Monthly Archives: June 2013

Banking FAQ’s

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

Banking Tips from Scarsdale AccountantAs tax professionals, our Westchester CPA firm sees firsthand many shared financial questions and concerns, so we thought we’d address these FAQ’s beginning with banking:

▼ What can I do to raise money for my small business?

Although the process is complex and frustrating, raising capital is the most basic of all business activities. When looking for financing, there are various sources to consider. For most new businesses, the main source of capital comes from savings and other forms of personal resources. There are better options available than credit cards that are often used for financing, even a small business loan.

When beginning, entrepreneurs usually look to private sources like friends and family. Generally, the money is loaned at a low interest rate or interest free, which is very beneficial at the beginning.

The most common source of funding, not including personal resources, are credit unions and banks who will provide a loan if it is possible to show that your offer is worthwhile. Other sources are venture capital firms that aid businesses in exchange for partial or equity ownership.

▼ For business financing, what kinds of loans exist?

You must know the exact amount of money that you need, what your purpose is and how you will repay it in order to be successful in getting a loan. You must convince the lender in a written proposal that you are a good credit risk.

There are two basic kinds of loans, although terms vary by lender:

Short-term and long-term, maturity periods of up to one year are generally short-term, which include accounts receivable loans, working capital loans and lines of credit.

Maturities greater than a year and less than seven years is a typical long-term loan. Equipment and real estate loans can have maturity up to 25 years. Major business expenses such as purchasing real estate and facilities, durable equipment, construction, vehicles, furniture and fixtures, etc. are a few purposes for long-term loans.

▼ When considering a loan request, what do banks look for?

The bank official who reviews the loan request is focused on repayment. Most loan officers request a copy of your business credit report to determine your ability to repay.

The lending officer will consider the following issues while using the information you provided and the credit report:

  • Have you invested at least 25% or 50% of savings or personal equity into the business for the loan you are requesting? (Keep in mind that 100% of your business will not be financed by an investor.)
  • Do your work history, your credit report and letters of recommendation show a healthy record of credit worthiness? This is a key factor.
  • Do you have the training and experience necessary to operate a successful business?
  • Do your loan proposal and business plan document your knowledge of and dedication to the success of the business?
  • Is the cash flow of the business sufficient to make the monthly payments on the requested loan?

▼ What do I need to include in a good loan proposal?

The following main points should be contained in a good loan proposal:

General Information

  • Reason for the loan: the exact purpose of the loan and why it is necessary.
  • Amount needed: the specific amount needed to reach your goal.
  • Business name and address, names of officers and their social security numbers.

Description of Business

  • Describe the type of business you have, its age, current business assets, and number of employees.
  • Structure of ownership: describe the legal structure of the company.

Management Profile

  • Prepare a short statement that is focused on each principal in your business; give details about education, background, accomplishments and skills.

Market Information

  • State clearly the products of your company as well as its markets. Name the competition and explain how you plan to compete in the market. Describe what the business will do to satisfy the needs of its customers.

Financial Information

  • Submit your own personal financial statements as well as those of the principal business owners.
  • Financial statements: the income statements and balance sheets for the past three years. If you have a new business, provide the projected balance sheet and income statement.
  • Specify the collateral that you are able and willing to give as security for the loan.

Scarsdale accountant Paul Herman is here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Larchmont NY, Purchase NY, Mamaroneck NY, Bedford NY, Pound Ridge NY, Chappaqua NY and beyond.

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Gift Giving

Scarsdale accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

If you give any one person gifts valued at more than $13,000, it is necessary to report the total gift to the Internal Revenue Service. You may even have to pay tax on the gift. The person who received your gift does not have to report the gift to the IRS or pay either gift or income tax on its value. Gift Giving Tips from Scarsdale AccountantYou make a gift when you give property, including money, or the use of or income from property, without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

  • Tuition or medical expenses that you pay directly to an educational or medical institution for someone’s benefit
  • Gifts to your spouse
  • Gifts to a political organization for its use
  • Gifts to charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift. Please contact our Westchester accounting firm to receive your free consultation and learn more!

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Risks of Interest-Only Loans

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions!

 

Not repaying principal, and therefore not building equity through debt retirement, means that an interest-only borrower is counting on market appreciation (price inflation) to help them own more of their home. Of course, this requires that prices increase while they hold the mortgage.

However, you don’t own the national realty market; you own a single home in a single neighborhood in a single town, and people will concede that prices can and do increase and decrease regularly on a localized basis. Scarsdale Accountant and Interest Only Loans RisksSo what does this mean to the interest-only borrower? There is a danger in not reducing the balance. If prices should fail to increase during the interest-only period, and if the borrower should find a need to sell the home, they could potentially be liable for thousands of dollars in sales costs which would need to be paid out of whatever equity (in the form of the down payment) they started out with.

The more extreme side of the first risk, of course, is that prices actually decline during the mortgage holding period. If our borrowers finds themselves in that situation, coupled with a low down-payment, they could easily find themselves “underwater” — a descriptive term that means they’ll sell the property for less than the remaining balance of the mortgage. In that unhappy case, the borrowers cannot sell without somehow coming up with what would likely be several thousand dollars to satisfy the mortgage balance as well as any sales charges (commissions, inspections, etc).

We noted before that payments made in the early years of a fully-amortizing are largely comprised of interest.

Interest Rate Risk

All the examples so far have been based on mortgages with a fixed interest rate. Unfortunately, most of the interest-only loans being made today feature only short fixed interest periods, if any; some featuring adjustable rates which can change each month. If history teaches us nothing else, it’s that low rates inevitably rise.
Above, we discussed term compression and its effect on payments, which causes them to rise above what they otherwise would be when the interest-only period ends. Now, magnify that compressed repayment term with a jump in interest rates, and you’ve got a recipe for a fiscal catastrophe.

Figure this: you, the interest-only borrower, have been happily making payments at $600 for the first five years of your (for now) fixed-rate loan. All the while, interest rates have been rising from their near-40 year lows to what could be considered “normal” — about 7% — and your monthly payment climbs over 40% to $848 per month. If you should find yourself in a period of considerably higher interest rates when the fixed-rate and interest-only period ends, your rate could climb to 9% or more — in which case your monthly payment could jump to $1,000 per month, or more.

Also at the moment, liberal and flexible mortgage underwriting standards are allowing borrowers to borrow more money for the same income, because qualifying ratios have been greatly expanded. Theoretically, a borrower’s budget might already be pretty stretched to the limit — and that’s before a nasty rate and payment hike.

Our Westchester CPA firm is here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Purchase NY, Mamaroneck NY, Bedford NY, Chappaqua NY and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.