Lending Library

Yes, credit card interest is deductible for businesses. But with recent changes, how much you can deduct has changed.

Is business credit card interest deductible for small businesses?

Credit cards are a great tool that many businesses use to keep themselves running. If you don’t pay your balances in full at the end of each billing cycle, you’ll probably end up paying some interest.

The long answer to whether or not you can deduct credit card interest on your taxes depends on the situation. Let's take a quick look at when you can write off your business credit card interest:

• Most (if not all) business-related credit card interest. Interest you pay on business credit cards is deductible when used for business-related expenses. The interest deduction also applies when the debt is directly related to your business operations, even if it's a cash advance. As long as it went toward operating your business, you can write it off.
• Different forms of interest within the paid year. You can only deduct qualified interest during the year in which you incurred the debt or made the payments.
• Your business credit card's annual fee. Some business credit cards come with an annual fee. If you have one of these credit cards, then you can write off the annual fee on your taxes.

Remember to keep your credit card statements and receipts to smooth the process of filing your small business tax returns. The IRS provides a host of resources to help you understand this process better, but in some cases, it may be a good idea to hire a qualified professional to do your taxes.

When is your business credit card interest not tax deductible?

One reason to opt for a business credit card rather than using a personal credit card for your business is that interest on a personal credit card isn’t usually tax deductible. Unless you can separate expenses from personal ones on your personal credit card, it can be hard to write off the interest.

Additionally, how much interest you can deduct has changed with the Tax Cuts and Jobs Act. When you file your taxes, businesses can only deduct up to 30% of their interest payments.

How to make claiming credit card interest easier.

Claiming credit card interest on your taxes might sound difficult. Here are some steps to make it easier for you:

• Don’t use a personal credit card for business purposes. Maintain separate credit card accounts for easy accounting.
• See if you can find an automatic way of tracking your credit card expenses and the interest that you pay on them.
• Hire a professional accountant or tax lawyer who will evaluate your specific business situation and give you a clear picture of how you can take full advantage of your small business tax deductions.

Small business tax deductions can add up to a significant amount of money back in your pocket each year. Remember that hiring a professional can help you maximize your tax return so that you can continue investing in your business.

Congratulations. You’ve beaten the odds and turned your retail dream into a small business success story. Maybe it took a few years, or maybe it happened much faster. Either way, your hard work has paid off and you’re at the helm of a profitable business, or at least one that’s breaking even month in and month out.

So, what’s next? If you’re like other ambitious business owners, the answer is probably pretty straightforward. It’s time to start growing your retail operation. You might have some ideas for getting started. It’s also possible that growing your business is a new topic, and you could use a little inspiration.  

In either case, the following tactics will help. We’ll give you proven growth initiatives that you can use for creating your own retail expansion strategy. If you already have ideas of your own, you can validate them against our list, and if you need some inspiration, our practical tips will make getting started a breeze.  

1. Target a Broader Audience

One of the most straightforward ways to expand your retail business is to target a broader audience. For example, maybe you run a retail shop that specializes in vintage women’s clothing. To begin targeting a broader audience, you could start selling men’s vintage clothing as well. Depending on the demographics of your market, this move could effectively double (or more) the size of your target audience.

There is, of course, some risk in making such a drastic change to your underlying business strategy. To mitigate this risk, we recommend starting small. For example, perhaps you stock a few men’s accessories like sunglasses, wallets, and rings instead of adding a full line of men’s clothing to your inventory. This technique allows you to test your audience’s appetite for this new product line. The goal is to avoid investing too much capital in inventory you may not be able to move.

Another approach you can take is to participate in some kind of a local market or to host a pop-up shop of your own. The goal of these events is typically to introduce yourself to a new audience, which makes them a perfect testbed for your expansion strategy. Shoppers will approach your brand without the biases or preconceived notions of your regular shoppers, allowing you to test a broader audience’s appetite for a more diversified product catalog.

Regardless of which approach you take, if you see initial success, begin further initiatives that’ll help you better reach this new audience. For example, you may want to send a few emails informing your customers that you now offer men’s merchandise and update your shop’s interior design. Similarly, you may want to move from offering a few accessories to a full line of clothing. 

