Investor Lawsuits Against Auditors Are Falling, and That’s Bad News for Capital Markets

Investors rely on corporate auditors to keep impartial watch on the accounting practices of the companies they invest in. Historically, investors have not been shy about launching litigation when they believed auditors did not do enough to stop their clients from cooking the books or engaging in other financial improprieties.

But new research shows that lawsuits against auditors for accounting violations have fallen over the past 20 years, and it’s not because accountants have become so much better at their craft or companies more honest.

“The number of lawsuits per year has declined, dismissals have increased, and settlements in recent years have declined,” conclude the authors of a new research paper. “Our study asks why.”

The number of lawsuits specifically about Rule 10b-5, the antifraud regulation created under the Securities Exchange Act of 1934, dropped from 487 in the year 2001 to 80 in 2014. Another example: Some 70 percent of auditors in 1996 were likely to settle claims with some sort of cash payment. By 2016 the percentage of paid settlements had dropped to a little over 30 percent.

Two Supreme Court decisions, although not the only reasons, appear to have made a difference, according to the researchers. The rulings in Tellabs v. Makor (2007) and Janus v. First Derivative (2011) have effectively narrowed liability standards, requiring plaintiffs such as institutional investors to prove that auditors knew, or should have known, their clients’ financial statements contained errors.

In both decisions, Rule 10b-5 lost its bite. Investors are at a disadvantage.

Companies from around the world seek to list in US capital markets and investors from around the world invest in US listed companies because the US legal regime offers a high level of investor protection. High quality auditing is a big part of this protection. When our investor protections standards go up, our capital markets become more attractive to global investors and companies. It’s a tradeoff, though. You don’t want to impose undue burdens on companies because that will deter one from listing and auditors from doing audits on companies that list in the US. On the other hand, if standards are too low then investors are not protected. There has to be a balance.

That balance is essentially a political and societal balance. The bottom line from our study is that the balance has moved away from investors and toward auditors. We hope our evidence helps provide some of the information we need to strike that balance.

Where is the trend heading? Hard to tell. But if the balance shifts too much away from investor protection it makes for weaker capital markets.

Federal laws are one aspect of our governance system. We can strengthen other aspects. One source of investor protection is the Public Company Accounting Oversight Board (PCAOB). One can make the case that the monitoring of auditors has greatly increased since the PCAOB was created after the Sarbanes Oxley Act of 2002.

There is also evidence that audit committees have improved their ability and willingness to monitor auditors. Investors can ask for and insist on strong audit committees of the board and pay more attention to what an audit committee does.

Investors can also engage with the Securities and Exchange Commission (SEC) and Congress to espouse their point of view. Lobbying for that through a coalition such as the Council for Institutional Investors (CII) can help.

We are a nation of laws. And we can have individual freedoms because we enforce our laws. If we reduce the impact of laws, we actually might not be improving society, because our individual freedoms are encumbered by laws. Which is exactly the issue here. Companies are free and auditors are free to do whatever they want except violate the laws. So reducing the bite, the risk of litigation, is not necessarily a good thing. There are countries with very lax laws and lax law enforcement, and there is a lot of evidence that their capital markets are some of the weakest in the world. We have some of the strongest capital markets because we have some of the strongest legal enforcement.

Sure, we need a balance. Companies have argued that they are subject to a lot of frivolous litigation. Raising the bar higher is a good thing then, to reduce waste of resources spent in litigation. But just reducing investor protections is a recipe for weakened capital markets.

Investor coalitions and individual large investors themselves understand this goal. Enlightened regulators and corporate leaders realize this as well and strive to strike a balance. Companies are benefited when more investors are in the capital markets. It is not a one-way street. When you improve investor protection, it’s not hurting companies. If you help companies, it’s not hurting investors. You need checks and balances. The trust we have in our system—we shouldn’t weaken it. That actually will end up hurting us.

Accounting Hacks For Small Business Bookkeeping

What does tax time look like for your small business?

Are you calmly organised so that it’s just another date on the calendar? Or, are you running around in mad panic trying to sort out all your paperwork?

It’s no secret that accounting and bookkeeping are some of the most maligned tasks faced by small business owners. Not many people leap out of bed with a cry of, “Bookkeeping, YES!”

Assuming that you’ve probably already set yourself up with a digital-based accounting software, here are some “hacks” to make your business bookkeeping more painless.

