Lending Library

Trade credit, sometimes called trade finance or supplier financing, is an extremely common form of exchange between businesses. Famously, Walmart relies heavily on trade credit. But it isn’t only large corporations that utilize this form of agreement between suppliers and buyers—trade credits are extremely common for small businesses, as well.

In fact, according to the World Trade Organization (WTO), an astounding 80% to 90% of all global trade relies on trade finance.

Therefore, trade credits will likely be involved in some way regarding your small business, and you should understand how this system works.

What is trade credit?

A trade credit is a business-to-business exchange where one business provides goods on credit to another, i.e. no cash is paid up front. In turn, the recipient of the goods promises to pay for the goods on a predetermined time frame.

Trade credits operate on the same basic idea as running up a tab at a bar or grocery store over time, which was common in years gone by. Importantly, though, a trade credit is a very formalized agreement between businesses, not a business and a customer.

In essence, trade credits are like financing with 0% interest—the buyer’s assets increase without the initial expenditure of capital. Depending on the size of your operation and your suppliers, a trade credit agreement might look a lot like a financing application from a bank, but they are often more informal. Typically, trade credit repayments take the form of invoices.

Trade credit definition.

A trade credit is the loan of goods or services from a supplier business to a buyer business. The buyer agrees to pay for the goods or services at a later date.

Trade credits in the international supply chain.

Trade credits are essential for businesses across the globe. Even if your business doesn’t have trade credit agreements, some organizations in your supply chain most likely do.

“International supply chain arrangements have globalized trade finance along with production,” the WTO notes. “Sophisticated supply-chain financing operations—including for small- and medium-size companies—have become crucial to trade.”

What is a trade credit example?

Trade credits have been hyped as one of the secrets to the success of Walmart, which continues to vie with Amazon for the title of world’s biggest retailer. Many of the products available on the shelves of your local Walmart store are procured without money up front.

“Walmart is no different from other large retailers,” points out financing expert Marco Terry. “Most large retailers are known for paying invoices in 30 to 90 days. Large companies operate this way during the course of their normal business.”

Walmart, which would have no problem getting financing in any form, must see a lot of intrinsic value in trade credits—the corporation uses up to 4 times more in trade credits than any short-term external financing.  

What are the advantages and disadvantages of trade credit?

Walmart probably sees a lot of benefit in trade credits because trade credits heavily advantage the buyer. This favorable condition exists because trade credits basically function as an interest-free loan. Walmart (or any other retailer chain) can start selling products before it has to pay for them.

Small businesses can take advantage of this, too. If you can work out a trade agreement with a supplier, you can begin making sales before spending money on inventory.

A disadvantage of trade credit is the risk involved—even though you don’t have to pay upfront, your business will still have to pay the supplier at some point. If you don’t have the money when the invoice is due, your company could face a dangerous cash crunch. If you don’t pay, you risk ruining your supplier relationship; not paying off trade credits can also damage your business’ credit score.

If you are on the supplier side of a trade credit, an advantage is that trade credits encourage repeat business. Trade credits allow you to do business with companies that might not have the up-front capital to buy from you before making sales.

If you offer trade credit, you basically become a lender, which involves inherent risks. This is why the supplier is at less of an advantage in a trade credit agreement than a buyer.

Make an educated assessment of the situation before offering trade credits. For example, is it worth waiting 30 days for payment if it means your product is placed on the shelves of a popular retailer? 

What are the types of trade credit?

The different types of trade credits are defined by invoice periods. On your invoice, it will typically say “net,” followed by the number of days when payment is due after the invoice date. The most common trade credit type is “net 30,” meaning repayment is due 30 days after the invoice date.

Trade agreements also occur with 45-day, 60-day, 90-day, and even 120-day payment periods. You should typically expect to repay in 30 to 45 days, though.  

What is bank credit and trade credit?

Bank credit and trade credit are different ways to understand financing available to your business. Bank credit is the total amount of money a business or individual can borrow from a bank. Bank credit includes credit cards, mortgages, and business lines of credit.

The value of trade credit, on the other hand, is connected to the value of goods or services being offered from a supplier to a buyer. Additionally, trade credit is available from suppliers instead of a bank.

