Adding Value: How to Help Clients Launch a Business Venture
Starting a company is certainly no easy task, and launching and growing a company requires commitment and diligence. Prospective business owners often rely on the advice of their tax preparer or CPA before they start and grow a business.
Insights into the tax implications of which business structure to choose, or the financial information needed in order to secure financing, is invaluable. Providing this advice can help you build stronger relationships with your clients and generate additional billable hours to help grow your practice.
Before taking on the challenge of business ownership, aspiring entrepreneurs should consider certain fundamentals that are often neglected.
When you advise your clients on how to launch a business, here are four key points to cover to guide them down the right path:
Have a Plan
The first step in starting a new business is to create a professional business plan. Developing a business plan is critical to setting a roadmap for growth and, equally importantly, securing startup capital.
The plan should explain what the company will be, who will operate it (and their experience level), the competitive landscape, and the selling points that will differentiate the business and enable growth.
Additionally, the plan should include an estimate of startup costs. Naturally, this can be a challenge for a business that has not yet opened its doors. However, making cost estimates as realistic as possible and providing some type of sales estimate will help convince lenders that the company is viable and will have a strong chance of success.
Choose a Structure
The structure of a business is important, and tax preparers and CPAs play a crucial role in helping entrepreneurs decide which business format — a sole proprietorship, LLC, general partnership, C-corp or S-corp — is most advantageous. There are obviously tax and liability implications for each entity type.
In a sole proprietorship, a would-be entrepreneur may use his/her personal credit card and keep all the profits, but his or her personal assets are exposed if something goes wrong. Setting up an LLC separates personal assets from business liabilities and offers some tax advantages, since the business itself is not responsible for taxes on its profits.
Every business needs startup capital. In the early 2000s, credit was free flowing, but since the "Great Recession" that started in 2008, many lenders have set the bar higher when approving loans.
Big banks typically request two to three years of financial statements before approving a small business loan and usually prefer to grant loans of more than $2 million. This is not feasible for a business that has not started operations.
Small banks, which often have more flexible lending parameters, and are more knowledgeable about the local economy, approve a higher percentage of small business loan requests than big banks do.
In the latest Biz2Credit Small Business Lending Index, which analyzed data from May 2015, big banks approved about 21.9% of their small business loan applications, while small banks granted 49.5%.
New players have entered the small business lending marketplace. For instance, institutional lenders (pension funds or hedge funds, for example) on platforms such as Biz2Credit's online marketplace lending platform are granting 61.3% of requests at lower interest rates and longer terms than other non-bank lenders.
Thanks to technology, small business owners have options to more easily access this type of financing, which often offers streamlined documentation and quicker time to funding.
A borrower who has consistent cash flow is attractive to a lender. Recommend paying invoices up front in exchange for pre-payment discounts whenever possible. This can eliminate black marks on a credit record for late payments and help with the cost of inventory.
Another tip is to shop around to find lower cost lines of credit and working capital if business owners are currently using them. Many smaller lenders are on the hunt for business and therefore offer more attractive lending rates. When monthly costs go down, cash flow improves. Thus, if business owners want to expand, it will be easier to find appropriate small business loan lenders.
Do you have clients who would like to start businesses but aren't sure how to get started or where to get funding?
Take this opportunity to become their trusted advisor – check out the content, tools, and financing options at www.biz2credit.com. You'll find a wealth of valuable information to share with your clients and help them become business owners by next tax season!
And be sure to watch for the second article of this series next month where we'll dive deeper into the types of business financing available from banks and non-bank lenders.
Read more articles from Biz2Credit on TaxAct ProAdvance.