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May 132016

How Advance Loans Work for Businesses

By |May 13th, 2016|General Personal Finance|Comments Off on How Advance Loans Work for Businesses

tie-690084_640Advance loans are a new form of funding for cash-strapped businesses. There are many difficulties associated with raising funds quickly. Advance loans have arisen to plug the gap. This guide will go into how advance loans work for businesses.

What are Merchant Advance Loans?

Merchant advance loans are loans taken out against the future sales of a business. It’s like being paid for sales that have yet to be made. All lenders demand is that they have a reasonable chance of recouping the money. This can be shown through providing a health check of the business and giving an insight into the company’s business plan.

These loans are typically short-term. In many cases, a direct debit is setup to repay a certain amount of the money each day. The agreement may also be in the form of taking a percentage of every sale made. Merchant Cash Advance is the service that has pioneered this type of financing. While it’s existed in some form for a long time, Merchant Cash Advance has made it available to businesses of all sizes for the first time ever.  There are several lenders that offer these type of loans including Business Lending Pros.com.

What Types of Sales Can Be Financed?

Anything that amounts to income for a business in the future can be conceivably part of an advance loan agreement. The most common type of cash advance you’ll find on platforms like Merchant Cash Advance is credit card sales. From the perspective of a lender, receiving payment from these sales is easy. When everything is done electronically, everything is transparent and relatively easy to handle.

But there are other types of future sales companies can finance. These can include future cash sales and net-30 commercial sales. But the repayment methods are extremely complex, and are thus undesirable from the point of view of many lenders. 

How Much are you Entitled To?

Unlike a conventional bank loan, you can’t waltz into the room and ask for as much as you think you can get away with. The amount you’ll be offered will depend entirely on your past sales history. Your past sales history may not be stellar, which is why you’re asking for funding in the first place, so you may be able to convince lenders that the situation will improve.

Generally, the amount of money you can ask for is between 80% and 150% of your monthly sales. If you do ask for above 100% of your monthly sales, be prepared to take a massive risk. If you fail to deliver improvement, you are likely to fall into financial difficulty.

The Factor 

A cash advance factor is what you pay back. This tends to come in the form of a number, such as 1.09 or 1.50. In this case, 1.09 means if you took out $100,000 you would have to pay $109,000. 1.50 means you would have to pay out $150,000.

Since most cash advances are repaid between three and fifteen months, you have to think carefully about the amounts involved before deciding whether the loan amount fits in with your financial plans.

What are the Disadvantages?

Like with all loans, there are disadvantages. Companies should think about why they need the money in the first place. The product is the solution in this case, so if the product is also the reason why you need funding this probably isn’t the right funding option for you. On the other hand, if you are a growing company that needs to take advantage of a sudden spike in sales this is the loan option for you. But like with any loan, you need to do your research and see which lender is best for you. This isn’t an agreement to go into lightly.

May 62016

The Panama Papers (Explained)

By |May 6th, 2016|Blog|1 Comment

Black Money

Approximately the amount I have in a Mossack Fonesca account.

The Panama papers leaks happened about a month ago.  No doubt there is still more to come as the leak was 2.6 terabytes of data.  Most of the news stories I’ve seen cover this mostly name drop politicians alongside more nefarious individuals alongside the implication that somehow these folks are cheating the system.  At the center of the controversy is the Panamanian legal firm Mossack Fonesca.  People indicated as having set up accounts with Mossack Fonesca include, Ian Cameron (the father of David Cameron), several close associates of Vladimir Putin,

Mossack Fonesca

The firm handles hundreds of accounts for clients.  Many of them are held by owners whose identities are not disclosed. They also provide some level of wealth management services.  This generally means that they try to invest the money held in the businesses registered to them in a sensible.  If you have a significant amount of money, and you desire some privacy you might be inclined to open an account with Mossack Fonesca.  Crazy thing is, it doesn’t even cost that much.  It’s something like $1000 to set up an account and then there are ongoing maintenance fees.  If you had known in advance that this leak was going to happen, and you wanted to make some folks think that you had real money (and were possibly a jerk), you could have just gone ahead and set up an empty account.  (Unsolicited advice: Don’t do something like that, it’s going to turn out to be more trouble than its worth.)