Categorize Expenses

Anyone who has spent hours (or paid their accountant several hours) to categorize all business expenses should appreciate this one. Setting up categories in your accounting software ahead of time is a huge time saver (and obviously a money-saver when you’re talking about paying an accountant!).

Most accounting software’s allow you to set up categories in the settings, which means as expenses come in, you simply need to assign them to a category. Much easier than trying to remember something 12 months later!

The categories you use will need to be specific to the tax authority you fall under, so you may want to consult with a qualified accountant in your area first to ensure you capture all relevant expense categories.

Some examples (which work for most places) may include: advertising, business fees, licenses and subscriptions, insurance, office expenses, rent, salaries, and telephone.

Another advantage to categorizing your expenses early is that you can clearly see which categories tend to be attributed with more spending. This can help you to identify early any areas which may be getting out of control.

Store Receipts Immediately

Most business owners tend to be clear on income, especially if you’re running an online business where all payments come in and are credited automatically by your payment software. However, it’s a different story when it comes to monitoring expenses.

If you’re digging through boxes, pockets, wallets, drawers, or vehicles looking for business-related receipts, you should know there is a much better way to keep on top of them.

Accounting software such as Xero or Quick-books allow you to take photos of receipts and immediately attach them to the expenses part of your bookkeeping. This means you can also categorize them immediately.

Another advantage of the photo option is that you don’t run the risk of receipts becoming illegible. Deterioration over time, especially on certain types of paper, can mean that you’re unable to read your older receipts at tax time.

If your accounting software doesn’t have this functionality, there are apps available to help you do this. Usually they also provide you with reporting and some of them will integrate directly with your accounting software if you prefer it.

Connect Bank Accounts and Credit Cards

The secret to more painless business bookkeeping is to automate as many functions as you possibly can. This means you should take advantage of features in your accounting software such as the ability to connect bank accounts and credit cards.

This functionality allows transactions to be pulled through and attributed automatically in your accounting software.

For this to be effective, of course you need to ensure that your business transactions only go through your business accounts and that no personal transactions go through.

Another point to note is that you need to ensure that the type of files your bank provides are compatible with what your accounting software accepts. (Or that you choose an accounting software which accepts the type of file your bank provides). Common file types are CSV, QIF, QFX, QBO and OFX.

Reconcile Weekly

It’s all about getting into good habits really. We know that many business owners procrastinate over bookwork because they’re not very fond of it, but if you set aside a small amount of time each week (even just an hour) to reconcile, it’s not such a big deal at the end of the financial year.

This helps you to pick up any errors as close as possible to the time they happened – it gets much more complicated to untangle that kind of thing if time has passed.

The other thing you should be doing with weekly reconciliations is following up with any late payments if your business works on an invoice basis. As Mark Gandy for Less Accounting says, call people even if they’re one day late. Everyone who is 30+ days late was once one day late. Having a clear follow-up process stops things from spiraling out of control.

Automate Invoicing Requirements

If you’re doing business across borders, the chances are you will come across different invoicing requirements for each country you have customers in.

What is your plan to deal with sales tax, GST or VAT invoicing requirements? What about local rules for what to include on invoices? These are important considerations because you don’t want to end up in a position where you’re being penalized for not following correct procedures.

The easiest solution is to choose a software which automatically deals with those invoicing requirements for you. You don’t want to have to add manual checks to every invoice that goes out.

Final Thoughts

Accounting tasks may not be your favorite business activity, but really they’re only as painful as you make them.

You can streamline your processes and save a lot of time if you put good systems in place and automate as much as possible.

Your system should also include regular time to reconcile your accounts, even if that means hiring a virtual bookkeeper. If you deal with a little, often, it becomes much less of a daunting task later on.

When Tax Returns Are Due: The Ultimate 2020 Tax Compliance Guide

The phrase “nothing is certain but death and taxes” is a real thing for taxpayers. When tax returns are due, you need to file them on time or be faced with penalties and interest. Not only can this hurt you financially, but it also exposes your business to IRS audits.

Thus, it is important to know when tax returns are due, so you won’t have to pay more than you have to.  The prompt filing of your tax returns allows your company to remain in compliance and in good standing with the IRS.

The best way to save on taxes and prevent audits is by hiring a tax professional  who will file your tax returns on time. They can also help you save on taxes since they have knowledge on the tax code and the application of deductions and credits.

The Basics of Filing Tax Returns

he IRS underwent major changes in 2018. However, the filing deadlines remain relatively consistent with previous years. When you file your return, the amount of tax you’re required to pay (or receive) is determined. If you have a subsisting tax refund, you will receive your refund usually within two to three weeks.  If you file a paper tax return, refunds usually take a little longer.

