the loan, the better. That’s not to say a broker (or even a service like Lendio) is a bad idea. Unfortunately, some loans get shuffled from broker to broker, everyone taking a cut, adding expense to the borrower. One of the emails I received last week lamented the fact that some transactions happen that way—I couldn’t help but agree.
  2. Look at their profile on the BBB (Better Business Bureau): That’s not to say you’ll learn everything you need to know at the BBB, but if a lender is transacting business in a shady or predatory way, there will likely be complaints there. Don’t forget, every company has an unhappy customer or two and will likely have a complaint. Look for trends, numerous complaints about the same things, and their status with the BBB. Those can all be indications of the quality of the company you are considering working with.
  3. Find out how long they’ve been around: The longer the better. The merchant cash space is relatively new. Nobody was really offering a merchant cash advance before 2003. So if the company you’re considering has only been around for a year or two, make sure you do some more research. “A lot of the people entering the space are the same people who were in the middle of the mortgage loan crisis,” said Sheinbaum. “Young doesn’t mean bad, but it does mean you need to make sure you’ve done your due diligence.”
  4. Talk to former customers: Make sure and ask for the names of previous customers—in your industry if you can. They will give you the best and happiest customers of course, but you can learn a lot about how they do business if you call several of them. Even happy customers can give you insight into potential problems and challenges.
  5. Do homework online and offline: Review sites are a great place to start, but don’t stop there. Many alternative lenders don’t exclusively do business online. You can also check with the Attorney General’s office in your state to see if there have been any complaints.
  6. Make sure you understand what the capital will cost you: Alternative funders aren’t regulated by the federal government the way banks and credit unions are, so comparing apples to apples can sometimes be problematic. Make sure you understand the cost of capital to you. And, if they are reluctant to explain it to you, they probably aren’t the right funder for you. Because this type of transaction often looks different from a traditional term loan, don’t take for granted you understand—make sure you do.

Having spent my share of time in the trenches running a small business myself, I’m encouraged by the changes taking place in the space. Most small businesses grow on borrowed capital and almost anything that makes more capital available to small business is a good thing.

Fortunately, it won’t take very long for us to see if Sheinbaum’s predictions come about. That said, I’m convinced he’s hit the nail on the head.

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Seven Tips For Smoothing Out Your Small Business' Cash Flow

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The following guest post is by David Sederholt, COO of Strategic Funding Source, Inc.

The financial universe of most hard-working small business owners is often very focused and revolves around their immediate obligations. They know that cash flow is the heartbeat of their business, and if they don’t have the cash on hand to pay their vendors, they don’t open the next day. It’s important to remember that some of the cash flow pain that these entrepreneurs face is the result of less than creative cash management. With some simple tricks in cash management, the ups and downs of income vs. expense tides can be stabilized:

1. Don’t pay everything at once. For a small business, cash flow management is like being an air traffic controller. You can’t have 100 planes trying to land simultaneously on two runways. We regularly see clients line up their monthly bills, sit down and write all the checks at once. They hope that they put aside enough cash or that their upcoming sales will float their payments through. In the worst case, checks bounce as the bank cannot cover them. This is like Russian roulette with a check book. These costs slam cash flow and ruin relationships with those who are currently offering you credit. It is okay to write the checks all at one time, but you need to put them into a “holding pattern.” Mark each envelope with the date you should mail it in order for it to land on time and without crashing into another check. Stagger the payment dates by setting up three tiers for disbursement of checks:

Tier 1: Must Pay Group – These are the checks that can hurt you the most either in cost or ability to operate your business if they aren’t paid. This includes items like payroll, taxes, rent or late utility bills. Tier 2: Important to Pay – Items like oil bills, utilities and insurance payments will often have a reasonable grace period or a financial penalty modest enough to take advantage of having this cash on hand when needed. But these are still important bills to pay because you don’t want to get cut off. There‘s nothing more destabilizing than having your electric shut off in the middle of a business day. You could lose customers and employees who worry about the health of their employer. Tier 3: Flexible Payment Opportunities – Suppliers, vendors and wholesalers who supply most small businesses are the best sources of flexible financing. Many of these are happy to work with a stressed business as long as there are regular payments scheduled, even if they are small. These suppliers will often continue to deliver as long as you keep open channels of communication and make payments with regularity.

2. Make it real! Pay on revenue you have, not on the sales you are hoping to make. Would you land a plane hoping that the runway is beneath you in that fog bank? No, you want to know it is there, so only make payments knowing your sales are in the bank. If you know what you have, you will know what you can pay.