Seller credit

A seller credit, or owner financing, is related to the sale of a business. The seller of a business can opt to sell all or some of a business like a trade credit—the new owner of the business can get started immediately and then repay the credit back over time. For the seller, it can allow you to get an overall better price for your business, but you assume the risk of the buyer defaulting. Seller credits are also common in home sales and function similarly to seller credits in the sale of a business. 

When opening a business, you have a lot of choices to make—including the structure of your business or the business entity. One of the most common types of businesses is known as an LLC, or limited liability company. In addition to being one of the easiest entities to form and maintain, it also offers legal and financial protection to its owners. 

Keep reading to understand LLCs and why they are so popular. 

What Does an LLC Mean?

However, an LLC limits the liability to just the business assets. These assets include company profits, equipment, and inventory but do not extend to any personal assets outside the business.

An LLC is often used by business owners to protect themselves personally when they go into business. 

How Can You Start an LLC?

What Does an LLC Cost?

Along with a startup fee, you will need to pay an annual fee to maintain the designation. These fees also vary widely depending on where you live. In Missouri, there is no annual fee, though business owners still need to submit annual reports. In Maryland, business owners need to pay $300 annually.

Look up your filing fees before you decide to become an LLC so you can budget for the costs. 

What Is an Annual Report?

These annual reports are typically due around the anniversary date of formation. You can often find annual report templates online. 

When Should You Form an LLC?

You don’t have to file your paperwork in January to form your LLC. Some states offer a “delayed effective date” up to 90 days out. This means you can work through your paperwork in October or November for an LLC launch date of January 1. 

One of the key traits of an LLC is the separation between professional and personal accounts. If you plan to start a company, make sure you have a foundation of good bookkeeping to easily report your income and expenses. Use an app like Lendio's software, which offers free tools for small business owners. This can make establishing a business easier.

What makes a lending marketplace different from applying through a bank or a single lender? Excellent question. There’s a lot to love about lending marketplaces and the way they’re changing the borrowing experience. Here are 5 things every business owner should know about a business lending marketplace. 

1. You Can Compare Options

You would never book a flight by visiting one airline’s website and saying, “I guess this must be the going rate to Orlando.” Comparing options is a vital part of the process and ensures that you can find a flight that matches the price you want to pay and your scheduling needs. 

A lending marketplace works the same way… but for business loans. The idea that you should have to pick a single lender and roll the dice on the terms you qualify for is, quite frankly, a little outdated. And it doesn’t usually work in the borrower’s favor. With a lending marketplace, you can compare multiple loan offers to ensure you’re choosing the right loan option for your needs. Through a lending marketplace, you can compare the interest rates, loan terms, loan size, and speed of capital of different offers to ensure you feel confident when you apply for a specific loan. 

2. It Gives You Flexibility

When you have multiple financing options, it can open up new ways to attack a specific problem. If you’re looking for financing to cover a large inventory order, for example, you may want a short term loan that gives you the capital fast so you can quickly repay the loan and move onto the next opportunity. Or you may find that opening a line of credit will allow you to make repeated inventory purchases. 

Being able to compare financing opportunities gives you the flexibility to tackle your business challenges in different ways so you can find the strategic path with the highest payoff. 

3. It Saves You Time and Effort

With a loan marketplace, you apply via a single application to compare multiple offers. That’s a heck of a lot better than the typical 25-hour bank application that only gives you a shot at… one loan option. 

What’s more, loan marketplaces typically prioritize your time and make that application short and sweet. We can only speak for ourselves here, but we’ve edited the process down to a single 15-minute application that can unlock offers from 75+ lenders. If you average that out, it means you spend about 12 seconds/lender on the application.

4. You Can Rely on Expert Guidance

When you apply through Lendio, we pair you with a team of experts to guide your application through the process. These experts can answer your questions, help you understand the pros and cons of different loan types, and be there to guide you through each step— from putting your documents together to submitting them for underwriting.

5. You Can Find Funding That Matches the Speed You Need

For some business owners, their first question is, “How fast can I get a loan?” For others, it’s, “How big of a loan can I get?” The beauty of a lending marketplace is that you can choose the option that best fits what matters to you. Need financing in 24 hours? Yup, there’s an option for that. Don’t mind waiting if it means you can secure a lower interest rate? We have an option for you, too. 

A lending marketplace puts you in the driver's seat for your financing experience. Ready for an experience that’s tailored just to you? Apply now. 