Filing Deadlines Of Common Tax Forms

If you receive a W-2 form from your employer, it’s likely that your employer is already withholding taxes on your behalf.  However, self-employed taxpayers need to file estimated tax payments each year. The IRS Form 1040-ES must be filed on or before April 15th. However, for those who pay their taxes quarterly, you may file by June 15th or on September 15th. The last deadline for installments is on February 15th of the following year. This type of tax return concerns partnerships. You need to file them on or before March 15th.

This form is called the Estates and Trust Income Tax Return. It’s due on April 15th of every taxable year but is extendable until September 30th.

This is called the C-Corporation Income Tax Return. Corporations are composed of several shareholders who earn income from the venture. However, being a separate and distinct entity from its owners, it must be filed as a separate form when tax returns are due.

Corporations are required to file this by considering the corporate income tax rate, not the shareholders’ personal tax rate.

The deadline for this form falls on April 15th of every calendar year. However, the deadline can be extended until October 15th.

You must file this form by March 15th on a calendar year when tax returns are due. However, the deadline may be extended until September 15th.

Taxes are not paid at the corporate level. However, you must file annually and provide this information to the IRS.

This is the Foreign Bank Account Reports form. It reports the financial interest over foreign financial accounts and filed with the Treasury Department. It’s due by April 15th but extendable until October 15th when filed with Form 1040.

This tax return is filed by employers to their employees which includes the payment of employee compensation, taxes withheld, retirement information and more.

This is an information return that shows income received if you are an independent contractor. If you earn at least $600 as an independent contractor, you must file this accordingly.

This type of tax return is filed by financial institutions. It concerns bonds, mutual funds, sales of stock, and the mutual funds of a brokerage account.

If you earn from investment securities, the IRS requires you to file the information on Form 1099-B. It also shows your cost basis since investment gains or losses are what determines the amount of tax liability.

This tax return refers to real estate transactions. This is where you indicate your capital gains and losses on your annual income tax return.

Property Taxes

Property taxes must be filed promptly when tax returns are due. If your mortgage properties are out of an escrow account, failure to pay the dues puts your property at risk of foreclosure. If these are not escrowed, you should save funds ahead of time just to make sure.

The penalties for late payments when tax returns are due include interest, property liens, and sometimes, foreclosure. The annual property tax bills are usually sent to you by October of each taxable year.

You may pay them in two installments. The first installment is due by November 1st while the second falls due by February 1st of each taxable year.

What To File When You Incur A Penalty

Underpayment of Estimated Tax by Individuals, Estates, and Trusts. It is attached to IRS Form 1040s and IRS Form 1041.

This indicates whether you have a subsisting penalty with the IRS or if you have an overdue balance from the previous taxable period.

First, you must indicate the amount of your annual payment. This tells the IRS how many penalties you incurred when tax returns are due.

Next, you need to indicate a particular reason for filing Form 2210.

Are you requesting a waiver of your penalty? Do you wish to reduce your liability by using the annualized income installment method? Do you have objections or corrections regarding your penalty?

The third step is also indicating whether you want to use the short method or the regular one in paying for the penalties.

The short method is used when you have no estimated tax payments or when you only paid withholding federal income tax.

You use the regular method if you made estimated tax payments but settled them late. This also applies when you are an employee that has not been paid his wages and whose income is subject to withholding income tax.

Finally, the next step proves why a tax professional  is exactly what you need when tax returns are due. This is the part where you will be asked to compute the underpayment you incurred.

Accountants fill out this form without effort. They are experts in knowing how much your liability is by examining your books. They even file other forms so you do not worry about

The Benefits of Your Filing Tax Returns On Time

iling your tax returns ahead of time lets you save more money.

Retirement Plan Contributions

The IRS raised the limit to $19,000 for 401(k), 403(b), and most 457 retirement plan contributions.

The IRA contributions also increased up to $5,500 to $6,000 this year.

Tax Planning Services

You can prevent incurring tax penalties by hiring someone to promptly file with the IRS when tax returns are due.

Accountants are trained to complete financial statements and tax filing initiatives before they are granted their CPA licenses.

Imposing efficient tax planning generates tax-saving solutions. We mitigate your risks of incurring tax penalties and file returns on time so you can avail of tax exclusions and exemptions.