3. Stop using sales tax money to float your operations. It will cost you far more in potential penalties, fees, interest, time and aggravation than obtaining some short term financing. The most prudent strategy is to discipline yourself to deposit all the sales tax money you collect each day into a separate bank account. Tax liabilities grow because business owners use the tax money they collect as working capital for their operations.

4. Invest in a payroll service. The two biggest cash flow crunchers are payroll and sales taxes. It may seem like an unnecessary cost for very small businesses, but a good payroll service can be invaluable, particularly in the collection and payment of payroll taxes. Rather than worry about saving the money and making progress payments to federal and state agencies, let the pros do it.

5. Get creative with your payroll schedule. Every business owner has a different revenue stream. Retailers and restaurants take in daily revenue. Manufacturers, wholesalers and even health clubs take revenue in on a monthly basis. Most of these businesses need to meet weekly payrolls and solid cash flow planning is required to make sure that the outflow is covered by the cash on hand and the incoming money. This is great for all of those businesses with high frequency of deposits like retailers, but could be a challenge for those with a slower receivables payment stream. Some states permit bi-weekly or bi-monthly payroll, which can be helpful to those businesses, especially when paid on the week before or after rent or other obligations are due. This also cuts down on the frequency of payroll tax deposits, as the payroll periods are spread out.

6. Establish relationships with a reputable credit provider. Planning for a rainy day is a noble cause but unrealistic for many small business owners. One thing I have learned as a one-time small business owner—and now as someone who finances them—is that most cash flow storms come on suddenly and it brings a sense of desperation or lack of control. It happens to most businesses at one time or another. If you work with a quality company that provides working capital, stick with them and build a relationship. If they know you, they will be there to help quickly when you call.

7. Strengthen your relationship with your banker. Your banker may not give you a loan and may not provide you with a line of credit, but they do have a great deal to say if checks bounce or are charged NSF fees and cleared. Communicate with your banker and let them know where you stand and what is happening with your business. They often listen and help.

Managing cash flow has long been, and will long be, a pain point for many small business owners, but it’s possible to bring relief through smart planning and open lines of communication with vendors and financial partners.

Startup Spending Do’s And Don’ts

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Bank Loan Covenants And Clauses Entrepreneurs Regret Most

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Many entrepreneurs face an uphill battle for sufficient capital to keep a growing business in a position where it’s able to pay its employees, vendors, and landlord on time. Unless the entrepreneur has a stockpile of cash to dip into when the business experiences a cash flow hiccup, reliance on short-term financing from a bank is his first line of defense. Accordingly, many entrepreneurs establish a line of credit with their bank, in addition to permanent financing such as a commercial mortgage, and term loans for equipment and other fixed assets.

According to the National Federation of Independent Business (NFIB) Research Foundation, in recent years approximately 45% of Small Business Owners (SBO’s) have access to and use a line of credit to address the cash flow fluctuations in their business. On the surface, this would appear to be a favorable statistic. However, the NFIB also found 30% of the SBO’s reported during the annual line of credit renewal process “the terms and/or conditions of the firm’s principal credit line have been unilaterally changed by the financial institution.”

Unfortunately, when a lending officer from a bank presents the line of credit or loan documents to an entrepreneur for his or her signature, most entrepreneurs sign them and move on. In fact, the typical entrepreneur is both relieved and delighted to have access to the cash made available by the bank and doesn’t give a second thought to what may go wrong.

Bank Financing Documents Protect the Bank, Not the Entrepreneur

Banks lend money to entrepreneurs based on three factors: Cash flow, Collateral, and Credit Score. The ‘boiler plate language’ in the bank financing documents is intended to ensure the entrepreneur will maintain the business’s cash flow during the term of the agreements and to protect the bank’s collateral in case the entrepreneur fails to make required and timely payments, or is unable to pay off the line of credit and/or loan. This is accomplished in two ways. First through covenants, which are promises the entrepreneur makes to the bank; and second through clauses, which address what will happen when things don’t go as planned. In my experience, the following five bank loan covenants and clauses are those which entrepreneurs regret agreeing to the most:

Second Mortgage on Home to Provide Business Loan Collateral

Many service businesses have little-to-no fixed assets to serve as collateral and accordingly, many entrepreneurs are forced to use their personal residence as collateral. In fact, if the loan is backed by the Small Business Administration under the 7(a) program, securing the line of credit requires a personal guarantee of any equity owner with 20 percent or more ownership in the business when other assets are insufficient to fully collateralize the loan. In many cases, this means the SBA loan is ultimately secured by the equity in the entrepreneur’s personal residence.

