3 Dirty Little Secrets Of The U.S. Economy

By Leon Wilfan, Chief Investment Strategist, Cashflow For Retirement The gap in funding for U.S. state and local pensions is greater than the German economy. That is to say: If you're counting on a state pension for your retirement, I suggest you start looking at alternatives, because there's a chance the money won't be there when you need it. Leon Wilfan Most state retirement systems are currently unsustainable. They can't meet their investment targets and didn't set aside enough funds to support pension promises made to employees. Further, unfunded state and local pension liabilities have increased drastically since the last financial crisis and now exceed $4 trillion. Again, that's more than the entire GDP of Germany and nearly as large as the GDP of Japan. Looking more specifically, in 2017, Illinois' unfunded pension liabilities stood at 601% of state revenue. Next most dramatic gap as of 2017 was in Connecticut, where unfunded pension liabilities were 360% of state revenue. In Kentucky the gap was 332% of state revenue; in New Jersey 290%; and in Maryland 263%. Last year, U.S. public pension funds tried to calm the situation by projecting that 2018 stock performance would surely be so strong that it would narrow the gap substantially. We all know how that turned out. 2018 was the worst year for stock markets in a decade, closing in the red for the first time since 2008. I hate to be the bearer of bad news, but this means the unfunded liabilities gaps will widen even further. The problem is that most public pension funds continue to expect a 7% average annualized return for their portfolios. This is unrealistic in the current environment. Stocks have little room to grow at this point, and bonds are offering dismal yields. That's dirty little secret #1 of the U.S. economy right now. Student Loan Debt Bomb Will Put The Brakes On U.S. Economic Expansion In the last 10 years, higher education costs in the United States have increased by 5% per year, far outpacing inflation. This has led to the expansion of the government's student loan asset balance from $130 billion to $1.23 trillion, a near tenfold increase in one decade. This acceleration of debt puts the younger generation in uncharted territory. At $1.3 trillion, student loans are now the second-highest consumer debt category, behind mortgages, exceeding both auto loans and credit card debt. Moreover, unlike other types of debt, you can't discharge it in bankruptcy, unless you go to court and pass the Brunner test. One in seven Americans today holds student debt. The number is even greater when you consider that parents often co-sign loans for their kids. Equally alarming are the latest figures showing that 43% of those who hold student loans are behind in payments or have deferred them because of financial distress. The student loan debt bomb could significantly hinder U.S. economic performance for years. First, it will anchor consumer spending for decades in a way no previous generation has had to deal with. Second, if the interest rates on student loans continue to rise faster than inflation, eventually people won't be able to pay them back, leading to a decrease in federal revenue and an increase in federal deficit. That's dirty little secret #2. So What If U.S. Debt Increases Forever? Dirty little secret #3 isn't a secret. Federal debt is the highest it's been in 60 years and growing. In theory, the United States could increase its debt forever without going bankrupt—as long, that is, as the economy keeps growing. The key is to keep debt as a percentage of GDP at a stable level. Debt crises happen when that level gets out of control. Bond buyers get nervous, which increases interest rates and the cost of servicing the debt. This puts the country at risk of default, further fueling skepticism, interest rates, and debt-to-GDP levels. U.S. debt is now growing faster than GDP and tax revenues, resulting in a rapid increase of the debt-to-GDP ratio, which is now the second highest in the country's history, surpassed only by World War II levels. The most significant jump happened during the last financial crisis, when large deficits increased the debt-to-GDP level by more than 60% in just a few years. In 2018, the government cut taxes but didn't cut spending. This will translate into a few hundred billion additional dollars of budget deficit every year. Unless tax revenues increase or federal spending decreases, debt as a percentage of GDP will just keep on rising. You Can Profit From The Coming Storm If You Act Fast Each of these three bubbles, when it bursts, will have a dramatic effect on the U.S. economy. The federal government may have to step in and bail out public pension funds. This would result in a large fiscal deficit that would have a limiting effect on government spending for decades to come. Meantime, future generations of middle-class consumers won't be spending either, because they'll be paying off their student loans. Less spending means less GDP growth and a stagnating economy. Finally, if government debt-to-GDP levels keep on increasing, U.S. credit ratings will downgrade. This will increase the cost of debt and could even result in a full-on debt crisis. None of these three bubbles show signs of slowing down. It's imperative you have an effective risk-management strategy in place. If you don't already, you need to start working on one ASAP. Stay vigilant, Leon Wilfan

Types of Business Loans

1. Term loans

A term loan is a common form of business financing. You get a lump sum of cash upfront, which you then repay with interest over a predetermined period.

Online lenders offer term loans with borrowing amounts up to $1 million and can provide faster funding than banks.

Pros:

• Get cash upfront to invest in your business.
• Typically higher borrowing amounts.
• Fast funding if you use an online lender rather than a traditional bank; typically few days to a week versus up to several months.