7 Ways To Get A Higher Tax Refund

Nobody wants to overpay on their taxes and many really count on getting a refund. That extra money can be a life-saver just when you need it most. Follow these tips to make sure you’re getting your full refund back this year.

Reevaluate Your Status

Your filing status isn’t an arbitrary classification as may think. For a lot of people, changing their status can have a big impact on the amount they pay and how much they get back. Even if your status seems obvious, go over all the options and figure out which of the choices you qualify for will best serve your wallet.

Take A Crash Course In Credits & Deductions

Too many people assume they already know which tax credits and deductions they qualify for. The problem is, the IRS changes things up from time to time and your life is in constant flux. There’s no way to know if you’re taking advantage of all the possible credits and deductions unless you go through them and check.

The next decision to make is whether or not to itemize your deductions. If, after assessing which you qualify for, you’re sure that your deductions won’t be higher than that of the standard deduction, then stick with that. However, if it could be higher, it may be well worth the time to itemize.

Check The Retirement Account Rules

You may have put enough money into a traditional retirement account this year to put off paying taxes on that money until you withdraw it later in life. Just make sure you specify which year you’d like it to count towards.

Timing Is Key

Many deductions can actually be increased just by making sure to do certain things closer to the end of the year. Your mortgage payment, health expenses, and even work equipment purchases can get you extra deductions if you time them properly.

Double-Check Your Withholding

How much you should be withholding depends on a myriad of factors. Many major life events like marriage, divorce, a baby, or job changes can cause that number to shift. Double-check that you’re still withholding the right amount each year.

The next decision to make is whether or not to itemize your deductions. If, after assessing which you qualify for, you’re sure that your deductions won’t be higher than that of the standard deduction, then stick with that. However, if it could be higher, it may be well worth the time to itemize.

Check The Retirement Account Rules

You may have put enough money into a traditional retirement account this year to put off paying taxes on that money until you withdraw it later in life. Just make sure you specify which year you’d like it to count towards.

Make The Tax-Advantage Your Advantage

A lot of employers provide the option to use tax-advantage spending accounts for things like health expenses and transportation. Check into them and see if you could be using them to raise your refund.

Don’t Rely Solely On Your Own Expertise

This one cannot be stressed enough. It is imperative that you work with a tax expert on these matters. Not only are they very confusing, but there are plenty of really helpful things that only a tax accountant will know how to properly use to your benefit. It’s too important to do alone.

Take Nothing For Granted

So many of these things rely on not being complacent with your taxes. It may be tedious and difficult, but the effort you put in is well worth the money you’ll get out. So double-check everything just to be sure you aren’t missing out on extra savings.


5 Study Hacks Proven by Science (and Why They Work)

Through college, I got a lot of advice from professors and fellow students on a bunch of study hacks. Some of the study hacks I heard sounded crazy to me. Like the students who stayed up all night reading chapter after chapter in a textbook or writing papers. I like my sleep too much!

Eventually, I found my own way to study, but I was still curious if there are more efficient ways to study than the one I used. I’ve done the research and collected some science-backed study hacks useful for any learner.

1. Learn by “chunking”

If you’ve taken a psychology class, you may already be familiar with the idea of chunking. The theory is that people tend to remember things better when they learn related ideas in small chunks, rather than simply trying to cram all the details of a topic into their heads at once.

It’s all based on the capacity of the working memory and how our brains turn short-term memories into long-term ones. Psychologists have consistently shown that people can easily recall a string of numbers or names that is 5 to 9 objects long. That means the average person can repeat about 7 items back a few seconds after being given a list.

Students who cram may be taking in a lot of information at once, but since their working memories can’t hold all those facts, they tend to forget most of what they learn. One way to overcome knowledge loss by cramming is to chunk topics together. Research has demonstrated that subjects tend to remember more items on a list when they relate certain items on the list with others.

So if you find yourself in the (non-ideal) situation where you got to remember a large amount of information in a small amount of time, try to group facts together based on their characteristics. Or, find a pattern in the information that is meaningful to you to connect seemingly unrelated ideas.

2. Don’t fall victim to the Forgetting Curve

You’ve heard of learning curves, but have you ever heard the Forgetting Curve? Research shows that people are much more likely to be able to recall information from a one hour lecture when they review what they learned later on. And, not surprisingly, the more times one turns the information over in their mind, the longer they’ll remember it.

Like chunking, this hack is based on the functioning of the working memory. People take in an astounding amount of sensory information each day. Since not all of this information is important, the brain must decide what to hold on to and what to forget. One way the brain decides what takes priority is by paying more attention to information that it has processed multiple times.