Personal Guarantees From Husband and Wife, Joint and Several

Similar to the need to use a second (or third) mortgage on the entrepreneur’s home for collateral purposes, this covenant is used to meet the bank’s collateral and cash flow requirements. When the business does not have sufficient cash flow to support a line of credit or loan, the spouses’ discretionary personal income may be used to hold up or augment the business’s cash flow deficiency. In many cases, this covenant is required by the bank even when the second spouse does not own or work in the business. Often this covenant becomes a big problem when a divorce is pending because banks don’t like to release this covenant unless the line of credit or loan is paid in full.

Debt Service Coverage Ratio Bank Loan Covenant

To satisfy the bank’s level of risk, the bank will set forth a cash flow requirement such as a ratio of income to debt payments which must be maintained by the business throughout the term of the line of credit or loan.

For example, the bank may set a debt service coverage ratio of 1.2 which means that the net operating income for a period must exceed the total debt payments (interest and principle) payable to the bank during the same period by 20%. If the total debt payments for the period were $100,000.00, then the business would need to have income equal to $120,000.00 during the same period in order to maintain the bank’s debt service coverage ratio covenant. In many cases, the entrepreneur agrees to this covenant and does not understand its meaning or implications should the business have a year with reduced net profit or a loss.

Bank Line of Credit Borrowing Base Terms and Compliance

It’s not uncommon to have a line of credit which requires a monthly certification process in order to draw upon the line of credit or alternatively pay back the line of credit principle to the bank. This process is established by the bank to ensure the entrepreneur is not exceeding the level of risk the bank desires to assume.

For example, the bank may set forth a borrowing base formula that states the entrepreneur may borrow up to 80% of the business’s Accounts Receivable which is considered to be ‘current’. The borrowing base calculation is required by the bank to be certified by an officer of the company and delivered monthly to the bank.

Close monitoring of the Accounts Receivable in terms of its aging is necessary. Otherwise, the entrepreneur may find himself with ineligible Accounts Receivable accounts to borrow against or alternatively needing to pay down the line of credit to meet the borrowing base defined limit without the cash to do so.

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We’re Not Investors, but We Were an ‘All-cash’ Home Purchase

We aren’t real estate investors, but when the opportunity to purchase our condo for cash became available, we quickly moved forward.

MarketWatch.com reports that, “All-cash purchases accounted for 42% of all sales of residential property in November 2013, up from 39% during the previous month, according to data from real-estate data firm RealtyTrac released Friday.”

And paying cash for our home not only relieved some of the stress of carrying a monthly mortgage payment but paid off financially in several other ways as well.

Lower mortgage application costs

Just obtaining a mortgage can get a little pricey. From things like the bank appraisal, credit report, tax service, and processing fees, to underwriting fee, prepaid interest, title insurance, and more, just getting to the point where you make regular monthly mortgage payments can involve some significant and hefty financial hurdles.

In our case, on our previous home we ended up paying almost $1,300 just to obtain our mortgage, a cost that we avoided when we closed our all-cash deal.

Significantly lower costs over time

Of course, probably the most significant aspect when it comes to savings provided through an all-cash offer is the mortgage interest over time. Considering that the interest alone on a $200,000, 30-year fixed rate loan at 4.5 percent would be over $150,000, the financial advantage of being mortgage-free can certainly be worthwhile.

Immediate flex equity

We don’t tend to look at our home as a bank, but I suppose we could if we wanted to since we could take out a line of credit on the immediate equity that we built with our all-cash purchase.

However, maybe even more than the opportunity we have to obtain credit on our home is that fact that should we need to sell – whether our home value has risen or fallen – we won’t likely have to worry about bringing cash to closing. The equity we’ve obtained by purchasing our home outright means that we have a bit more flexibility when it comes to selling since we’re not bound by any loan obligations to a financial institution and are able to set our sales price accordingly, yet another benefit of being an all-cash deal.

So while it might not be possible for everyone, and may not be the best option in every real estate transaction, buying a home for cash can present certain benefits of its own.

More From This Contributor:

Building a Revenue Producing Blog

I Won’t Be Waiting to Take Social Security

Preparing to Publish My First E-book

Disclaimer:

The author is not a licensed financial, mortgage or real estate professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

LoansFinance […]

Loans Aren't Taxable Income, But Convincing IRS Of Loan Status Is Priceless

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(Image credit: highrisesociety)

When your uncle loans you $10,000 to tide you over, is it taxable income? Nope. What about when the bank loans you $100,000? No again. That’s provided it’s a real loan and not income. That’s a key distinction that lands lots of taxpayers in trouble.