Cons:

• May require a personal guarantee or collateral — an asset such as real estate or business equipment that the lender can sell if you default.
• Costs can vary; term loans from online lenders typically carry higher costs than those from traditional banks.

Best for:

• Businesses looking to expand.
• Borrowers who have good credit and a strong business and who don’t want to wait long for funding.

2. SBA loans

The Small Business Administration guarantees these loans, which are offered by banks and other lenders. Repayment periods on SBA loans depend on how you plan to use the money. They range from seven years for working capital to 10 years for buying equipment and 25 years for real estate purchases.

Pros:

• Some of the lowest rates on the market.
• High borrowing amounts up to $5 million.
• Long repayment terms.

Cons:

• Hard to qualify.
• Long and rigorous application process.

Best for:

• Businesses looking to expand or refinance existing debts.
• Strong-credit borrowers who can wait a long time for funding.

3. Business lines of credit

A business line of credit provides access to funds up to your credit limit, and you pay interest only on the money you’ve drawn. It can provide more flexibility than a term loan.

Pros:

• Flexible way to borrow.
• Typically unsecured, so no collateral required.

Cons:

• May carry additional costs, such as maintenance fees and draw fees.
• Strong revenue and credit required.

Best for:

• Short-term financing needs, managing cash flow or handling unexpected expenses.
• Seasonal businesses.

4. Equipment loans

Equipment loans help you buy equipment for your business. The loan term typically is matched up with the expected life span of the equipment, and the equipment serves as collateral for the loan. Rates will depend on the value of the equipment and the strength of your business.

Pros:

• You own the equipment and build equity in it.
• You can get competitive rates if you have strong credit and business finances.

Cons:

• You may have to come up with a down payment.
• Equipment can become outdated more quickly than the length of your financing.

Best for:

• Businesses that want to own equipment outright.

5. Invoice factoring

Let’s say your business has unpaid customer invoices, which typically are paid in 60 days. If you can’t wait that long to get paid and need cash now, you can get money for those unpaid invoices through invoice factoring.

You’d sell the invoices to a factoring company, which would be responsible for collecting from the customer when the invoice is due.

Pros:

• Fast cash for your business.
• Easier approval than traditional funding options.

Cons:

• Costly compared with other options.
• You lose control over the collection of your invoices.

Best for:

• Businesses with unpaid invoices that need fast cash.
• Businesses with reliable customers on long payment terms (30, 60 or 90 days).

6. Invoice financing

This is similar to invoice factoring, but instead of selling your unpaid invoices to a factoring company, you use the invoices as collateral to get a cash advance.

Pros:

• Fast cash.
• Your customers won’t know their invoice is being financed.

Cons:

• Costly compared with other options.
• You’re still responsible for collecting the invoice payment.

Best for:

• Businesses looking to turn unpaid invoices into fast cash.
• Businesses that want to maintain control over their invoices.

7. Merchant cash advances

You get a lump sum of cash upfront that you can use to finance your business.

Instead of making one fixed payment each month from a bank account as you would with a term loan, you make payments on a merchant cash advance either by withholding a percentage of your credit and debit card sales daily, or by fixed daily or weekly withdrawals from a bank account.

Pros:

• Fast cash.
• Unsecured financing.

Cons:

• Some of the highest borrowing costs — up to 350% in some cases.
• Frequent repayments can create cash flow problems.

Best for:

• Businesses that have high and consistent credit card sales and can handle frequent repayments.
• Businesses that can’t get financing anywhere else and can’t wait for capital.

8. Personal loans

It is possible to use a personal loan for business purposes. It’s an option for startups, as banks typically don’t lend to businesses with no operating history.

Approval for these loans is based solely on your personal credit score, but you’ll need good credit to qualify.

Pros:

• Startups and newer businesses can qualify.
• Fast funding.

Cons:

• High borrowing costs.
• Small borrowing amounts of up to $50,000.
• Failure to repay can hurt your credit.

Best for:

• Startups and newer businesses with strong personal credit.
• Borrowers willing to risk damaging their credit score.

9. Business credit cards

Business credit cards are revolving lines of credit. You can draw from and repay the card as needed, as long as you make minimum monthly payments and don’t exceed the credit limit.

They are typically best used for financing ongoing expenses, such as travel, office supplies and utilities.

Pros:

• Earn rewards on your purchases.
• No collateral required.

Cons:

• High cost, with a variable rate that may rise.
• Extra fees may apply.

Best for:

• Ongoing business expenses.

10. Microloans

Microloans are small loans — $50,000 or less — offered by nonprofit organizations and mission-based lenders.

These loans typically are available to startups, newer businesses and businesses in disadvantaged communities.

Pros:

• Low cost.
• Other services may be provided, such as consulting and training.