Not sure how to choose the right lending marketplace? Check out our tips.

White glove service refers to high-quality care and a concentrated focus on the needs of your shoppers. The phrase “white-glove service” conjures images of Downton Abbey, scenes from Titanic, and visuals from other movies where butlers and house staff don pristine white gloves to ensure a meal or experience is exceptional. 

In the modern era, white-glove service means going above what your customers expect. It means genuinely putting them at the highest priority to meet their needs. You don’t need a large budget or substantial customer service team to offer this service—you just have to know what your customers want.  

Track (and improve) your response times.

One of the most tangible ways to provide white-glove service is to respond to customers quickly. The sooner you can address their needs, the better their experience will likely be. According to a SuperOffice survey of 1,000 companies, it takes an average of 12 hours to respond to a customer email. 

However, when 3,200 customers were asked how quickly they expect a response from brands, 88% said within 1 hour, and 30% expect a response within 15 minutes or less. Asking a customer to wait 12 hours is 11 hours too long and means you will start off your conversation with a poor experience.

Try to update your customer service policies to respond to customers quickly. This process could mean sending a confirmation email that you received a query so your customers don’t think their messages are stuck in the ether. It could mean investing in a 3rd-party customer care service so you can help customers faster. 

Your business doesn’t necessarily need to be on-call with 24/7 service, but you can set a goal for 2023 to significantly improve your call and email response times. 

Avoid canned responses.

A common mistake that brands make when setting up their customer service programs is the creation of canned responses for various situations. These pre-written scripts are meant to make training new team members easier while creating a unified tone and response front across the company. Executives never have to worry that customer care team members will say something inappropriate as long as they keep up with the script. 

However, these canned responses can infuriate customers who feel like they are speaking with a robot. Placations, canned apologies, and strict customer service processes can frustrate customers before their problem ever gets addressed, leaving them with shorter tempers and a bad experience with the company. Plus, canned responses can wear out your representatives, who can start to mumble through the same phrases each day. 

Instead, develop a customer care process focused on listening and active problem-solving. Train your team members on tone and branding, rather than asking them to read directly from a script. This will make their conversations more engaging, and they’ll create personal connections with customers, driving better results. 

This doesn’t mean you shouldn’t have some responses written down for new team members or for when your staff needs help, but try to avoid forcing your employees to always “stick to the script.” 

Balance automated prompts with human conversation.

Along with canned responses, talking with automated systems and chipper chatbots can also leave your customers frustrated and feeling neglected. Automated prompts are meant to make the customer service process easier. They sort customer problems into different categories and help teams identify certain customers. However, endlessly listening to menus and pressing different buttons can grow weary, as each answer prompts a new question and fresh menu. 

“Sometimes it’s super frustrating because you enter in a bunch of information in there, only to have to repeat it again,” Janelle Matthews, senior vice president of Solution Strategy at Genesys, tells Marketplace. “It drives me crazy. So painful and it doesn’t have to happen.”

The customer already told the system what is wrong—they don’t want to go over the issue again with a customer service person. Plus, many people will click through a menu without thinking or just say “representative” until they can speak to a real person about the issue.  

This automated process gets more complex with certain industries, including insurance firms or credit card providers. Oftentimes, customer teams will have to confirm the digitally-entered information for security purposes or will lose the information due to a computer glitch and will have to ask for it again. 

In the same way that not all canned responses are bad, there is a time and place for automated prompts in customer service. However, they need to be used in moderation, and the answers need to provide value to your customer care team.  

Look into tools to easily pull up customer order history.

When a customer needs help with an order, they don’t want to spend several minutes explaining to your team what the problem is and hunting down confirmation numbers. This process is frustrating to them and can create confusion with your team members. Instead, look into tools and apps that can highlight the customer problem before they even speak to your customer service representatives.

According to the 2017 Global State of Customer Service Survey by Microsoft, 66% of Americans expect a brand representative to know their contact information and product or service information and history. This number is slightly lower than the global average of 72% of respondents, including 77% of consumers ages 18–34. 

How can having this information help you offer white-glove service? There are several ways.

• If you get disconnected from the customer, you can call them back instead of sending them through your service system again.
• Your representatives can quickly report on the status of an order and make adjustments as needed.
• You can use their previous buying history to recommend products or offer discounts on items your customers might find valuable.