2. Expand Your Product Offerings

Another approach to expansion is to begin offering a wider variety of products. While similar to the first strategy, there are some differences. It’s not quite as dramatic a shift as beginning to target a very different secondary market. Instead, the goal is to better serve your primary audience by offering them more products that they can purchase from you.

The best approach is to consider complementary product lines. If your retail shop specializes in cooking supplies, you could begin offering bartending or mixology tools. If you’re a bookstore or a record store, you could blur the retail lines a little bit and set up a small cafe so your shoppers can sip drinks while they browse books or listen to music.

Similar to our first point, you will want to expand in small steps. For our cafe example, you could start with a hot plate and a stovetop espresso maker before investing in a full-size machine. Once you’ve run enough tests that you’re confident in your new offering, it’s time to take the next step and invest capital in the equipment and inventory you need to fully commit to this new segment of your business.

3. Kickstart Your Marketing

No, you don’t need to be Don Draper, but if you want to grow your business, you do need to market it effectively. That means you should do more than send a monthly email or run an advertisement in the local paper. You need a comprehensive strategy that markets your business in the channels and mediums your potential customers use to find and research new businesses.

Up until the advent of the internet, marketing was tough for small businesses. Most of the channels and media for reaching customers like TV, radio, and billboards were expensive and dominated by larger brands. But the internet leveled the playing field. We’re generalizing a bit here, but the way your customers consume media has almost certainly changed. People rely more on online tools like social media, review sites, search engine queries, and online videos to find businesses and engage with brands than they do traditional media.

This shift helps you because marketing online is often far more affordable and targeted than traditional media. Not only can you maintain a sizeable marketing presence cost-effectively, but you can ensure the money you do invest only goes toward reaching your specific target audience.

The specific marketing tactics you use will depend heavily on the preferences of your audience, as well as your skill level and available financial resources. With that in mind, here are a few ideas that can get you started:

• Customer reviews: Despite the shift toward digital marketing, word of mouth is still king. Claim your profiles on popular review sites like Yelp and Google, then incentivize happy shoppers to leave you great reviews.
• Email marketing: It may be one of the oldest digital marketing channels, but email is still highly effective. Make it a habit to regularly send a variety of marketing messages including promotional email and newsletters.
• Social media: You don’t need a presence on every platform. Instead, focus on the ones your customers use most. For retail, Instagram is particularly powerful because of its visual nature.
• Targeted advertising: Using social media platforms and Google AdWords, you can run highly targeted and cost-effective marketing campaigns.

Outside of these tips, you’ll want to ensure that you have the right tools at your disposal. One of the most powerful for retailers is a modern point of sale system (POS). This system can help you reach new customers and build repeat business with tools like customer loyalty programs, gift cards, and integrations with marketing platforms like email marketing software. Many POS allow you to collect email addresses right at the point of purchase where they’re automatically synced to your email list and available to receive your next marketing emails.   

4. Start Selling Online

Tapping into the booming world of e-commerce is another surefire way to expand your retail business. According to Statista, retail e-commerce sales are expected to reach over $550 billion in 2019. And with e-commerce platforms more affordable and easier to use than ever, there’s never been a better time than now to start selling online.  

Here are a few tips to help you start selling online:

• Pick the right technology: Use a reputable e-commerce platform like BigCommerce or Shopify. Ideally, it will integrate with your POS system and other business tools to streamline your operations.
• Brand your shop: Your online store is an extension of your online business, and as such, it should represent your brand. Incorporate colors, imagery, and even tone of voice into your online store’s design.
• Marketing matters: Your online shop is almost a separate business of its own. To succeed, you need to set aside marketing dollars and create a dedicated strategy for reaching new customers. This plan and investment should be distinct (but it can integrate) with what you’re doing to market your brick-and-mortar business.
• Consider online marketplaces: Getting started on eBay, Amazon, and other marketplaces is often easier than building your online store. Plus, you can tap into shoppers that are already on those marketplaces and ready to buy.
• Use experts if necessary: E-commerce isn’t easy, especially if you aren’t tech-savvy. Don’t be afraid to hire a freelancer or agency to help you with everything from store design to marketing to operations and logistics.