Sidenote: A Rant on Privacy

One of the most bothersome things about this whole fiasco, in my view, is that ordinarily pro-privacy liberals have started making the same tired arguments against privacy that neocons like to make.  “If you have nothing to hide why do you need privacy,” has been a dumb argument for centuries and it doesn’t get any smarter just because you can target it at someone you don’t like.  Most millionaires in the United States practice “stealth-wealth”, meaning that their neighbors, friends, and even family don’t know that they are millionaires.  Like clockwork you see these news stories, “Old lady dies and leaves millions to local school.  ‘We had no idea that she could afford food, let alone owned all of the Wendy’s restaurants in town’ say neighbors.”  Why do most millionaires in the United States keep their wealth a secret?  Something like 70% of lottery winners go bankrupt.  There are plenty of reasons to use shell companies as well. Check out Donald Trump’s situation for example.

So What’s the Big Deal?

So all these rich guys just need an account that’s private, I can get behind privacy, so who cares?  There are three major cheats that I’m aware of:

  • Tax cheating: The trouble starts if your company starts dealing with another company you own.  Maybe you pay your Panamanian company $1,000,000 a year for consulting.  That consulting never actually happens, but it doesn’t look as suspicious because no one knows that you’re really paying yourself.  This means that you can effectively sidestep taxes.  Expenses aren’t taxed, just profits, so all that money can flow to Panama tax free.
  • Bribery:  Perhaps you’re a politician and you’re for sale.  You’re very willing to sell out a vote for money, but you want, like actual money, not help with your re-election.  You vote the way a company wishes you to, then your Panamanian company bills them for bogus consulting.  No problems because you aren’t associated with the Panamanian company according to the outside world.
  • Appearing Poor:  Let’s say that you’re a politician and you need to appear to be a man of the people.  You don’t want it getting out that you’re really a billionaire, that’d ruin your image.  Instead you have most of your net worth in a Panamanian shell company.  No one knows you own it, and you lie and don’t report it to the government.  Boom, you’re “poor”.  This, in my view, is totally justified if you don’t have an obligation to share your net worth, and I recommend that most people not share their net worth.  However, it’s clearly fraud if you are required by law to disclose it.
  • Sheltering Assets:  Suppose you want to divorce your husband, but you don’t want him to take away half of your stuff.  You create a shell corporation, it bills you for nearly all of your net worth and by the time you serve the husband with divorce papers he gets to find out that the marriage is largely penniless.
  • Money Laundering: Suppose that you’re criminal and you need to spend your money.  Perhaps this could be done in one step, but I think it might require two.  Set up two shell companies call them Good partners and Evil & co.  Set it up so that Good partners owns Evil & co.  Make a payment to Evil & co.  Evil & co then makes a dividend payment to Good partners.  The money at Good partners is now clean and spends just fine, because as far as the world knows Good partners has nothing to do with you.

There are other nefarious things you could do as well, and this isn’t an exhaustive list.  This is why everyone’s pissed.  The argument goes, why would you have an account with them unless you were trying to do one of the above?  Mossack Fonesca says that it complies with regulations to prevent the above from happening, but ultimately no one really believes them.

How big a deal is this?

It’s a pretty big thing.  Backlash has already caused the prime minister of Iceland to resign.  (Alright, Iceland is a huge country).  The biggest impact in my view might be David Cameron, the Prime Minister of England and the leader of the Labour party.  His father was referenced in the papers.

If you don’t follow English politics this is a big deal because about a year ago Jeremy Corbyn became the leader of the Labour party.  Jeremy Corbyn is a very radical leftist, and was widely considered likely to lead the Labour party to a disastrous election cycle.   If this scandal sticks to David Cameron in a big way then it could mean a massive move to the left for the UK.  Of course the Labour party might be too shattered from Corbyn’s election to take advantage of it.

 

 

Apr 292016

Tax Gain Harvesting

By |April 29th, 2016|Blog|3 Comments

Hand Putting Deposit Into Piggy BankPerhaps you’ve heard of tax-loss harvesting.  It’s a tax minimization strategy in which you sell stock that you’ve lost money in, in order to capture the tax deduction you get by recognizing the capital loss.  It is a common tactic that can add a little bit to your overall returns.  Let’s say that you own two stocks, ABC and XYZ.  ABC has done really well, and you’ve made $5,000.  XYZ has done pretty poorly, and you’ve lost $5,000.  Generally, it’s a bad idea to sell your ABC stock (all other things equal) because it creates a tax bill.  Selling your XYZ stock can be a good idea (all other things equal) because it creates a tax deduction.