But if it’s a real loan and is forgiven, it is income then. That’s cancellation of debt income, often shortened to COD income. You got cash when you borrowed the money. Then when you don’t have to repay it, that cash is no longer loan proceeds.

The tax code generally taxes you when you are relieved of paying back a debt, treating it like cash paid to you. See 10 Things About COD Income. This unpleasant rule might seem easy to ignore, except that when a loan is forgiven, you’ll generally receive a Form 1099-C reporting income to you—and telling the IRS. If you receive one and disagree with the amount shown, write the lender requesting a corrected Form 1099-C showing the proper amount of cancelled debt.

Don’t ignore Forms 1099. In some cases COD income isn’t taxed. If you believe the cancelled debt isn’t income because you’re insolvent or for any other reason, you’ll need to address this on your return.

If you receive a loan, can the IRS claim the “loan” you received—that is still outstanding and hasn’t been forgiven—isn’t a loan and was actually a sale? In other words, can the IRS claim that “loan” proceeds are really sales proceeds and therefore taxable?

Sometimes, yes. That’s exactly what happened to Jonathan Landow. Landow took out a 90% loan against securities he put up as collateral. The loan was non-recourse—meaning that Landow could not be sued personally if he defaulted. Yet the securities were pledged as collateral.

In fact, the lender had the ability to sell the securities in ways that were unusual for garden-variety loans. And that’s just what the lender did, even though Landow later claimed he had no idea his securities would be sold. Landow didn’t pay off any of the $13.5 million principal amount of the loan.

He also didn’t report the “loan proceeds” as income. The IRS claimed the loan transaction wasn’t a loan at all and instead was a sale. The Tax Court agreed with the IRS, treating the putative loan as a highly orchestrated transaction. They court thought everyone knew the transaction would be documented as a loan but really amounted to a sale.

How real is the danger that will IRS will treat loans as sales? In transactions like Landow’s, very. Landow’s deal was part of a litigated and controversial tax shelter that produced a series of cases. See Shao v. Commissioner and Kurata v. Commissioner. In that sense, the result in Landow’s case was no surprise.

How you structure a transaction is important, as is how the transaction actually plays out. In general, courts look to indicators such as whether legal title passes, how the parties treat the transaction, and the parties’ intent. There can also be danger in simple family transactions.

But there, the question is often whether something is a loan or a gift. Gifts may not trigger income tax, but they can trigger gift tax. Loan vs. income vs. gift? Think about taxes up front, and document what you intend. Everyone will be better off.

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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First Person: Refinancing Our Rental Required $11,000 in Cash

When my husband and I refinanced a refinanced a rental property two-and-a-half years ago, the last thing I imagined was that interest rates would drop even lower. Back then, the best loan we could finagle on a investment property was 7.5%.

Since last winter, our banker has been urging us to refinance at a lower rate. At the current rate of 4% we could afford to wrap a $12,000 emergency repair in with the home loan and change the payment term to 15 years without changing the monthly payments. What a deal!

Changing lending standards

Last week we’ve started the refinance process and to our surprise discovered that lending standards have changed rather drastically. Not only did we have to provide two years of financial statements and tax returns, bank statements, retirement statements and so on, we also needed cash reserves. How much? We needed about $11,000 to cover three groups of expenses.

Even though the rental we were refinancing had been continuously occupied for the past 3 years, “breaking even” from a debt liability standpoint, and worth about $90,000 more than what was owed against it, our loan officer required a six month PITI (principle, interest, taxes, and insurance) of liquid assets. This came to $5000. Also needed was a three month PITI payment reserve on our primary mortgage which was not part of the transaction. A three month reserve on our home meant an additional $3000 needed in savings.

The last expense we had not anticipated were 3% closing costs to the tune of nearly $3000. This brought the cash needed to close the deal to nearly $11,000.

How we met the cash reserve guidelines.

Since my husband and I had been throwing most of our income towards debt reduction these past 6 months, our savings account balance was only around $4000. Fortunately we both had nearly $52,000 in a retirement fund that our banker accept in lieu of cash savings. The closing costs we were able to roll into the mortgage as well but only because we were borrowing less than what we qualified for.

For landlords looking to refinance a rental property, it takes a lot more than good credit these days to swing a new loan. Our experience has demonstrated that higher closing costs and nine months worth of cash reserves now seem to be the new standard, making it tougher than ever to refinance a home mortgage.

*Note: This was written by a Yahoo! contributor. Do you have a story that you’d like to share? Sign up with the Yahoo! Contributor Network to start publishing your own finance articles.