Adding an online store to your business can certainly be a challenge. As we mentioned earlier, it’s like running an entirely separate business, so be sure you have the time and resources to commit to its success.

5. Open a Second Location

It’s a sizable undertaking, but opening a second location for your business is another proven method for expanding your customer base and revenue. However, outside of opening an online store, it’s also the most expensive and time-intensive. You shouldn’t head down this road unless you’ve done your homework and can commit the time, capital, and effort to making it work.

To help you start the planning process and avoid the most common pitfalls along the way, let’s look at some strategies and tips to consider:

• Max out your main market first: Before opening a second location, you want to ensure you’ve done all you can to tap into your local customer base. Otherwise, you’re wasting an opportunity unnecessarily.
• Location is everything: Ideally, you want to locate your second shop in an area where you already have some name recognition, but you want it to be far enough away that it won’t cannibalize your primary store’s sales.
• Formalize processes: When you add a second location to your business, complexity increases. Standardized processes can help you maintain operational efficiency so you can better manage inventory, as well as financial and human capital.
• Set goals: Clear goals will help you stay focused on why you’re opening a second location while also giving you a straightforward way to measure performance.
• Get your financing in order: Expanding locations isn’t cheap. It’s likely that you’ll want to want to seek outside financing in the form of a retail business loan from a bank or other entity. You might also consider venture capital funding if you want to avoid traditional loans.
• Seek expert advice: In your local small business community, there are likely entrepreneurs that are running or have run multi-location businesses. Fellow business owners are often friendlier than you think. Buy one of them a coffee in exchange for a little bit of expert guidance.

There you have it —  proven tactics to power your retail expansion strategy. While none of these tips are easy, they’re all straightforward, proven paths toward growth. It’s unlikely they all will work for your business or situation right away. Our recommendation is to think long and hard about the objectives you’d like your retail expansion strategy to achieve. From there, select the tactic that you think will get you where you want to go most efficiently.

Ready to get financing to fuel your expansion strategy? Learn more about retail business loans.

A survey done by the National Federation of Independent Business (NFIB) showed that record-breaking levels of small businesses are experiencing growing profits and, in turn, investing significantly more money into investing, hiring, and continued growth.

Small businesses are making a number of capital investments, such as purchasing new equipment and vehicles, as well as improving their infrastructure. Many other industry experts predict that small business startups will continue to rise.

Inspired by the success of their peers, entrepreneurs across the country are  springing into action and starting their own businesses. But 30% of new businesses fail during their first two years. About half fail within the first five years.

These figures may seem intimidating. After all, starting a new business is expensive, and you may be putting up your life savings to get it going.

But you shouldn’t be afraid. If you're interested in starting your own small business, here’s what you’ll need.

1. Time

Many businesses fail within their first year because the owners can’t invest enough time in their business. In a market saturated with small business owners, the competition is fierce. Time is one of the most important things you’ll need to create a business plan that will make your enterprise successful.  

2. Money

As a business owner, you’ll need enough cash to hit the ground running. If you don’t have the financial resources you need, you will have to be willing to take out a loan or get a credit card to start funding your business. If you have a solid business plan, the time you need to devote yourself to your business, and the courage to make it grow, you shouldn’t fear taking out a loan.

There are lots of things a small business loan can help you cover costs for:

• Advertising, including a website or business cards
• An accountant or accounting software
• Point of Sale processing equipment
• Licenses and permits
• Business insurance
• Retail, office, or warehouse space
• Legal fees
• Equipment including appliance, office furniture, and machinery

3. Patience and Confidence

The bottom line is that as an aspiring entrepreneur, you need to be patient and confident. There may be things you have to deal with, such as stagnant profits, the loss of money, regulations to adhere to, and more. The overarching point is that staying in the game is worth it. Being patient and having confidence is what it's going to take to make your business succeed.