Caveats for Tax Loss Harvesting

There are a couple problems with tax loss harvesting.  Naively it seems bad because if your goal is to “buy low and sell high” you’re always selling lower than you’re buying with tax loss harvesting.  You might be inclined to sell your losing stock then rebuy the stock immediately afterward to gain the tax benefit without having to give up the stock.  Unfortunately, this is called a wash sale.  If you repurchase within 30 days then you don’t get the tax deduction.

As an example, let’s say that you bought 100 shares of Coke stock on April 4th for $4700, then sold the Coke stock April 21st $4300.  If you wanted to keep that $400 tax deduction you wouldn’t be able to repurchase the Coke stock until May 22nd.

Enter Tax Gain Harvesting

Tax gain harvesting on the other hand comes with none of those caveats.  “But Adam,” I hear you cry, “why would you want to sell stock triggering capital gains taxes early!?”

Well, if you’re a Thousandaire like me then you may not be in your highest earning years. (Really we’d like to be millionaires by our peak earning years).  In fact, if you make less than about $47,850 ($37,500 + $10,350 for the personal exemption and standard deduction) you probably don’t have to pay long term capital gains taxes! This means that any stock you own you can sell and keep the income tax free.  You do need to make sure that you don’t sell enough stock to push yourself into the higher tax bracket.

Caveats for Tax Gain Harvesting

This is the part where I warn you again about the wash sale rule, but that’s the good news.  The wash sale rule doesn’t apply to tax gain harvesting.  (Disclosure: Check with your accountant.  I am not an accountant.  I just kind of look like one.) This means that if you have an investment which you have held for more than a year, you could sell it and immediately repurchase it in order to take advantage of a higher cost basis when you sell it in a future year.

For example,  I own 100 shares of Microsoft that I originally purchased three or four years ago at $25 per share.  They now trade for roughly $50 per share.  I could sell them tomorrow and repurchase them immediately.  This would add $2500 of capital gains income to my tax bill in 2016.  Fortunately, I would probably owe $0 on those gains because I am in the 0% bracket for long term capital gains.

Suppose in the future I’m in a higher tax bracket and have to pay 15% on my long term capital gains.  Suppose also that Microsoft shares are trading at $100 per share and I need to sell.  (Maybe a better investment has come up, or I simply need the money for something).  If I don’t use tax gain harvesting then I’ll have to pay taxes on $7500 of capital gains ($1,125).  If I do use tax gain harvesting tomorrow then I’ll have to pay taxes only on $5000 ($750) of capital gains because I already recognized $2500 of it in 2016.   Tax gain harvesting will have saved me $375, well worth the $10 of transaction fees I’ll have to spend buying and repurchasing the Microsoft stock.

Yay?

This is one of those cases where planning your tax situation in advance can have some advantages.  You may also be inclined to do your tax gain harvesting at the end of the year, when you have the clearest picture of how your income will turn out.  Capital gains taxes may not be this low for long and the tax brackets may not be so favorable in the future.

All tax deferred accounts IRAs, Roth IRAs, 401k’s, 403b’s etc are basically equivalent to not paying taxes on capital gains.  You all should know by now how much I love these sorts of accounts.  However, if you already don’t pay taxes on capital gains because you’re in the 15% bracket, then you want to recognize as much capital gains at a 0% tax rate as you possibly can.

 

Disease Called Debt
Apr 242016

Advice for Building Your Financial Wellness Toolkit

By |April 24th, 2016|General Personal Finance|1 Comment

accounting-761599_640Do you feel a knot in your stomach when you sit down to pay bills each month? Ever wondered in the middle of the night when you’ll get out of debt?

Your worry and anxiousness over money is also shared by millions of other people who feel that financial stress is eating away at their sense of security and well-being. Being in debt and dealing with things like rising grocery costs or unexpected life events can drain you both physically and emotionally. It can zap your good health, make you unhappy, and even negatively impact your relationships.

Many of us believe that if we work, think, and try harder, we can resolve our financial issues, but sometimes that isn’t the reality. A recent survey found that 40 percent of millennials say they have used payday loans, pawnshops, a tax refund advance, or other finance options in the past five years, and according to Nerdwallet, the average American household is saddled with $129,579 in debt owed against credit cards, mortgages, and various types of other loans.