More by this contributor: How to pay down your mortgage faster. How to maximize the profit on your rental property. Top 5 personal financial planning tools & strategies for meeting your goals. […]

Corporations Can Prepay Royalties To Access Foreign Cash

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Seal of the United States Internal Revenue Service. The design is the same as the Treasury seal with an IRS inscription. (Photo credit: Wikipedia)

Foreign subsidiaries of U.S. multinationals generally retain their excess cash because paying a dividend to the U.S. parent would result in significant U.S. tax costs. For example, a $50 million dividend received from an Irish subsidiary would be subject to approximately $13 million of U.S. federal income tax (this assumes a credit and related “gross-up” income inclusion for income taxes paid to Ireland, which has a 12.5% tax rate).

An idea for accessing excess cash of foreign subsidiaries without increasing total tax costs is to prepay royalties. This option is available if intellectual property (IP) is owned in the U.S. and licensed to foreign subsidiaries for use in their business operations.

To illustrate, assume a foreign subsidiary pays $15 million of royalties to its U.S. parent each year. The foreign subsidiary could prepay three years of royalties, providing the U.S. parent with $45 million. The advance payment would be applied as an offset against future royalties due under the license agreement.

The amount of the advance royalty payment generally is subject to U.S. tax in the year received (but there would be no further taxable royalty income in years 2 and 3). Thus, while U.S. tax on the three years of royalty income is accelerated, the total amount of taxes is not increased. For financial reporting purposes the royalty income and taxes generally are reported over the three-year period as if the royalties had been received each year.

It is critical that the amount received by the U.S. parent be nonrefundable—otherwise the advance payment would be treated as creating a debt. A prepayment that is considered as indebtedness of the U.S. parent would be taxable as a dividend (see my blog “A Costly ‘Repatriation Tax’ Defeat” discussing the tax treatment of a loan from a foreign subsidiary to its U.S. parent as a deemed dividend), while the royalties would still remain taxable as such.

Companies seeking to tap excess foreign cash for U.S. needs without incurring additional tax costs should consider having foreign subsidiaries prepay taxable royalties.

Also on Forbes:

Companies That Pay CEOs More Than Uncle Sam

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How Online Pawn Shops Prey on Desperate Entrepreneurs With 90%+ Interest

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Say you’ve got a great idea for a startup business. You don’t have a lot of cash, and banks don’t loan much to brand-new businesses that don’t yet have a track record of income.

You may be broke now, but you do have some assets left from the go-go days: maybe some fine jewelry, a Rolex, a stocked wine cellar or luxury car. You’re too refined to go downtown to a pawn shop, and they might not want your expensive possessions, anyway.

Now, there’s a solution for that: upscale online pawn shops. These sites have sprouted like weeds over the past few years, and now include Pawngo, Pawntique, borro, and more.

At base, these sites provide secured loans. At a bank, a secured loan means you get a lower interest rate or better terms than if you’re obtaining an unsecured loan. But at the online pawn shops, you put your family heirloom at risk of being lost to you forever and still pay sky-high interest rates that top out at 8 percent a month — that’s over 90 percent a year. What a great deal…for the pawn shops.

Advantages of pawning

Two advantages here that are drawing borrowers are speed and little paperwork. Loans are often in hand within a couple of days. If you don’t want to reveal your income on a bank loan form, you can hock that boat and skip the disclosures.

Some online pawners also offer larger loans than a typical entrepreneur might easily obtain from a bank — up to $1 million.

It’s also somehow less unsavory to pawn your item via a smartphone snapshot, UPS, and an Internet site, versus going to a bars-on-the-windows pawn shop to hock your goods. This is exactly the crowd borro is targeting, their PR contact informed me.

They’re looking to build repeat business, borro reports, and staying flexible about when loans are repaid (translation: they’re willing to keep raking in high interest payments on the loan for additional months).

They also don’t consider themselves a pawnshop at borro because they don’t take possession of goods when loans default, choosing to sell off all property immediately. The borro team conceded it might be “semantics” to say they’re not a pawnshop. Ya think?

Whatever you call them, these sites are making loans. Pawngo reports it’s loaned out $9 million since starting up in June 2011, at rates from 4 percent to 8 percent, inclusive of all fees. In its first seven months in the States, borro has made $7 million in loans, at rates from about 3 percent to 4 percent.

The average loan, Pawngo says, runs only three to six months. So most borrowers don’t end up paying the staggering annual rate that would result if the loan ran all year. These lenders also don’t build in prepayment penalties, so you can pay off your loan early, redeem your item, and skip any remaining interest that would have been due if you stretched out payments longer.

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