4. Information and Research

Another thing to research is market trends. You may think you have a brilliant idea, but unless you do research, there’s no way of predicting whether your idea will be successful. You’ll also want to research costs that you’ll need, such as raw materials, space, employees, and everything else that goes into running a business.

The Final Word

It’s a new year, and you know what that means: it’s a great time to consider planning for financial success in 2019.

You probably don’t relish thinking about tax time, but this year’s tax season could be a game changer for your business, bringing with it some new opportunities to save money. Significant alterations to Section 179 were made in the Tax Cuts and Jobs Act (TCJA) of 2017 that can lead to improved cash flow, and that means more funds available for your company.

There's good news in the bonus depreciation allowance, too, with an increased depreciation rate that can be claimed sooner. Both these measures allow you to deduct the assets you need for business activities more quickly and for higher amounts than you could before.

It’s always a good idea to review your options thoroughly before you file taxes. You could find new opportunities for the growth of your business in the fine print. Here’s what you should know about Section 179.

Section 179

Section 179 was first established in 1958, with the intention of stimulating small business investment in goods that benefit the business, simplifying accounting, and reducing the tax burden.

In order to qualify for the deduction, you must use the goods for business for a minimum of 50 percent of the time. The cost of the goods can be deducted in the tax year the goods were “placed in service”—that is, ready to be used in the business.

Under TCJA, the list of assets that are eligible for Section 179 deductions has been expanded and the maximum deduction has been increased, along with the spending threshold.

You might find differences between your local authority and the IRS when it comes to definitions of tangible personal property and real property. Remember that qualifying property for the Section 179 deduction is defined by the IRS and not controlled by local law.

The IRS provides a complete list of qualifying property in Publication 946.

Tangible Personal Property

Tangible personal property is defined by the IRS as tangible property that is not real property. Examples of tangible personal property include fixtures inside or attached to a building, such as refrigerators, office equipment, printing presses, testing equipment, and signs. Numerous improvements to the interior, roofs, heating, security, and fire protection are also acceptable Section 179 expenses.

Machinery and equipment used for manufacturing, production, or extraction, or to provide transportation, communications, electricity, gas, water, or sewage disposal services are considered tangible personal property. Research facilities needed for business activities qualify for the Section 179 deduction, and air conditioners and heaters put into service after the tax year 2015 are also eligible.

Livestock qualifies for Section 179, as well as single-purpose structures for livestock and horticulture. Facilities used in relation to distributing petroleum or primary products of petroleum are also allowed.

Another potential deduction is off-the-shelf computer software purchased and put in service from 2003 and forward

Real Property

Certain property placed into service in the tax year can be treated as Section 179 property. Qualified real property includes certain leasehold improvement property, qualified restaurant property, and qualified retail property.

Generally, the property must be non-residential and meet requirements set out in the Internal Revenue Code. The IRS provides detailed information in "Special rules for qualified section 179 real property" in Publication 946.

Section 179 Limits

Section 179 is subject to two limits: an investment limitation and an income limitation.

Investment Limitation

You can deduct up to $1 million of qualified expenses per year, purchased and placed in service for your business in 2018 and following tax years. A dollar-for-dollar phaseout begins when expenses for the year exceed $2.5 million to a limit of $3,500,000—Section 179 deductions stop at that threshold amount. Both amounts are indexed to inflation.

Investment limitation amounts cannot be carried forward for future tax years.

Income Limitation

Section 179 deductions are not allowed to exceed the taxable income of the business, including wages and salaries. The limitation is calculated after the investment limitation. For example, if the taxable income of your business is $50,000, and qualified expenses total $75,000, Section 179 deductions are limited to $50,000.

Allowances that can't be used because of the income limitation can be carried forward indefinitely.

Bonus Depreciation Allowance

When you have exceeded the limits for Section 179, you're able to recover capital expenses for your business over a longer period and at a slower rate, by claiming depreciation deductions under Section 168(k), referred to as bonus depreciation. A few changes have been made to this allowance, too.

