Making It Legal:

Business credit doesn’t happen on its own–and as business owners, we need it now more than ever. 

This E-Myth podcast, featuring Trent Lee of Corporate Credit Concepts, talks about how to establish your business credit and ways that you take an active role in doing so.

Making it through these challenging economic times is not just about ensuring an income (or cash) stream—it’ll also take economizing where you can. 

This article from Entrepreneur.com provides 50 handy ways to save money in these clever categories:

Penny-pinching promotions
Internet ideas
Location logic
Office overhead
Insurance intelligence
Employee economics
Shipping savings
Tax tactics
Financial focus
Professional policies
Buying brainpower

Some of the suggestions, like bartering and using 1099 contractors, can work well, provided you have a clear understanding of your expectations.  Make sure you put those in writing to spare yourself headaches down the road.

 When it comes to small-business financing, there seems to be a lot of lip service and very little financial service. It’s hard not to get cynical when you hear that “small businesses are the backbone of the economy” on the one hand, yet learn that the big Wall Street banks have slashed their small-business loan portfolios on the other.

Many small businesses are facing cash flow problems, and there’s a serious question whether recent congressional proposals are equipped to really handle the situation. According to Professor Scott Shane, these programs will help only a tiny sliver of the small-business world, and largely ignore those businesses with fewer than five employees.

Anecdotally, I’m also hearing that credit institutions are reducing small-business credit lines–through no fault of the business, and even if all payments have been made on a timely basis.

With all of the gloom and doom, what are some proactive steps you can take?

1. Run your financial statements to get clear on your financial needs. If you’re having trouble understanding them, check out the educational videos available on BestSmallBizHelp.com. 
2. Screen the banking and credit institutions you deal with carefully. Some claim to have programs to help small businesses, but make sure you get the full picture. For example, according to Inc. Magazine, JP Morgan Chase recently began a program to reduce interest rates (by half a point) on credit lines for every new hire the company makes. However, if they make it difficult to get the credit line from the outset, or if the interest is exorbitantly high, you may want to work with another bank. Make sure you get the full picture. 
3. Get your legal house in good order. It’ll help make your case when you’re seeking financing–plus it will help plug any leaks . . . so that you can avoid costly crisis situations. What are the leaks? Get your copy of my Legal Health Checklist so that you can put your company–and your finances–on the road to recovery!

Last week, I interviewed Robert Bertsch, Esq., on Entrepreneur’s Daily Dose about legal issues involved with attracting investors online.  Some of the most frequently-asked questions concern confidentiality and staying in line with state and federal securities laws–aparticularly thorny if you’re going to post your Next Great Idea online.

There are other issues, too, in choosing the right investor.  Sure, money talks.  But money isn’t everything.  Do your visions align?  What about your mutual expectations?  Is their background, experience, and contacts relevant for your needs?  Check out my article, “Investing in the Right Investor,” to make sure you’re doing your due diligence and talking to the right people.

It’s been said that “every silver lining has a cloud,” and that certainly applies to having business bad debt. In a number of cases, you can get a tax deduction and write off the bad debt against income. But the fact remains that, to get the write-off, the debt has to be uncollectible. Which means that you’ve lost a paying customer.

In addition, there are several things you have to establish before you can legitimately write off the debt:

• You’ve already declared the income. As noted on BrightHub.com, unless you have already reported or booked the income from the sale (such as if you run your business on an accrual tax-paying basis), you cannot write off the debt. This can be a source of huge frustration for service-based businesses, so speak to your tax advisor about ways to minimize the damage.
• Your company had a legal relationship with the debtor. How can you show that? According to BadCrediting.com, either by having a written agreement or invoices showing what was provided/owed.   You can’t write off a handshake.
• The receivable is worthless. Have you taken any steps to try to collect what you’re owed? (If not, sign up for a free copy of my Contracts & Collections Info Kit, which will help you develop a collections policy and procedure.)  Has the debtor filed for bankruptcy? A little legwork is necessary–you can’t just sit back, take no steps, and then throw up your hands and say “write it off.”

As access to credit gets tighter in the “new economy,” many business owners may look to friends and family to help them get through the lean times. Friends and family are a tried-and-true source of funds.

That said, business deals with friends and family can be enormously counterintuitive. Because you’re dealing with your college roommate Patrice or your Aunt Louise, entrepreneurs have a natural tendency to want to handle these situations on a handshake, in the same kind of casual rhythm as you’d ask them out to lunch.