Multiple customer service apps on the market can pull up buyer history based on their email address, name, or phone number. Look into these tools if calls to your customer care team are increasing. 

Listen to customer service complaints.

If you want to improve your customer service experience, then start with your customers. Learn what they consider a weakness in your company and take steps to improve it. For example, if your customers aren’t happy with your slow response times, identify ways you can address problems faster. If your phone system is too robotic, look for ways to make it more personable. These changes will make your improvements more effective as you directly address your customer needs and deliver a white-glove service that will separate you from your competition.

UPDATE: The PPP loan application period ended May 31, 2021. Apply for the Employee Retention Credit today through Lendio.

Over the past year, the SBA has rolled out a series of updates and adjustments to better serve the self-employed who need/want a Paycheck Protection Program (PPP) loan. Here’s everything you need to know: 

How Can You Apply for PPP If You’re Self-Employed?

You can apply for PPP via any lender participating in PPP whether or not they are your primary bank. Online applications make it easy and accessible, in addition to limiting exposure with an in-person application. To apply for a PPP loan online, you’ll need to calculate your payroll costs and gather the required documentation to complete the application successfully. 

For full instructions for how to apply online, consult our Step-by-Step Guide to Applying for a PPP loan. 

Who Can Qualify for a Self-Employed PPP Loan?

To qualify for a PPP loan, self-employed individuals must meet the following criteria: 

• You were in operation as of February 15, 2020
• You are an independent contractor, sole proprietor, or other qualifying business classification with self-employment income
• In 2020, you filed a Schedule C or Form 1040
• Your primary place of residence is the United States
• You meet other program requirements 

How Much Money Can You Get?

You can qualify for 2.5 times your monthly payroll costs— based on either your net profit or gross income during the calculation period. 

In March 2021, the SBA released new guidance allowing the self-employed to choose whether they want to calculate their PPP loans based on net profit or gross income. Previously, calculations were limited to net profit, which limited the funds you could access if you’re in the habit of maximizing tax deductions. 

If you have additional employees on your payroll, their payroll can be used to calculate payroll numbers. You cannot include 1099 workers in your payroll calculations, as they are entitled to apply for their own PPP loans. 

How Can You Calculate Payroll Expenses If You’re Self-Employed?

There are 2 different methods for calculating your PPP loan depending on whether you employ other people. 

How to Calculate a PPP Loan If You’re Self-Employed and Have No Employees

• Retrieve your Schedule C from either 2019 or 2020. If you’re using 2020 to calculate your payroll costs and have not yet filed your 2020 return, you can fill out your 2020 Schedule C and calculate the value.
• Choose the number you’ll use to calculate payroll. This will either be gross income (found on line 7 of the Schedule C) or net profit (found on line 31 of the Schedule C). If the amount is greater than $100,000/year, reduce to $100,000/year. If neither number is greater than $0, you do not qualify for a PPP loan. 
• Take that number and divide by 12 to calculate your monthly payroll costs. 
• Multiply the monthly total by 2.5.

How to Calculate a PPP Loan if You’re Self-Employed and Have Additional Employees

• Choose whether you will use net profit (line 31) or gross income (line 7) on your Schedule C from 2019 or 2020—depending on which period you’re using to calculate payroll. 
  • You will then subtract the following from your net profit or gross income total. Add employee payroll from: line 14—employee benefit programs, line 19—pension and profit-sharing plans, and line 26—wage (less employee credits).
  • The maximum total for this step is $100,000/year. If greater than $100,000/year, reduce to $100,000. If the number is less than $0, set the amount to $0. 
• Calculate your gross wages and tips paid to employees who live principally in the US (line 5c, column 1). If the total for any employee is in excess of $100,000/year, reduce to $100,000. Add this number to the total from the previous step. If you have employees who live primarily outside of the US, subtract their wages.
• Add employer contributions from 2019 or 2020 to employee group insurance (line 14), retirement (line 19), and state/local taxes on employee compensation. 
• Divide the total amount by 12. 
• Multiply that number by 2.5.

If You Have an EIDL That Will Be Financed By the Loan

Whether or not you have employees, you must take an additional step of adding the outstanding amount of any Economic Injury Disaster Loan (EIDL) awarded between January 31, 2020, and April 3, 2020, which must be refinanced into your PPP loan, although if you only received an EIDL advance, you will not need to refinance the advance amount into your PPP loan. 