You’re more likely to remember information from your lectures if you review what you’ve learned every day for a small amount of time everyday rather than cramming. If you don’t have time to review everything you’ve learned in a class everyday at least try to make sure you’ve looked at and actively processed a topic several times before a test.

One way to do this is to actively read the relevant material from your textbook before your lecture, take notes, and then review those notes that night before you go to sleep. Obviously, it’s helpful to look over your notes again before a test, and the more time you can find to review, the less you’ll be re-learning before your test. It can actually help save you time in the long run!

3. Exercise before you study (and consistently!)

Exercise has both long and short-term effects on cognition. When you exercise, your body interprets the physical stress as you fighting or fleeing an enemy and activates your sympathetic nervous system. In response, your brain is flooded with extra blood, rich in oxygen and nutrients, to make what it thinks could be life-saving decisions. It’s even been demonstrated that exercise can lead to neurogenesis, or the creation of new brain cells–a process previously thought impossible.

In addition, a brain structure called the hippo campus is stimulated during exercise. Research has shown that the hippo campus is important for reasoning and memory. Besides short-term boosts in cognition, regular exercise can actually slow down age-related shrinkage of the hippo-campus.

Another benefit of exercise is its role as a stress-reducer. Stress can be a huge hindrance to focus and memory formation (thanks to the hormone cortisol), and unfortunately, college can be extremely stressful. Luckily, exercise is a cheap and easy way to curb some of the stress associated with day-to-day life, ensuring you can focus on learning what you need to for your classes.

The Department of Health and Human Services recommends 150 minutes of moderate exercise each week to maximize benefits. Small lifestyle changes, like walking or biking to class or work, are an easy way to get those minutes in. To get the immediate benefits of exercise before a study session, try doing 20 minutes of moderate cardio before hitting the books.

4. Study before you go to sleep

A collaborative study published by researchers from Notre Dame and Harvard found that research subjects tended to remember unrelated word pairs better if they had learned them shortly before a good night’s sleep, rather than in the morning before 12 hours of being awake.

It has long been theorized that sleep helps to stabilize the memories we form throughout the day. Interestingly, it seems that being awake does the exact opposite–creating interference in our memories and causing us to forget some of what we’ve learned.

5. Break up long study sessions for better focus

You may be tempted to commit yourself to hours-long study sessions. There’s nothing wrong with having the occasional study-athon, just make sure that you give yourself shorts breaks while you work.

Research has shown that when people try to focus on a single task for a long period of time, their minds start to wander. It’s the same phenomenon you experience when you hear the same sound over and over again–you become habituated to it, and it becomes background. The idea is the same for a task you’re trying to focus on. In essence, you start going through the motions without actually thinking about what you’re doing.

It turns out that taking short intermittent breaks can help you regain focus and study more effectively.

If you know you have problems focusing while studying or are simply interested in getting the most out of your study sessions as possible, try this: set a timer for the amount of time you think you can study without your mind wandering (you could even use the timer to measure the time between when you start studying until you notice yourself becoming distracted) then, once that time is up, take a short (around 5 minutes) break to engage your mind in some other task, such as grabbing a coffee or starting a load of laundry before sitting back down to study. This should allow you to reboot and refocus on studying.


Cloudways Makes Google Cloud and AWS Hosting Understandable

Cloudways is a hosting company located in Malta. They are bridging the gap between the big cloud platforms that are still technical and the needs of small businesses. Cloudways is helping SMBs take advantage of what cloud hosting has to offer. For example, it tackles the complexity of configuring and setting up platforms like AWS and Google Cloud.

They want to make it so you don’t need to have a systems administrator on hand to take advantage of what these bigger platforms have to offer.

Cloudways for Small Businesses

Small Business Trends contacted Pere Hospital, the founder for more information. He started out explaining more about what the product does.

“Cloudways is a managed cloud hosting platform that emphasizes simplicity, choice, and freedom,” he writes.  “The Platform is built to facilitate businesses in deploying and scaling their online assets without worrying about the underlying hosting solution.”

One of the things that will attract small businesses are the options.

“There’s a choice of five industry-leading IaaS providers and it’s easy to deploy almost all PHP powered applications. Cloudways provides choices so that the Platform remains a great fit for a very broad set of businesses.”

Meeting Challenges

Here’s why small businesses need a hand setting up and configuring the cloud hosting on platforms like Google Cloud and AWS for small businesses.