The Bonus Depreciation Allowance (BDA) applies to used qualified property now, as well as new acquisitions. The depreciation limitation has also been accelerated in the TCJA to temporarily allow you to deduct 100 percent of such purchases for the same year.

The cost of goods placed into service from September 28, 2017, through to the end of 2022 is eligible. Starting in 2023, the percentage for depreciation is scheduled to decrease in increments, down to zero percent by 2027 and after.

Though both Section 179 and bonus depreciation are available in the same tax year, claims must be filed in the right order. Claim Section 179 allowances first; then you may proceed to claim bonus depreciation for the amount that remains.

By accessing deductions under Section 179 and the bonus depreciation allowance, you could potentially deduct nearly all the expenses incurred for qualified acquisitions for the tax year—as long as the deductions are claimed appropriately.

Start the Year Right

Beyond researching Section 179, there’s a lot you can do at the beginning of the year to set yourself and your business up for financial success. Stay on top of all the changes to the tax laws, key tax dates, and other essential financial tasks with this Q1 financial planning checklist.

--

This guest article was contributed by Irene Malatesta of Fundbox. Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Very few e-commerce businesses survive beyond their first few years. Analysts peg the failure rate of online stores anywhere between 80 to 97 percent. There are several reasons contributing to this. For starters, e-commerce is highly competitive but has a very low barrier to entry. This attracts a lot of non-serious players to the business who close down at the very first hurdle. More significantly, financial mismanagement plays a critical role in the closure of many well-funded e-commerce stores.

This is ironic because one of the reasons e-commerce businesses are so lucrative compared to brick-and-mortar stores is they have fewer liabilities. Online stores can make do with small office spaces and very little inventory, and this is a big draw for many entrepreneurs. So why do so many e-commerce stores struggle financially?

A Primer on Working Capital

Working capital is similar, except it is the difference between all your assets and liabilities in a financial year. If all your assets (properties, inventory, income, etc.) totaled $500,000 in a year and you spent $400,000 of it to pay off loans, salaries, and rent, then you have a surplus of working capital.

Here is the tricky part. By definition, working capital does not include your liquid cash. If you face a deficit of $20,000 that needs to go into paying the mortgage, it is not realistic to sell off your property to meet the deficit. However, liquid cash or inventory that can be quickly liquidated may be used to pay this off. A business only has high working capital if there is sufficient liquidity in its operations to meet any of its immediate expenses.

What E-commerce Businesses Do Wrong

On paper, inventory is listed as an asset; you can liquidate inventory just like your property or equipment. In practical terms though, this may not always be the case. For one, inventory can be a depreciating asset (technically, called “current assets” since the value changes with time). If you sell phones online, the value of your inventory may go down each time new models launch in the market.

It is worth noting that inventory is not a capital asset. A manufacturing plant or equipment is necessary to build a product, and hence vital to your business operations. This is not true with inventory which is essentially your liquid cash converted into a depreciating asset. If you do not convert your inventory back into liquid cash by selling it, you'll potentially lose money over time.

In other words, the more inventory you hold, the more vulnerable your working capital.

Vendor terms can also wreck your working capital situation. Let's go back to the example of an online store selling phones. This seller may procure $100,000 worth of phones from a vendor with a 60-day credit period. To maintain the current working capital, the needs to sell these $100,000 worth of phones within the next two months to pay the vendor back. If it fails to sell the phones, the business could be staring at a deficit which needs to be recovered by selling off other assets. Alternately, the business could procure a short-term loan to pay the vendor, but this does increase liabilities for future months. It is a healthier financial habit to use small business loans for capital purchases rather than paying off liabilities.

Bad vendor terms can mean only one thing for e-commerce owners—digging deeper into a hole trying to meet financial obligations.

How to Improve Working Capital

Reduce inventories. Inventories are a depreciating asset and a ticking time bomb. Holding too much inventory could put your business under greater pressure to sell, forcing you to try strategies you may have not executed otherwise. For instance, you may want to increase your advertising spend in order to liquidate your inventory assets faster. If your ads do not work out, not only do you continue to own the inventory, you also stack up more liabilities to your advertising partner.