Cons:

• Smaller loan amounts.
• You may have to meet stringent eligibility requirements.

Best for:

• Startups and businesses in disadvantaged communities.
• Businesses seeking only a small amount of financing.

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The Reason One-Third of Small Business Owners Don’t Have Retirement Savings Plan

New research reveals which types of retirement plans are most popular for small business owners.

Retirement is top-of-mind for professionals everywhere, but that doesn’t always mean they have a savings plan in place. To determine how small business owners are planning for retirement, Manta surveyed 1,960 small business owners and found that more than one-third do not have a retirement savings plan, while another 36% plan on seeking out other job opportunities upon retirement from their business.

The research also explores how small business owners’ retirement savings habits differ from consumers, their reasons for not having a savings plan, and which plans are the most popular among small business owners.

 The results were indicative of what has been taking place in America for the past 20 years.  People are finding it more and more difficult to stash money away for retirement.  In March 2016, GoBankingRates published research conducted with 1,504 adults over the age of 55 (4.3% margin of error). About 30% of the respondents age 55 and over claimed to have no retirement savings. An additional 26% reported less than $50,000 saved for retirement. When considering typical benchmarks needed for a successful retirement, 54% of the older Americans in this survey lacked sufficient retirement funds. 

Business owners have the advantage over non-business owners when it comes to funding their retirement.  Business owners are creating equity that can be pulled out of the business at the time of sale.  Most business owners are frustrated however with the rate the equity is growing.  There are several things an owner can do to increase the profits as well as the value of their business.  


The first step to take, so potential buyers will understand the value of your business, is to show a track record of increasing profits. If you can show them your profits will continue to trend upward, you can get a much higher selling price. Finding opportunities to increase sales, reduce costs, and create efficiencies leading up to a sale will demonstrate an extra profit boost and impress buyers. Obtaining a short-term business loan can help expand your operations, boost profits, and increase the sales price for your business.

Ultimately, all value drivers contribute to profit potential aka increasing cash flow, and buyers look for companies whose cash flow is increasing year over year. For example, compare two businesses, each experiencing $6 million of cash flow over the last three years. One company’s cash flow was $1 million three years ago, $2 million two years ago and $3 million last year. The second company had $2 million of cash flow in each of the same three years. Which company is worth more to buyers? The company with growing cash flow. Its track record of steadily increasing revenue can be convincingly projected into future, post-sale growth.

Find ways you can increase sales and revenue, especially recurring revenue, that will generate income for the new owner - right from the start. This may include shoring up any pending customer or vendor contracts, giving the new business owner peace of mind that they will have consistent revenue flow as they get accustomed to running their new business.

Business buyers typically look for a customer base in which no single client accounts for more than 8-10% of total sales. When you develop a diversified customer base, you insulate your company from the loss of a major customer. For example, if your three top customers generate 25-40% of your sales, a buyer will be concerned that one or more of them would leave upon learning that you sold your company. To a lesser extent this may also be a concern to inside buyers if the biggest customers are loyal to you, rather than to the company or other employees. Customer concentration then, is a risk factor to be avoided regardless of the exit path you choose.

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10 Steps to Increase the Sale Price of Your Business

Below are steps you can take now to boost the value of your business

1. Increase profitability

The first step to take, so potential investors will understand the value of your business, is to get proof of continued increasing profits. If you can show them your profits will continue to trend upward, you can fetch a higher price. Finding opportunities to increase sales, reduce costs, and create efficiencies leading up to a sale will demonstrate an extra profit boost and impress buyers.  Obtaining a short-term business loan can help expand your operations, boost profits, and increase the sales price for your business.

2. Create streams of recurring revenue

Find ways you can increase sales and revenue, especially recurring revenue, that will generate income for the new owner - right from the ‘get go’. This may include shoring up any pending customer or vendor contracts, giving the new business owner peace of mind that they will have consistent revenue flow as they get accustomed to running their new business.

3. Establish and document processes

When you Institute and document regimented processes, which enable the company to function effectively without your involvement, you will make buyers feel at ease. This can certainly increase the value of your business. Potential investors need to be convinced that long after you’ve made your exit, the business will continue to thrive and run smoothly.

4. Cultivate a high-quality workforce

Another way to increase the value of your business is by hiring top-notch employees. New owners don’t want to deal with employee turnover, especially when they’re new to the business. Experienced workers bring balance and stability and help to generate profit. You can increase your company’s worth by actively cultivating a high-quality workforce.

5. Position your products or services to stand out in the market

Businesses with differentiated products and services are uniquely positioned to dominate a part of the market. They have an advantage over their competitors and therefore, can command a higher price. You can do this by developing and promoting any intellectual property, patents or other unique feature of your products or services.

