How to Manage Your Small Business Finances to Secure a Hard Money or Stated Income Loan
Running a business is a dream for many entrepreneurially-minded individuals, offering a freedom that working for someone else doesn’t allow. However, starting a business takes a lot more than a good idea and big dreams.
Managing small business finances, particularly for those who don’t have a finance background, can be a true challenge that will require significant learning and attention to detail. If your business finances aren’t managed carefully, even in the early stages of establishment, you will likely face challenges sooner rather than later. Keeping accurate financial records is paramount to being approved for a hard money or alternative documentation loan.
This is what you need to know about managing finances for your small business to help with the funding of your next real estate investment.
Make Education a Priority
If references to P&Ls or statements of cash flow don’t mean much to you, a little rudimentary financial education will go a long in way in helping you stay organized and on top of reporting.
There’s no need to go get a degree in accounting or finance, but a solid foundation in the basics can make sure your bookkeeping is up to par and you know how to read financial statements to look for trends, whether good or bad. Books on small business finance can help, but an in-person class can make the main topics a little easier to understand. Many community colleges offer classes in business fundamentals, and some even offer classes specific to small business owners without any formal background.
Break Out Business and Personal Expenses
When your business is in its beginning stages, you might not yet have a strong structure in place. Things like purchase orders might be funded out of your pocket at first as you invest personal funds to get your company off the ground.
However, this can put you in dangerous waters, no matter how benign it may seem on the surface. Running a successful business means keeping personal and business expenses completely separate to keep your corporate financials in line.
Before investing in anything, from business cards to pens, be sure you know what you’re spending and where it’s coming from. It’s advised to open up a separate business account to be sure there will be no commingling for any reason. Don’t put this step off; business accounts are generally a separate form of account maintained by a bank, and running a business out of a personal account is often against the rules. By opening a business account when the company is new, you’ll be able to easily track what you’re spending, where you’re spending it, and how much of your own money you have invested into your company’s growth.
Your business books will be a critical part of seeking funding. Without clean and accurate records, it will be far harder to convince a third party that your business is worthy.
Reduce Your Costs
In the beginning, excitement will dominate the process of starting your business. You’ll be enthusiastic about creating a brand image and spreading the word about what you can do to other businesses and potential customers in the area. While this is good – passion is an important part of carrying a corporate mission forward – it can unfortunately lead to overspending in unnecessary places.
Things like branded pens may seem like a fun marketing tool but in reality, you can take notes just as well with budget pens from an office supply store. These kinds of little expenses can seem small, but little purchases add up, leading to the diversion of significant cash flow to expenses that don’t matter.
Before splurging on something you don’t need or risking getting ahead of yourself, ask yourself these kinds of questions:
- Do I need this to achieve my goals?
- Can my business function without this?
- What effect will this expense have on improving my ROI?
- Is this essential to attracting customers?
- What does this say to potential investors or lenders?
When seeking additional capital lenders or private financing, providers will want to see a track record of wise financial choices. Squander too much money too early, like renting a storefront months before you’re ready to launch, can throw up red flags related to your ability to make wise business decisions.
Stay Up to Date
The early days of a small business can be hectic, particularly when you’re moving quickly to try to get things up and running. During this time, and as your business ramps up and you’re still stuck wearing many hats, it’s not uncommon to let little administrative tasks get away from you. Unfortunately, this can be an issue.
Keeping up with financial information, including cash inflows and outflows, financing received, interest paid, purchase orders, invoices, and anything else that could hit your books, is imperative to operating a successful business. Ideally, these things should be documented as they occur, with each action resulting in a parallel entry into your financial systems.
To-the-minute transactions may be asking a lot, but at the very least, update your ledgers once every few days. Every transaction, even that pack of post-it notes you bought on a whim that cost under a dollar, needs to be included in your records in a timely manner. When you don’t stay up to date, you run the risk of omitting transactions and letting things slip through the cracks. Should this happen, you may find yourself understating expenses and, consequently, mismanaging the cash you have on hand.
No matter how busy you may be, always find time to keep your books up to date.
Keep Accounting by the Book
Accounting is a science, not an art – in fact, creative bookkeeping can actually be a crime. When it comes to keeping your books straight, it’s important to do things the right way, regardless of the systems that feel better to you. Jotting down transactions in a notebook may seem convenient, but if you’re not maintaining clean, accurate accounting records that follow industry standards, you’re going to have a hard time generating the financial statements that investors and lenders will want to see.
Luckily, you don’t need a CPA to be able to handle rudimentary small business accounting. There are many programs out there, like QuickBooks and Xero, that allow for easy bookkeeping, even for those who aren’t experts in debits and credits. These programs are user-friendly, easy to learn, and take care of most of the organization for you. Things like copying entries, scheduling recurring entries, and even month-end close can be handled in a few clicks, giving you the power to handle all of your accounting needs.
Further, these kinds of platforms offer the ability to run financial statements, like balance sheets and income statements. While these may not mean much to you in the beginning, financial statements are the best possible way to get a snapshot of business performance, which can then be used to inform future decisions. Our lenders may request a copy of these kinds of reports, so if you don’t have them on hand, you may find yourself scrambling to pull documents together in a hurry – and ultimately not be able to provide this information in a timely manner.
Renting vs. Buying Equipment
As the adage goes, you have to spend money to make money, but this doesn’t mean you need to go crazy on equipment and property in your first few months, or even in your first few years. This can actually be to your detriment, putting you in debt or significantly compromising your cash flows unnecessarily.
Buying often seems like a better investment, giving you assets that can be used over a longer period of time, but this isn’t necessarily the case. If you don’t need equipment forever or aren’t sure the time requirements of your investment, leasing is almost always a better option. In almost all industries, major electronics and equipment of all kinds can be rented versus purchased, from POS terminals to backhoes. This can allow you to experiment, see if equipment fits your needs, explore multiple options, and otherwise be absolutely sure about the necessity of a purchase before taking the leap.
When you are ready to buy, always shop around for a good deal. Buying shiny and new may seem appealing, but used equipment can save you a substantial amount of money without compromising performance.
Get a Grip on Taxes
No one likes tax time, but it’s not something your small business can avoid. Unless you are operating your company as a pass-through entity, or a form of business structure that flows through to your personal tax return on a Schedule C, you will have to prepare taxes for your small business. Depending on the structure of your company, this could be any of the following:
- Form 1065: U.S. Return of Partnership Income
- Form 1120: U.S. Corporation Income Tax Return
- Form 1120-S: U.S. Income Tax Return for an S Corporation
Tax time will depend on the form of business structure, but can vary whether you’re operating on a fiscal year or a calendar year. Filing requirements will also vary based on the kind of company you’re running. Be sure you completely understand which forms apply to you and what information you will need to ensure that all necessary details are organized and ready to report.
Minor errors in your in-house approach to finance generally aren’t the end of the world, but consider partnering with a CPA or IRS Enrolled Agent who specializes in your industry.
The nuts and bolts of finance aren’t always something new business owners consider, but understanding the basics of small business finance is essential to running a successful company. The finance side of a business can be overwhelming, but with a cool head and an idea of what matters most in mastering the financial side of small business, it’s possible to run a successful company that grows from a good idea into something great. It can also help you secure a hard money or alternative documentation loan.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574-LOAN or by visiting westparkloans.com.