Change the business model. Depending on your industry, you could look at changing your business model. A made-to-order product can allow your store to charge higher prices for a bespoke design. At the same time, you also get to sell your product before paying your vendor for the manufacturing. If that does not work, you may also look at dropshipping. With a dropshipping business model, you pass on the responsibilities for order fulfillment to your vendor. This way, you do not hold any inventory at your end and also get paid before you pass on the vendor’s share.

There are a few challenges with this model, however. Dropshipping can increase the shipping time of your product (especially if your vendor is from another country like China), and can bring down the user experience. While that is a cause for concern, it is still better than shutting down your store or filing for bankruptcy. There are other ways to deal with long shipping times.

Update vendor terms. Bad vendor terms are one of the biggest causes for poor working capital among e-commerce businesses. Each product goes through its own unique sales cycle. The time it takes for a customer buying a dress online is much shorter than it takes for one to buy a smartphone or a TV. At the same time, it costs more to hold an inventory consisting of electronics compared to apparels. Consider these factors before agreeing to your payment terms.

Establishing a healthy cash flow and working capital is paramount for any business, not just e-commerce stores. Consider hiring an advisor to assist you with managing your finances. As any successful entrepreneur will tell you, while these advisors are a liability on your balance sheet, they are one of the most important assets you can have.

As entrepreneurship continues to expand across America, many who have caught the small business bug are desperate to find a profitable field to make their mark. A recent study released by Sageworks ranked small business industries according to their profitability. The overall winner was financial services, with accounting, tax prep, bookkeeping, and payroll processing coming out on top with an 18.3% growth in sales this year.

Rising Trend: Accounting and Legal Firms

Accounting firms have a number of built-in benefits that make them perfect for small business. They are low-cost enterprises, requiring little capital to get started. All firms really need are trained employees who can crunch numbers. There are no inventory costs and, with the rise in popularity of coworking spaces, finding office space is much more affordable.

Accounting is not the only field, however, that has these built-in benefits. Legal firms also lack inventory costs and require only well-trained employees. The legal services field saw a 17.4% growth this year.

Legal firms can rake in significant sums of money depending on their specialty. The highest paying legal fields at the moment are litigation and intellectual property. Litigators handle high-dollar, high-profile, and high-stakes cases that usually end in large settlements.

Intellectual property law protects ideas: patents, copyrights, trademarks and other profitable concepts. As technology innovations continue, the demand for patent lawyers increases. Because of this, intellectual property law is also the fastest-growing sector in the law field.

Other Highly Profitable Industries

While accounting and legal firms made the largest profit strides this year, they aren’t the only industries on the rise. Here are some other profitable industries from the Sageworks study:

• Lessors of real estate: 17.4%
• Management of companies and enterprises 16%
• Outpatient care centers: 15.9%
• Offices of real estate agents and brokers: 14.8%
• Offices of other health practitioners: 14.2%
• Offices of dentists: 14.1%
• Specialized design services: 12.8%
• Automotive equipment rental and leasing: 12.5%
• Activities related to real estate: 12.3%
• Warehouse and storage: 11.6%
• Offices of physicians: 11.5%
• Nonmetallic mineral mining and quarrying: 11.2%
• Medical and diagnostic laboratories: 11.1%
• Other schools and instruction: 10.5%

The Least Profitable Industries

• Oil and gas extraction: -7.6%
• Support activities for mining: 0.6%
• Beverage manufacturing: 0.8%
• Grocery and related product merchant wholesalers: 1.9%
• Lawn and garden equipment and supplies stores: 2.0%
• Miscellaneous durable goods merchant wholesalers: 2.3%
• Petroleum and petroleum products merchant wholesalers: 2.4%
• Grocery stores: 2.5%
• Automobile dealers: 3.2%
• Building material and supplies dealers: 3.2%
• Continuing care retirement communities and assisted living facilities for the elderly: 3.3%
• Other motor vehicle dealers: 3.3%
• Home furnishings stores: 3.3%
• Furniture stores: 3.4%
• Beer, wine, and liquor stores: 3.4%

Many of the least profitable fields have huge inventory and overhead costs. The Sageworks study qualifies their research by saying, “not all private companies are necessarily shooting for high profitability; maybe their industry is price sensitive and relies on volume for growth or maybe they are sinking profits back into the business for R&D.”