6. Identify and highlight tangible and intangible assets

It is essential to list and price all physical assets of your business, including furnishings, fixtures, equipment and inventory. But also consider the value of your intangible assets—things like contracts and agreements, customer relationships, brand recognition, and more. Every non-material asset that contributes to your company’s profit line has the potential to boost its price.

7. Mitigate your risks

Put yourself in the buyer’s shoes. Do whatever is possible to enhance your company’s value. Are your financial records accurate and up to date? Is your facility looking its best? Are there any loose ends that you need to tie up before you list your business? Increase the value of your business by giving buyers what they prefer a business that comes with low risks and high rewards. 

The best part about learning how to increase the value of your business is not only that you are prepared to sell it. As an added bonus, your sales and profits will increase right now. When you put time into shoring up the different elements that make your business stand out, it only becomes more stable, which will help your business command a higher price.

8.  Develop a Diverse Customer Base

Buyers typically look for a customer base in which no single client accounts for more than 8-10% of total sales. A diversified customer base insulates your company from the loss of a major customer. For example, if your three top customers generate 25-40% of your sales, a buyer will be concerned that one or more of them would leave upon learning that you sold your company. To a lesser extent this may also be a concern to inside buyers if the biggest customers are loyal to you, rather than to the company or other employees. Customer concentration then, is a risk factor to be avoided regardless of the exit path you choose.

9.  Improve Cash Flow

Ultimately, all value drivers contribute to good and increasing cash flow, and buyers look for companies whose cash flow is increasing year over year. For example, compare two businesses, each experiencing $6 million of cash flow over the last three years. One company’s cash flow was $1 million three years ago, $2 million two years ago and $3 million last year. The second company had $2 million of cash flow in each of the same three years. Which company is worth more to buyers? The company with growing cash flow. Its track record of steadily increasing revenue can be convincingly projected into future, post-sale growth.

10.  Demonstrate Scalability

A scalable business is one in which profit margins increase as revenues increase.  Profit margins increase because costs do not rise in lockstep with increasing revenue. For example, and speaking from personal experience as an attorney, most professional service firms, are not highly scalable because their revenues are based on an individual lawyer’s billing rates. To increase revenue, increase the number of lawyers; in other words, costs rise in tandem with revenue.

Compare that to a business that licenses software to that same law firm—the cost to produce the software, once created, is almost nothing. The additional licensing revenue it receives increases revenue, profit margin, and cash flow.

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Reasons to Get a Business Loan

Reasons to Get a Business Loan

Small business owners get commercial loans for a variety of reasons.  Loans can be made using accounts receivable or inventory as collateral. Borrowing money is expensive for a company and raises its risk. In addition to the risk of whatever enterprise you are undertaking, borrowing money introduces another level of risk to your company. Regardless, debt is one of the forms of financing small business operations. Here are four reasons that companies often use  debt financing.

1.

 To Purchase Real Estate and Expand Operations

Banks are likely to loan money to existing owners who wish to purchase real estate to expand their operations. If a business is expanding, then the bank knows the business is successful and it wants it to keep on doing what it's doing. Expansion generally only happens if the business is generating a profit, has positive cash flow, and has positive forecasting numbers. That is a scenario that makes a bank likely to approve a loan. Bank loans for real estate are usually in the form of a mortgage. Long-term bank loans are usually 25-30 year term loans. The real estate is used as collateral.

2.

 To Purchase Equipment

Business owners have a couple of choices with regard to the acquisition of equipment. They can buy it or they can lease it. There are good reasons to get a loan to buy your equipment. You can get a tax write-off of $25,000 the first year you use the equipment and depreciate the rest of the equipment over its economic life. You can also use the equipment for its life and sell it for a salvage value. In order to know whether it is best to buy or lease equipment, you should do a cost-benefit analysis before you make the decision. When a bank makes a loan for equipment, it is usually an intermediate term loan. Intermediate-term loans are generally 10-15 year term loans.

3.

 To Purchase Inventory

Banks sometimes make loans to small businesses to purchase inventory. Some small businesses are seasonal in nature, particularly retail businesses. If a business makes most of its sales during the holiday season, they want to purchase most of their inventory prior to the holiday season. They may need a bank loan prior to the holiday season to purchase a large amount of inventory to gear up for that time. Bank loans to purchase inventory are generally short-term in nature and companies usually pay them off after the season is over with the proceeds of sales from their seasonal sales.

4.  To Increase Working Capital

Working capital is the money you use to manage your day-to-day operations. Small business owners sometimes require loans to meet their daily operations needs until their earning assets are sufficient to cover their working capital needs. Banks sometimes loan short-term money to small businesses to enable them to get off the ground and grow. As the business grows and their own assets enable them to earn money, they can repay the working capital loan to the bank. Working capital loans may have higher interest rates than, for example, real estate loans since banks consider them riskier.

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27 Mistakes that Will Get You Denied for Business Credit and Loans… And How to Get Approved