So before you let money stress get you down, here are three simple ways you can build a financial wellness toolkit to relieve financial stress:

  • Invest and save. Do away with impulsive or indulgent purchases and save or invest at least 10 percent of your income instead. Sounds tough, right? It’s easier than you think and can even be done while you’re paying off debt if you plan accordingly. By cutting the credit and putting yourself on a spending “diet,” you’ll not only chip away at any lingering debt, but can also work to build a nice little nest egg for future savings or purchases. It’s a win-win situation for you and your bank account.
  • Get educated. One of the easiest ways to combat money stress is to know where you stand. Once you become financially literate, you’ll have a better understanding of where you need to make improvements to stabilize your financial future. Don’t know where to start? A good first step is to conduct a financial self-assessment—there are even free resources online you can tap into! Or perhaps you can participate in any number of the available webinars or seminars. If your budget allows, consulting a financial advisor can be a suitable option as well. Regardless, it’s up to you to take control of your situation by using all means necessary!
  • Take action. Use new technology to your advantage. There are a lot of software programs for smart phones, tablets and websites that can offer digital assistance in managing finances to make life more enjoyable and easier. A great financial tool that can help you out is Zebit, a free employee benefit that provides financial education, planning tools, and a worry-free, no-cost credit option called a ZebitLine that helps working Americans take control of their everyday financial lives. By partnering with employers and leveraging advanced technology, Zebit provides a unique financial wellness offering that lowers employee stress. If you are always on the go and always connected through your smartphone, you can download Zebit’s free Instant Budget App—available for download at the Apple App andGoogle Play stores—which takes the guesswork out of budgeting by automatically creating a customized budget based on income, where someone lives, and the number of people in his or her household.

Always remember: your money worries are just that—worries. To beat money stress, it all starts with you. You must realize that having more money is not the real solution; it’s changing your current spending behaviors and perspectives that can help you recover from financial stress and shape your overall financial outlook for the future.

Apr 222016

Mortgage Points

By |April 22nd, 2016|Blog|2 Comments

house-435618_640So you’re thinking about purchasing a home.  Big decision.  Some people at this point say things like “good for you”, or “now you won’t be throwing money away on rent”.  Codswallop.  Sometimes you’re financially better off renting.  It’s just a fact.  People in general would rather own than rent, but that doesn’t alone make it better.  You’re also a Thousandaire and you have all of this extra money after putting down a down-payment (if not, you might be better off renting, a great calculator to help you decide is available here).  The lender starts talking about “points” should you buy them?

What are points?

Points come in two flavors: discount points and origination points.   One point corresponds to 1% of your total loan amount.  So if you are buying a $200,000 home and you put 20% down that leaves you with a $160,000 loan and 1 point is costs $1,600.  Now for that $1,600 what do you get?  Well, for origination points you get the lender to originate your loan.  This is basically a fee they are charging you.  Sucks.  Shop around, but basically if you want the lender to originate the loan you have to pay these.  (Like everything else in life it is negotiable!)  Discount points are usually what folks are talking about regarding points.  You pay that $1,600 and your interest rate gets reduced by some amount (like 0.25% per point or something).

Discount Points

The hope here is that you are able to reduce the interest rate by enough to pay back that money you spent on the discount point. How do we calculate if this is worth it?  Well, any reasonable mortgage calculator will be able to tell you what the reduction in monthly payment will be.  We can work a quick example.  Let’s say that you’re buying that $200,000 house.  The interest rate would be 4%, but you purchase a point for $1,600 and the interest rate is now 3.75% ($1,600 might realistically buy you more or less of an interest rate reduction, ask your lender). The payment at the 4% rate is $764, the payment at the 3.75% rate is $741.  This works out to a difference of $276 per year.

Naively you might be inclined to simply divide the cost of the point ($1,600) by the annual savings ($276) and figure,  “well, if I’m not going to sell the house or refinance for 5.8 years then its a good deal.”  The problem with this is that you aren’t considering what that $1,600 would earn you otherwise.  At the very least you could earn 4% on that money by applying it to your loan immediately! If we’re a little loose and dirty with the calculation we could just go ahead and figure that at 4% $1600 would produce an “income” of $64 annually.  Therefore, let’s go ahead and divide that $1,600 figure by $212 (276 – 64) instead.  This means that the break-even point is pushed out to 7.5 years.  We can do even better if we assume that the money would be invested in the stock market at a rough rate of return of 8% per year.  This gives a break even point of 10.8 years.