What Documents Do You Need to Apply for PPP If You’re Self-Employed?

To complete your PPP application, you will need the following documentation. We recommend gathering this information prior to starting the application. 

• • Copy of government-issued ID for all owners with 20%+ share in the business
  • Proof that you were in business as of February 15, 2020:
    • If you have W2 employees: IRS Form 941 from Q1 2020 or a third-party processing report from February 2020. 
    • If you do not have W2 employees: February 2020 bank statement or a customer invoice from February 2020
  • Tax documentation: 
    • Form 1040 with a Schedule C, or:
    • 1099

• If you have employees, you’ll need to provide proof of payroll costs. Choose one:

• • W2s and W3 for your employees
  • IRS Form 944
  • IRS Form 941 (all 4 quarters)
  • 3rd-Party Payroll Processing Report

Can You Use a PPP Loan to Pay Yourself?

Yes, you can use your PPP loan for payroll-related expenses, including paying yourself. To qualify for loan forgiveness, individual payroll amounts cannot exceed the calculation limits, meaning you can pay yourself a maximum of $8,333/month ($100,000/year) to be eligible for forgiveness. 

What Can You Use PPP For?

The allowed uses for PPP loans have been expanded. Due to high demands for the loan, it’s expected that you will still need to spend 60% of loan funds on payroll-related expenses, but you can now use the other 40% on a variety of uses. 

Payroll Costs

• Compensation in the form of salaries, wages, commissions or similar compensation up to $100,000
• Payment of cash tips or equivalent
• Payment for vacation, parental, family, medical, or sick leave
• Allowance for dismissal or separation
• Payment of retirement benefits
• Group vision, dental, disability, or life insurance
• Payment of state or local taxes assessed on the compensation of employees

Other PPP Uses for the Self-Employed

• Healthcare costs related to the continuation of group healthcare benefits during periods of sick, medical, or family leave, as well as insurance premiums
• Mortgage interest payments (but not prepayment or payment of the mortgage principal)
• Rent
• Utilities
• Interest on any other debt obligations incurred before February 15, 2020
• Refinancing an SBA EIDL received between January 31, 2020, and April 3, 2020
• Covered expenditures such as business software or cloud computing services that facilitate: business operations; product or service delivery; the processing, payment or tracking or payroll expenses, human resources, sales, and billing functions; accounting or tracking of supplies, inventory, records, or expenses
• Covered property damage costs
• Covered supplier costs
• Covered worker protection expenditures

What Documents Do the Self-Employed Need to Apply for a PPP Loan?

• 1040 Schedule C for 2019
• Your birth date
• A color copy of your Driver’s License (front and back)
• 1099-MISC, if you have them
• A voided check for your business bank account
• If you have 941 Quarterly Tax Filings (2019, 2020 Q1) or 944 Annual Tax Filings (2019), they should be submitted

You can visit our step-by-step guide on completing the PPP application for full instructions. 

Can You Get a PPP Second Draw?

Self-employed individuals can apply for a Second Draw on their PPP loan if you’ve experienced a revenue reduction of 25%+ due to the pandemic and you meet the other Second Draw qualifications. Learn more about how to qualify and apply for a PPP Second Draw. 

How Much Can a Self-Employed Individual Claim for Payroll Expenses?

The maximum amount for a PPP loan is 2.5 times your average monthly payroll costs. Income listed on a Schedule C in your personal tax return is the only payroll that can be used to calculate your PPP loan amount. If you’ve hired 1099 workers, they cannot be included in your PPP loan calculation and may apply for their own PPP loans. 

Do You Need to Take the Full Amount You Qualify For?

No, you may apply for a PPP loan that is smaller than the maximum you qualify for (2.5 times your monthly payroll costs). 

How Can You Get Your PPP Loan Forgiven?

The SBA has simplified loan forgiveness applications for PPP loans less than $50,000. This provision was specifically designed to support independent contractors and the self-employed. Loans that meet this threshold will not have to meet the employee retention requirements of larger loans, 

If your First Draw loan is $50,000 or less, you can not apply for forgiveness using the simplified Form 3508S. 

The SBA has not yet indicated whether or not this guidance will apply to PPP Second Draw loans. 

What If Your PPP Loan Is Not Forgiven?