Don’t.

Once you have a business proposition on the table, let the pendulum swing to the opposite extreme.  Be overly vigilant about documenting the deal, clarifying the interest and payback terms, and adhering to your agreement. As I mention in my article, “Raising Capital from Friends and Family,” failing to put your loan agreement in writing can lead to a variety of tax and legal complications. For example, your family member can’t claim the appropriate deductions for the loan.

Underlying it all, you have a very special asset at risk: trust. Because of the personal relationship, it’s not “just business,” the way it is with, say, a bank. Make sure you keep your benefactor apprised of how you’re using the money. Be proactive if you run into problems meeting the payment terms. Open and honest communication–just as you would use on the personal front–will go a long way to keeping all facets of your relationship strong and vibrant.

I was recently contacted by an entrepreneur (”Marie”) for a “rush job”: She had formed an S-Corporation about a year ago, and now a couple of investors were waiting in the wings to take an equity piece of her company. She needed the deal signed, sealed and delivered within two weeks.

Now I won’t say that’s impossible (although given my current caseload, I couldn’t fit her in). And you certainly don’t want attorneys dragging their heels when you have a deal that needs to get done. But bringing on an equity investor is not something to take lightly. Leaving aside the legal issues, there are a number of tax and valuation issues that need to be addressed.

And here’s what smelled fishy:

• If these were sophisticated investors, they’d know that these kinds of deals take time (and they’d want their own counsel to review it).
• If they were pressuring Marie to do the deal fast, there could be something about it that could come back to bite her in the future.
• And if these were just “friends and family investors,” what’s the rush?

Here’s another problem. Marie had formed an S-Corporation. But an S-Corporation is not a legal form of business that permits passive investors. In order to accommodate them, they’d either have to become active participants in the business (which they probably wouldn’t want), or Marie would have to change her tax status to a C-Corporation (which takes time and could affect the timing of the deal). 

The moral of the story: Even assuming Marie had found the right investors, she didn’t have the right legal foundation for inviting them into her company.  Sometimes it’s not so much understanding the details (like “entity-level taxation” or “limitations of liability”), but knowing where you want your business to go.  Have a look at  my article, “Uncover the Stories Behind Business Entities,” which tries to put a human face on a sometimes complicated and technical decision.

Q: Is there is a way for one to tell whether or not one is personally liable for a business credit card?

A: If the card is in your name along with a company name and the credit card statements are addressed to the company, that c-o-u-l-d be an indication that the account is in the company name alone. But that still wouldn’t answer the question of whether there’s a personal guaranty underlying it.

The best way to check is just to call the credit card company and ask. And see if it will provide you with a copy of the initial credit agreement that you signed. In the future, make sure you keep a copy of all credit card applications so that you know for sure.

Inc. magazine swears that there’s still angel investment funding out there for the right businesses.  Well, OK, maybe “swear” is too strong a word.  Still, the articles “Angels Are Still Interested” and “Angel Investing 2009” paint the picture that, while perhaps not quite roaring like a mighty river, angel investor financing is more than just a pathetic trickle.

Because angel investors are being far more cautious than in years past, entrepreneurs need to put far more thought into how they attract angels.  You need to:

• Have experienced people on your management team, preferably ones who have weathered economic volatility
• Revise your game plan to reflect the changed economic realities
• Do some soul-searching to see if you’re really passionate about your business idea
• Demonstrate an expert knowledge of your market and the discipline to follow thought

For more information on where to find these angels, check out Inc.’s guide to angel-investor networks, available in the hard copy of the magazine (sorry, folks), where you’ll also get more tips (like the ones above) from Kasey Wehrum about choosing the right angel . . . and getting chosen .

 Does this sound like you: “I’ll just work harder and sell more stuff/get more clients. That’ll turn my financials around.”

Well, as Jay Goltz says in his FSB article, “Why Small Businesses Fail,” working harder won’t fix a broken businesses model.  You’ll either face burnout, or worse, a bevy of legal headaches resulting from your inability to pay vendors, employees, and other creditors.

As frustrating and daunting as it may seem, “every business owner needs to be his or her own CFO,” says Goltz.  But how do you know what to look for?  How can you make more informed decisions?