Nevertheless, profitability is an important consideration for entrepreneurs, and is a good indicator of potential success. If growth in the aforementioned industries continues, there will be significant upticks in small businesses seeking opportunities in those fields this year.

Ever feel like big businesses have too much money and power? They do. But there’s one thing they don’t have that you probably do: happy workers.

Small Business Employees Are the Happiest

A recent report found that people working in firms with 10 or fewer employees have the highest happiness levels, while organizations with 10,000 or more employees report the lowest. Likewise, 43% of small business workers say they feel happy at work while only 27% of their peers at large businesses report the same.

If that’s not enough to prove that big business is losing the happiness game, consider this: 95% of small business employees say that at least some of their happiness is due to working for a small business. Of that percentage, 39% attribute most of their job satisfaction to working for a small business.

The discrepancies between small and big business satisfaction widen every year. In fact, small business optimism is currently the highest it’s been in 43 years. Because of this, small businesses enjoy the benefits of having employees that actually care about their work.

So why do small businesses have the edge over the big guys?

Small Businesses Appreciate Their Employees More

• Being appreciated (67%)
• Having a flexible schedule (27%)
• Seeing the fruits of their labor (23%)
• Feeling like their input matters (17%)
• Being rewarded for hard work (14%)
• Getting noticed by people who matter (9%)
• Broadening their skill set (6%)

Why? Because small businesses have less bureaucracy and more authentic human interaction. This leads to tight-knit communities of professionals who support each other in achieving common goals. In other words, small businesses help employees feel needed and appreciated when they’re at work instead of leaving them feeling like a small cog in a giant machine. 

And there's more: happy employees lead to happy bosses. In fact, happy workers:

• Are 12% more productive
• Have more active and creative minds
• Are more willing to collaborate

Whether you’re just starting a business or you’ve been in business for years, you’ve probably asked yourself this question: “Should I get a small business loan or find an investor?” The short answer is, it depends. There are a lot of factors that go into play when making that decision and each decision has the potential to forever change the course of your business. Don’t make the decision lightly. Here are some of the biggest pros and cons of each route for you to consider.

Business Loan

Getting a business loan can be a viable option for those who prefer a straightforward path to funding, without relinquishing company control. However, like any financial decision, it comes with its own set of considerations and implications.

Pros:

• You maintain sole ownership of your business: The nice part about getting a business loan is that no one else gets a part of your business. You borrow money from a lender, pay them back, part ways with the lender, and at the end of the day, you still own 100% of your business.
• You maintain sole decision-making rights for your business: When you own and operate 100% of your business, you can do whatever you want with it. Want to change your menu or start selling a new line of something? Great! Go right ahead. A business loan allows you to make whatever decisions you want, no matter how crazy or unorthodox.
• You retain all the profits you make: Say you’ve had a killer year and your revenues are through the roof. Everyone wants results like that, right? Of course! And when you own your business outright, you get to keep every last penny of the profits you make.
• You build credit: When you get a small business loan, you are simultaneously building your credit. Were you only able to qualify for a small amount and hit with a high interest for your first loan? Once your current loan term is up (assuming you’ve made timely payments), you will have built your credit and increase your chances of getting a larger loan with lower rates the next time around.
• Shorter-term than an investor: If you have an immediate need that will likely be fixed or solved in a short period of time, a small business loan is absolutely the way to go. Even if your loan term is 3-5 years, once that timeline is up, you own your business free and clear. Investors are in it for the long haul and will likely be around as long as you are in business. It’s not worth it to give up a portion of your company if you only need short-term assistance.
• More predictable: If you want finances you know you can count on, you are actually safer with a business loan. Why? Because if you take out a loan for a certain amount, you can count on that money to help run your business. A lender can’t back out of a loan. Sure, they require payments and if you don’t pay, they will cash in on collateral or whatever else you put up to secure the loan. But as long as you are in good graces with the lender, they’re not going to change their mind. An investor on the other hand, can decide one day that they are no longer interested and take their financing with them.