If your loan forgiveness application is denied, you will be required to repay the loan. PPP comes with a 1% interest rate and a maximum loan term of 5 years. 

Is Loan Forgiveness Automatic?

No, you must apply for loan forgiveness through your lender. 

As you look to secure funding for your business, you may come across the concept of a lien. A lien gives creditors the legal right to claim your property if you fail to pay them back for a loan or purchase. Liens are most commonly found in mortgages, where lenders can take your house if you fail to meet your monthly payments. 

A lien isn’t necessarily a bad thing, but it can impact your credit and financing opportunities. Let’s dig deeper into a lien’s definition and what it means for your business.  

Is a lien bad?

A lien isn’t necessarily a bad thing to have. Many people take out voluntary liens when they accept mortgages or business loans. If you keep making payments related to this lien—proving to your lender that they will get their money back—then a lien isn’t something you need to worry about. 

However, there are instances when a lien can be bad. An outstanding lien can mean that you hold unpaid debts to various creditors or vendors. When this condition applies to a property, it could relate to your mortgage lender or the local government that collects property taxes. If you fail to pay these obligations, then your creditors have the right to seize your property or take legal action against you.  

What happens when you have a lien against you?

If you have an unpaid lien against you—or if you stop making payments on it—then the lienholder can step in and reclaim their assets. The person who issues the lien is known as a lienholder. For example, your bank might be your lienholder when issuing your mortgage.  

In theory, the bank or financial service provider can seize your business if you have outstanding liens. They can evict you and sell your property at auction. This action allows your lender to reclaim some of their lost funds, even if they sell your property below market value. 

However, not every lien against you can lead to foreclosure or seizure. Lenders often do whatever they can to get business owners to meet their financial goals. They will also take business owners to court in hopes of recouping the lost funds in cash rather than spending time selling off assets. Navigating the seizure of assets and the resale process is time-consuming for lienholders and can severely damage the credit of loan recipients.  

How do you get a lien removed?

You have a few options if you need a lien removed from a property or asset. First, you can pay off the debt. This option is the best if you took out a loan and created the lien. You might also need your lienholder to submit a release-of-lien form if you paid the lien holder before the lien was placed. This document needs to be notarized and will protect your accounts from going to collections. 

Most entrepreneurs have liens related to their business assets. If you make regular payments against your debt, you can grow your credit and keep your lienholders happy. The best way to avoid bad liens is to keep up with your repayment schedule as best as you can.

Small business owners aren’t restricted to operating in the original state in which they open their businesses. It’s completely reasonable to move a business—successful or not—to a new location, regardless of the state. This reality is especially true for sole proprietors who don’t have to worry about letting employees go or gaining approval from their board before relocating. 

While it’s definitely possible to move a business to another state, it’s not always easy. Whether you’re a solo entrepreneur or run a thriving small business with several employees, you’ll need to consider the numerous repercussions that come with relocating your business out of state.

This guide will cover many of the considerations that come with moving a business to another state, including taxes, licenses, permits, banking, and other requirements. Use this information to make moving your business to a new state as seamless as possible.

Update your licenses and permits.

Like any interstate relocation, a business move requires you to cut ties with 1 state while establishing yourself in another. Failing to remember each of the different registrations or licenses you need could slow down your reopening process or create extra fees—and headaches.

Evaluate the licenses and permits related to your business in your current state and your future state. Start by canceling any permits or licenses that don’t transfer or aren’t required in your new state. 

Send official documentation that your business is closing in your current state, proving that you don’t need to renew those licenses anymore. This proof can be a simple letter or even an email to alert the permitting party—you just need something in writing. 

Alerting these organizations of your impending move is a better practice than letting your licenses expire naturally. This way, you won’t receive questions from governing bodies once your permits expire or potentially accrue fines because these organizations don’t know that you’ve moved. 

As you take steps to cancel your old permits and licenses, start working on your future requirements in your new state. Getting a jump on these—or at least familiarizing yourself with the paperwork—can mitigate any delays or roadblocks from acquiring the required operating documents.

Let the IRS know.

Believe it or not, moving states is a federal issue. The IRS includes your current address in your federal Employer Identification Number (EIN) paperwork and uses it to send you mail and to analyze the impact of small businesses in certain areas. 

There are multiple ways to tell the IRS that your address has changed. You can call them, complete a change of address form, send in a written statement, or use your new address when you file your tax return. These options give you flexibility when notifying the IRS of your business move.

