A Review of the New Tax Law: What Lenders Should Know
Jun 25,2018
A sweeping new law, the Tax Cuts and Jobs Act (TCJA), was passed in late 2017 with significant implications for businesses. Lenders need to be aware of these changes and understand the potential ramifications for their borrowers — both positive and negative — so that they can help customers take full advantage of any new tax breaks and minimize the adverse effects of provisions that will generate additional revenue for the IRS. What is the corporate rate? Under prior law, C corporations paid graduated federal income tax rates as follows: 15% on taxable income of $0 to $50,000, 25% on taxable income of $50,001 to $75,000, 34% on taxable income of $75,001 to $10 million, and 35% on taxable income over $10 million. Personal service corporations (PSCs) paid a flat 35% rate. For tax years beginning in 2018 or later, the TCJA establishes a flat 21% corporate rate. That rate...
Seize the Opportunity: Lending to E-commerce Companies
Feb 01,2018
Like brick-and-mortar businesses, e-commerce companies need capital for working capital and fixed asset purchases. To help meet their financing needs, they’ve historically turned to alternative online lenders. Nontraditional lenders may provide needed capital, but they also can saddle e-commerce companies with onerous terms and high interest rates.As the online distribution channel has matured and become more mainstream, traditional lenders have become more open to lending to e-commerce companies. Before adding these types of companies to your loan portfolio, it’s important to recognize how their business model differs and consider adjusting your underwriting process accordingly.Here are three ways you can vet loan applications from e-commerce companies.1. Learn about customer acquisitionOnline marketing expense consumes a significant portion of an e-commerce company’s budget. Ask for a detailed analysis of the company’s marketing efforts, including the total spent on each campaign and the effective acquisition cost of each customer in the previous 12 months.Focus...
Five Factors to Consider for Your Due Diligence Approach
Oct 25,2016
Before reviewing a borrower’s financial statements, consider the industry in which it operates to determine what’s most relevant. Doing so will help frame your due diligence efforts and credit risk assessment. Focus on five factors In 1979, economist and Harvard Business School professor Michael Porter identified five competitive forces to consider when developing business strategy. This five-factor approach remains useful today. Power of customers. Start by understanding the borrower’s target market. A company that relies heavily on a few customers for a large portion of its revenue may be at the mercy of key customers, especially if there are multiple competitors in the industry and no long-term contracts. This factor affects the prices and terms a borrower can negotiate with its customers. Power of suppliers. Likewise, identify the companies that a borrower purchases raw materials and resources from. Consider the existence of long-term contracts and possible alternative suppliers, if a key...
Teach Borrowers to Build Higher Business Credit Scores
Dec 04,2014
Many private business owners underestimate the importance of establishing strong business credit early on — and are surprised when they don’t qualify for affordable financing when they need it. Lenders are often the bearers of this bad news. Here’s a refresher on why it’s important for businesses to establish credit, what makes (or breaks) a business credit score and how borrowers can improve their ratings. Blending debt and equityMany private business owners underestimate the importance of establishing strong business credit from the get-go. Rather than deal with the red tape of applying for bank loans, they rely on shareholder loans or advances from family members to finance growth. Eventually most businesses outgrow the owner’s personal resources, requiring them to apply for bank loans. But an application may be turned down or a loan issued at a higher interest rate or lower amount than the owner anticipated. The reason is simple:...
Pros and Cons of Corporate Inversions
Dec 04,2014
Establishing a tax domicile abroad — also known as a corporate inversion or expatriation — is a tax strategy that’s received a lot of media attention this year. The United States has the highest corporate tax rate in the industrialized world (35% before state and local taxes). And it’s the only country that taxes corporate profits earned outside its borders. Corporate inversions are nothing new. More than 50 large companies have redomiciled over the last three decades, with several others in the works. Lower taxesHere’s how it usually works. A U.S. company becomes a wholly owned subsidiary of a foreign corporation through either a merger or a sale of its assets to the foreign company. The change to foreign ownership allows the company to avoid paying U.S. tax on foreign operations and distributions to the foreign parent. But income earned domestically is still taxed at ordinary corporate rates.Mixed resultsCompanies typically...