Cons:

• You are charged interest: Yes, that pesky thing called interest that we all despise. Yet, it’s a necessary evil if you want to secure funding for your business endeavors.
• Monthly payments are required: Rain or shine, your payment WILL still be due on the due date and there is no negotiating around that. Whatever terms you agreed to with the lender are the terms they will hold you responsible for, so if you have a tough month and don’t have enough to make your payment, the lender isn’t invested in your business so they won’t care. All they’ll want is your payment and they will do whatever they can to make sure they get it.
• You may have to put up collateral: If you are a newer business or a startup, you may not have enough credit built up to secure a loan based on merit and credit alone. In this scenario, lenders will often require you to put up collateral that is worth the value of your loan, to protect their interests in the event that you don’t pay. If your business doesn’t have much in terms of collateral, you’ll likely have to put up personal assets such as your house or a car.
• You risk losing your business and personal assets: When you take out a small business loan, you are responsible for that amount and that will never change. Depending on how you set up your business, there is a very likely chance that if you don’t pay they can not only liquidate your business to cover your business debt, but they can also come after your personal assets as well. This is why many small business owners choose to become an LLC - to protect their personal assets.

Investors

Shifting our focus to the other side of the coin, let's delve into the dynamics of securing funding through investors and the associated pros and cons it brings to your business.

Pros:

• You typically don’t have to repay the money – even if your business fails: If you’re just starting your business and you need cash in order to start but don’t have enough business credit to secure a small business loan, an investor can be a great idea. They will provide you with the funds needed and won’t require you to repay it either! Investors realize that there is always a risk associated with investing in a new company. So, unless it is explicitly stated in your contract with the investor, if your company fails, you are not responsible for any repayment.
• No interest or monthly payments: When an investor gives you money for your business, there is absolutely zero interest you have to worry about, and no monthly payments either. It is definitely a lot nicer to not have to worry about if you will have enough to make your payment for the month.
• Advice from investors may help your business: If you’re new to running a business, the advice and mentoring of an investor can prove to be invaluable. Investors have typically “been there, done that” and they know the pitfalls to avoid as well as tips and tricks. If you want immense amounts of help along the way, this may be a great option for you.

Cons:

• You have to give up a share of your business: Investors don’t typically give businesses money out of the goodness of their hearts. They do it because they see a chance at a bigger return than their initial investment. They invest in a company because they see that the business may be going places and they’re placing their bet on that success. This means that they want a piece of the action: your company. If you use an investor, they will usually require a portion of your company in the form of equity. Be careful how much of your business you give up to investors. If you give up too much, it’s no longer your
• Investors now have a say in how you run your business: If you know what you’re doing and have a clear vision of how to get there, you likely won’t be able to execute your plan exactly. Because investors have money invested in your business now, they want to make sure they see that return. This sometimes means that they will dictate how you run your business based on their own experience. This can become cumbersome and frustrating, especially if you started your business to be your own boss.
• Too many investors and you may end up getting kicked out of your own business: If you give up too much equity in your company, you will no longer be the primary shareholder. That means that all the other shareholders combined hold the majority of your business. If you get to that point, they could very easily vote you out of your own company!
• Share of profits: While you may not have to worry about interest payments on a loan, you do have to worry about sharing your profits here. If your business isn’t making much yet, then this may not seem like that big of a deal. But once your business really starts to take off, suddenly the interest rates of small business loans begin to sound very appealing. Depending on your revenue, the amount you end up having to pay to shareholders runs the risk of being far higher than any interest payment.

Choosing between investors vs loans

The important thing to remember is that there is no wrong answer. Whatever direction you choose is entirely up to you and your immediate needs. If your needs are short-term, you are almost always better off with a small business loan. But if you want ongoing funds with lots of advice and you’re willing to relinquish part of your business for it, investors may be your best bet. The most important thing is that you are happy with your business and have the funding that you need to grow it!