Decide what to do with your LLC.

If you operate as a sole proprietor, you can pretty much pack up and leave whenever you want. You don’t need to worry about state registration and can start working in your new state whenever your licenses and permits get approved. 

However, moving becomes more complicated if you have an established business entity—even an LLC.

Your first option is to dissolve the LLC in the original state and re-establish it in the next. For this step, you will need to file Articles of Dissolution with your current state to alert governing bodies that you no longer operate there. You can find examples of these articles online, or check to see if your state has a Certificate of Termination template that you can complete. 

If you fail to let your state know you no longer operate there, you may be expected to keep paying taxes for your business even after it closes. The state doesn’t know you closed and will estimate your taxes accordingly. Some states also have fines for failing to alert them to the dissolution. 

Once you have terminated your business with your current state, you can file as a new LLC in your new state. Keep in mind that state filing fees (and annual renewal fees) change by state, so your new location could be more expensive to operate in than your previous one. 

If you don’t want to terminate your LLC, you can file a foreign qualification in your next state—or let that state know that you will be operating there while staying registered in your old state. 

The foreign qualification is often used if you plan to expand your business: for example, if you’re opening a second location in a new state while continuing to operate in the first one. This option can also be used for partnerships where a single partner is staying in-state while the other is moving.

Talk with a lawyer about your moving options to find the best option possible.  

Consult with your bank.

Along with updating your customers and local authorities, talk to your bank about the move to ensure they can accommodate you. If you operate out of a national bank, this could be as simple as changing their records with your updated address and issuing new checks after you move. However, if you opened your account through a local bank or credit union, they might not service your new area. 

Even in the modern era of digital banking, it’s important to have physical locations in the state you operate in. Otherwise, you are stuck working with your bank over the phone and will have to adjust your time zone to their operating hours. 

If you need to switch banks, consider opening an account at a nationwide chain for an easy transition. You can always switch back to a local credit union after you move, but keeping your money isolated during the moving process can prevent confusion and disruptions to your operations. 

Time your move carefully.

Not everyone has the luxury of choosing when they move—but if you can, try to schedule your transition in the new tax year. If you move your business mid-year, you will need to file your business taxes in 2 different states, complicating your taxes and slowing down the filing process. However, if you close your business at the end of the year and then reopen at the start of the next, you can keep your companies separate, tax-wise. 

Your family might also appreciate the end-of-year move, as your kids won’t have to switch schools in the middle of the semester and can start fresh at a new location in January. 

Evaluate your operating budget.

Depending on where you’re moving, you could either save money or exhaust a lot of capital through this relocation. Different states have different guidelines for running a business, and everything from your annual filing fees to employee wages may change. 

You might not know the true impact of the move on your professional finances until you get settled in your new area, but you can estimate the cost of moving out of state. Work through your expense sheet to calculate which costs are going up and where you can save money. Below are a few potentially impacted expenses.

• Payroll: Minimum wage varies by state and even by city. Hiring the same number of employees for the same jobs could cost you much more.
• State income tax: Not all states have income taxes—so you may or may not have to account for income tax, depending on your move.
• Gas and utilities: If you have a delivery-based business, you will need to adjust your budget to reflect local gas prices. The cost of electricity and water could also increase. 
• Insurance costs: Some states have higher insurance premiums than others. This is particularly true if you are moving to a high-risk area, like opening a business on the beach or in a fire-prone county. 
• Licenses and application fees: The cost of doing business could go up with more expensive annual filing costs.
• Rent and real estate: Whether you own or rent your business location, the cost can increase or decrease monthly depending on the state. This expense could be even higher if you try to move your business before your current lease agreement is complete.

These changes in operating costs could force you to adjust your prices to maintain profitability. By estimating your extra costs beforehand, you can set your costs from the get-go rather than raising them after a few months in operation.  

Check local hiring laws.

If you are planning to hire employees in your new state, familiarize yourself with local hiring and firing guidelines. Along with minimum wage, see how prevalent unions are in your area—especially if you don’t currently live in a union-heavy state. 

You may need to follow specific hiring practices, report new hires to your state, and change your termination policies to follow local laws. 