One way, certainly, is to hire a CPA or CFO to help you interpret the numbers (and educate you in the process so that you know what you’re looking for).  Another, suggests Alan Badey, in his New York Enterprise Report article, “Uncover What Your Numbers Say About Your Business,” is to create a basic business dashboard so that you can see and analyze the numbers that substantially affect your bottom line.  These include:

• Using existing technology and systems
• Determining which areas/data are most valuable to track
• Comparing numbers not only month to month but year to year
• Sharing data with key employees

Your dashboard will help you better forecast and budget–and can help catch fraud, Badey writes.

Investors can be a real boon to your business, but no question–they’ll want a piece of the action.  What’s involved in issuing shares to them?

Q: We currently have a market cap of $200,000 (2,000 shares X $100 per share). We were wondering how to authorize new shares to new investors.

A: It’s not unusual for companies to issue new shares at some stage in their existence. This can happen when:

• You want to provide bonuses to employees or directors
• You’re issuing additional equity as part of a takeover of another company
• As in your case, you want to provide equity to new investors.

However, before you run to the secretary of state and fill out the forms to issue more shares (and to change your certificate of incorporation to reflect the increased number of authorized shares), you need to look carefully at a couple of matters. First, is there a shareholders’ agreement among the current owners?  You need to be sure that you properly document the shareholders’ approval of this transaction and follow the procedures in the agreement for admitting new shareholders.  If this transaction will dilute the profit percentages (and it likely will), the current shareholders may need to be specifically apprised of this effect that the transaction will have. Make sure your legal counsel helps you through this process. 

In addition, you’ll want to speak with your accountant to determine both the value of the shares and whether they will fall within the same class of shares as those already issued. If not, that, too, will need to be documented and squared away with the secretary of state of the state you’re incorporated in.

I was sitting with a colleague, Matt Clifford of The Island Financial Group last week, chatting about a range of things: the economy, is the administration’s Stimulus Package truly stimulating (or is it a handout), and how small business owners can protect themselves.

Our conversation then moved to “whom can you trust?” With the seemingly pervasive attitude of fear, how can business owners protect themselves in areas where they might not have enough experience (e.g., financial planning, accounting and law)? How can they feel comfortable trusting those professional specialists? For starters, we came up with a list of Top 5 questions to ask those who will become part of their trusted advisor team.

Choosing a Financial Planner:

1. What does “financial planner” mean to you? What will you be doing for me? Manage/invest my money? Write a plan? Set goals?Sell insurance? Some combination of the above?
2. What’s the breakdown (in percentages) of your own income? How much comes from money management fees? Fees for plan creation? Selling insurance?
3. How can you help me create a lifestyle for myself and my future? How can you help me take the money I accumulate and turn it into an income I can live on?
4. How will you help me protect what we put together? What will you/we do to protect against the effects of inflation, market downturns, disability, prolonged illnesses and more dependents (e.g., caring for parents or siblings)?
5. Tell me a story: How were you able to help someone in similar circumstances to mine?

Choosing an Accountant:

1. How will you act as my advisor? Are you just filing my taxes or is there more you’ll do?
2. How can you help my company meet its financial and tax goals?
3. Can you help me determine the profitability/feasibility of major financial decisions, such as buying equipment, business acquisition or business expansion?
4. What is your background and experience with companies in my industry? With my revenue levels? With the particular issues my company is facing?
5. Do you have your certified professional accountant (CPA) designation, and will that be important for the kind of work I’ll need done?

Choosing an Attorney:

1. What is your background and experience with companies in my industry? With my revenue levels? With the particular issues my company is facing?
2. How do you charge for your services? Hourly rates? Flat fees? What are those rates/fees? Do you require monthly retainer payments or do you charge on a project basis? How can you help me keep my legal fees and costs down once I’ve hired you?
3. Who will be doing the actual work on my matters? You? Or someone else in your firm? (Make sure you meet those people, too)
4. How will you keep me informed about the progress of my matters? Should I call you periodically? E-mail check-ins? How quickly can I expect to hear from you in response to my call or email?
5. Tell me a story: How were you able to help someone in similar circumstances to mine?

For more details on how to hire an attorney, when you’ll want to have one on your team and how to manage the relationship so that it works for you, I’ve created a program, How to Choose and Use Attorneys, available through my site GreatBusinessLawResources.com. It comes with a handy checklist/questionnaire to make sure you ask the attorney–and yourself–all of the pertinent questions you want the answers to when you’re pre-screening.