So, do I buy points or what?

Probably not.  It seems to me that the lender is simply counting on you refinancing or moving within about 11 years. Frankly, think you’ll move or refinance within 11 years.  The, “or refinance” is an important point here.  I used to think interest rates couldn’t go lower, yet somehow they continue to march downward.  There’s a couple in denmark paying a negative interest rate on their mortgage.  There’s a decent chance that at some point in the next 11 years interest rates will be lower.  Sure, maybe interest rates will be only be higher, but if you know what direction interest rates will move over then next 11 years, buying discount points on your mortgage has got to be the worst way to profit from your powers of precognition.  Of course, this all changes if your lender offers you more than a 0.25% reduction per discount point, but now you have a quick back-of-the-envelope method for figuring if it is in the ballpark of a good idea.

 

Disease Called Debt

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Apr 182016

How to Use Your Tax Refund the Smart Way

By |April 18th, 2016|General Personal Finance|Comments Off on How to Use Your Tax Refund the Smart Way

accounting-761599_640Today we have a guest post for you from Listen Money Matters about how young people can finally get over their fear of investing. Enjoy!

Internal Revenue Service statistics show that in the past two years they have sent out around 40 million tax refunds each year. If you are one of the lucky millions expecting to receive a refund this year, you may be trying to figure out how to use your tax refund the smart way. Here are several options for you to consider:

1 Wait until It’s in the Bank

Have you ever heard the expression, “Don’t count your chicks until they’ve hatched?” It’s true for many things, including tax refunds. Don’t book a non-refundable vacation or go on a shopping spree simply because you are expecting a good sized refund on your taxes this year. One reason not to do this is because your refund could fall short of what you have anticipated resulting in debt. Some better uses for your refund are listed below. Please read on.

2 Start Some Sinking Funds

A sinking fund is an account you have opened for a specific purpose to be used at a future time. You “sink” your money into this account to build a “fund” to be used for whatever purpose you have chosen, such as an emergency fund, a car fund, or a home improvement fund,  just to name a few. Online there are banks that allow accounts to be set up that will pay you interest with no minimum balance and no fees, which are perfect for sinking fund, and a great way to invest in your future needs.

3 Pay Off Debt

Paying off debt is a great way to use your tax refund. A good way to decrease your debt the fastest is to start by paying all or as much as you can of whatever debt has the highest interest rate. Then proceed to the next debt having the next highest interest rate and so on. Next, resolve not to accumulate more debt and follow the same process of debt reduction next year. Continue to do this for several years and you should gain some financial freedom.

4 Invest

There are many different ways to invest your tax refund. For instance, a few ways you could invest are real estate, stocks, bonds, or a Roth IRA. The degree of risk associated with each type of investment differs, so research each to ensure you are making the best choice for your investment dollars.

5 Home Improvements

If you want the greatest return on your investment dollars, think about using your refund for basic maintenance such as siding, a new roof or a new energy efficient furnace rather than a new updated kitchen with all the bells and whistles. Of course, if your home is already in good condition, you could instead use your tax refund to make some updates in other areas. Keep in mind the current value of your home as well as others in your area. The current housing market in your neighborhood will also affect the value of your home. Before doing any remodeling, research other homes in the area in order to make decisions that will give you the greatest return on your investment.

6 Start a College Savings Fund

Another good use of your tax refund dollars would be to start a college saving fund for your children or grandchildren. You can open a 529 plan and save tax dollars on the earnings as well as on any money taken out for college expenses, as long as you follow all of the rules of the plan. The plans vary from state to state, so look everything over carefully before making your decision.

7 Start a Business

Using your refund to start a business could give you an enormous return on your investment if you make sound business decisions. Do your homework before you spend any money and avoid anything that sounds like a get rich quick scheme because if it sounds too good to be true, it probably is.

Hopefully the tips we have provided will enable you to use your tax refund this year in a way that will give you greater financial security in the future.

Do you have other ideas of how to use your tax refund the smart way?

Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.