You may want to consult an employment attorney before moving or see if there are any state-provided resources to improve the hiring process. Knowing these changes ahead of time can prevent unwanted fines or even lawsuits because you didn’t know the new rules when you moved.  

Prepare to move professionally and personally.

Once you have all of your documents, permits, and taxes in order, you can focus on moving your business in the same way you move homes. Decide which assets and equipment you want to move across state lines and which items you would rather sell off and buy fresh later. 

Update your business cards, email signatures, and other letterheads to reflect the move. Inform your existing customers that you’re closing and launch a marketing campaign in your new area. 

Deciding to move your company across state lines may seem overwhelming and daunting, but if you take the necessary steps and plan accordingly, you can effectively move your business from one state to the next.

As soon as you know that you’re moving, begin the transition process to ensure that every aspect of your licensing, permits, and other paperwork is covered.

There are several methods to calculating depreciation, and business owners often want to find what works best for them—accuracy, convenience, tax-friendly. While the straight-line method might be easy, it doesn’t take into consideration how cared-for an asset is and how much work it performs. An item that is used constantly and rarely cared for won’t last as long (and will have a lower value) than a well-cared-for item or rarely-used asset. 

The units of production depreciation method works to address this principle by tracking how much an item is used and using that to determine its value. Get to know this depreciation method better to see if it is right for you. 

What Is the Units of Production Depreciation Method? 

With the units of production depreciation method, an asset’s value is based on how much it is used—or the number of units it has produced. This method is often used for manufacturing equipment that wears down over time as it produces more products. 

This depreciation method is popular in production-oriented industries because it can fluctuate based on machine demand for that year. For example, if a company works overtime to fill orders 1 year but then has downtime during another year, the depreciation amount is different because the assets were used less and therefore retained more of its useful life—value.

How to Calculate the Units of Production Depreciation Method

The units of production depreciation method is fairly straightforward to calculate. However, you will need to change the calculation annually based on the units an asset produced. You will also have to track how many units an asset produced to make sure your calculation is accurate. 

Start by calculating the Units of Production Rate (UPR):

• UPR = (Cost of the Asset - Salvage Value)/ Total Units that Will Be Produced Over Its Life

Naturally, this calculation is an estimate. You can’t predict how long an asset will last (especially machinery) and the number of units it will produce—but you can make an educated guess based on the IRS value expectancy and the production rate of similar assets.   

Once you have the UPR, multiply it by the number of actual units produced for that current year. 

Let’s use the example of a baker who makes doughnuts with a specialized machine. This is what the formula might look like. 

• (Machine Cost - Salvage Value)/Estimated Doughnuts Made Over Its Life x Doughnuts Made This Year
• ($25,000 - $500)/100,000 x 10,000
• $24,500/100,000 x 10,000
• 0.245 x 10,000
• $2,450

The depreciation for that year is $2,450. Now, if the baker makes more doughnuts the next year, the depreciation will be higher because there is more wear on the machine. Let’s say the baker made 15,000 doughnuts the following year. In this case, the depreciation would be:

• 0.245 x 15,000
• $3,675

Once you have the base formula for calculating units of production depreciation, you can estimate how much you lost in assets each year with relative ease. 

Pros and Cons of this Method

The main drawback of the units of production method is that you can’t use it to calculate your tax deductions for the year. This means it can’t be your only depreciation method of choice. Some companies use the units of production method for their internal accounting (or to report to shareholders) and then opt for a different method for their taxes. 

The units of production method also can’t be used for every piece of equipment. Not all assets can be tracked by what they produce. (You wouldn’t base the value of a computer on the number of emails it has sent or the total PowerPoint presentations it has created.) This means you could end up using multiple depreciation formulas for various assets internally, as well.

Finally, the units of production method isn’t predictable. You can’t easily estimate how your assets will change until you close your books and look at the number of units you produced. Your depreciation rates could fluctuate over time. 

While all of these cons are significant, many manufacturers still prefer this method of accounting for depreciation because the value of an asset is directly tied to production. Teams can track an asset’s value over time to get a clearer idea of how long it should remain functional. This allows them to budget for replacements if an item is wearing out or schedule maintenance after a certain number of units is produced. 

Learn More About Depreciation and Bookkeeping 

As you set up your accounts for your small business, consider the various options at your disposal for calculating depreciation. Using the units of production method might be ideal if you work in manufacturing, but it likely isn’t the only model you should use.