Due Diligence Tips
Dec 04,2014
Related-party transactions played a major role in accounting scandals that happened at Enron and Tyco International. These scandals led to the Sarbanes-Oxley Act of 2002 and prompted auditors to take a closer look at related-party transactions and financial relationships. Such scandals aren’t unique to large public companies that engage in complex business transactions, however. In fact, they’re even more prevalent among small private companies without auditors and financial analysts to scrutinize their financial results. With small businesses, lenders must act as gatekeepers and scrutinize related-party transactions as part of their regular due diligence procedures. If not, their loan portfolios may be at risk.A case of out-of-control nepotismDan is the second-generation owner of a trucking company in Ohio. When profits took a nosedive five years ago, Dan blamed increasing gas prices and the recession. But his lender, Joan, suspected that out-of-control nepotism was partially to blame. So, she started asking questions.It...
5 Ways to Speed Up Collections
Dec 04,2014
Borrowers often pledge receivables as loan collateral. But recent studies show that many companies are collecting receivables slower than they did before the Great Recession. When you review a borrower’s year-end financial statements, ask whether management has taken these five simple steps to turn receivables into cash faster. Tighter collection procedures can expedite service debt and reduce working capital needs and bad debt write-offs.1. Streamline the billing processThe success of any collection program begins with the billing process. Borrowers can’t collect what they don’t bill, so they need to invoice clients promptly — as soon as the product ships, if possible. Companies that provide services need to track billable hours daily and bill monthly — or as often as permitted under the customer’s contract.Electronic payment systems allow companies to send real-time invoices and enable online payment. Many companies also ask customers to provide up-front service retainers or make substantial deposits...
Typosquatting Scams
Oct 09,2014
Most companies take advantage of basic security measures such as data encryption and secure payment methods to protect against hackers. However, there is a lesser-known online security scam - typosquatting. All it takes is accidentally misspelling a company name when trying to find their website. Your borrowers may end up being unknowingly diverted to sites where they download malware. And poof, their personal information is stolen. As with any technology scam, education is key — so share this important information with your borrowers. Domain names with a twist Cybersquatting occurs when someone registers a website domain name that includes a trademark and then tries to profit by selling that name to the trademark owner. Likewise, typosquatting involves the purchase of domain names in bad faith. It takes advantage of a tendency among Internet users to hit the wrong keys and enter misspelled trademarks or brands. For example, in a recent case involving the retailer Lands’ End, a...
Coming Soon! Changes to the way borrowers report revenues
Oct 09,2014
In Sean Spitzer's recent article, "Prepare Now for Revenue Recognition Changes," he provides a clearer picture of the new standard (ASU No. 2014-09, Revenue from Contracts with Customers), describes the new standard's affect on certain industries and recommends next steps for planning. Below, we outline changes for your borrowers that you should be aware of.Which borrowers will be affected? Companies that engage in simple point-of-sale transactions will see minimal changes to their revenue recognition methods, because the standard primarily targets revenues from complex, long-term contracts. Industries expected to feel the biggest impact include software, real estate, asset management and wireless carrier companies. But all types of businesses will be required to disclose more details about their revenues. Expanded footnote disclosures include breakdowns of the borrower’s sale mix by product lines, geographical markets and contract length. This is good news for lenders who are interested in learning more about their borrowers’ products and...
Borrowers and Occupational Fraud
Oct 09,2014
Every two years the Association of Certified Fraud Examiners (ACFE) conducts a fraud study, the Report to the Nations on Occupational Fraud and Abuse. A typical business loses 5% of their revenues to fraud. The median loss of revenue rose $5,000 from $140,000 to $145,000 from the 2012 study to the 2014 study. Discover which industries are the most fraud-prone and what questions you can ask yourself to better asses fraud risks for your borrowers.Fraud-prone industries Certain industries tend to report more frauds than others. The most victimized sectors in the ACFE’s 2014 study include: Banking and financial services. Lenders are no strangers to fraud. Financial institutions reported the most fraud cases, accounting for 17.8% of the cases in the ACFE study. This sector reported a median loss of $200,000 and is especially vulnerable to stolen cash and corruption schemes. So before assessing your borrowers’ risks for fraud, you may want to turn inward and assess your own risks. Government and...

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