First off, they need to understand AWS and Google Cloud are industry leaders that offer a very broad lineup of very powerful tools and services.

“All this power comes at a cost,” Hospital says adding it takes time and effort to harness it into profitable business operations.

Keeping Pace

He says these mid-level players such as SMBs and digital agencies need AWS or Google Cloud to keep pace. Many don’t have the skilled team members to manage and maintain a server positioned on these cloud providers.

Setting Up the Server

Simply setting up a server is the first hurdle. Cloud servers are different from web servers. Getting these business-ready requires several steps.

“Small businesses need to install the right OS, set up the stack and then deploy the core business-level applications.”

This usually makes setting up a cloud server the domain of a tech expert that many small businesses can’t afford

Bringing Cloudways Into Play

That’s where Cloudways comes into play. This product takes over server management and allows small businesses to get the most from AWS and Google Cloud.

Why Cloud Hosting Should Matter to Your Small Business

Shared Hosting is one of the models that small businesses favor because it is cheap. Here’s why cloud hosting is better.


Scaling the server to meet demand. In the cloud, scaling resources is about adding virtual servers. There are no physical aspects so you can deal with traffic spikes quickly.

Examining Performance

Cloud hosting is a fact because there’s no physical architecture. Troubleshooting is simpler and there are automated custom-built solutions available.

Considering Sustainability

Cloud hosting has better sustainability for small businesses.  In the end, it all comes down to one word. Uptime.



Why Banks Perceive the Financial Risk to Be Greater Among Small Businesses

Traditionally, banks have viewed small business loans as some of the riskiest. The 2018 credit crisis prompted banks to cut their riskiest loans and led to a 30 percent decrease in the amount of government-backed business loans compared to 2007, according to CNN. Much of the hesitation to lend to small businesses comes from the historical rates on small business failure.

Time Frame

The older a small business gets the less likely it is to fail. Young companies, however, have inadequate financial information to judge the health of the company until the two- or three-year mark. Even if the company has a solid business plan, most banks do not want their money tied up in a new venture that could fail in months.


Small businesses have high failure rates in two key areas: loan defaults and company success. According to CNN, in 2009, U.S. Small Business Administration loans had an 11.9 percent default rate. Historically, small business loans have had a default rate of 0 to 28 percent, depending on the location of the business and the state of the economy.

Failure Rates

The actual failure rate of the average small business is unknown, but business consultants usually consider 33 percent a close approximation, according to, a website focused on small businesses. This failure rate goes up to 66 percent for companies younger than 2 years old, based on U.S. SBA statistics.


The government created the Small Business Administration in 1953 to help small businesses grow and get advice, according to the SBA website. The SBA also backs loans made by commercial lenders to entice them to lend. The guaranteed portion of SBA loans varies from year to year, but the SBA backs at least 75 percent of loans by approved institutions and this often goes up during recessions


Banks want an applicant to have a credit score above 700 and collateral to secure at least 10 to 20 percent of the loan and a solid business plan, according to William C. Deegan of the State University of West Georgia. New businesses should have a plan to get positive cash flow within six months, while existing companies need records that prove the company can afford loan payments.



Business Finance Solutions

Different sources may be appropriate for different stages of growth. Start-ups often rely on family members, friends, or local associates. As you grow, you may need to turn to alternate sources such as Venture Capital. Once you have achieved a financial track record, you can turn to other sources such as Asset Based Lending or Commercial Loans.

Here are the major business finance solutions available and when to use them.

Venture Capital

ne problem many new businesses face is raising sufficient capital. A business in its primary phase will also face a difficult challenge getting a bank loan. One alternative is venture capital.

Venture capital firms offer capital in exchange for equity in a company. This type of financing is ideal for new businesses since venture capital firms focus mainly on the future prospects of a company when banks use past performance as a primary criteria.

Asset Based Financing

In increasingly popular business financing solution is Asset based as a means of financing growth and providing working capital. Asset based financing is a general term whereby a lender accepts as collateral the assets of a company in exchange for a loan.

Most asset based loans are financed against accounts receivable and less often, against inventory since receivables are among the most liquid of a company’s assets followed by inventory. Receivables are favored by lenders since they self-liquidate in a short period of time by themselves and are not susceptible to problems such as shrinkage or physical damage.

Another type of asset based lending is factoring. Factoring is defined as the purchasing of a company’s accounts receivable on a non-recourse basis.

Asset based lending may be the best source of working capital for companies in turnaround where traditional bank loans may not be available or for new and rapidly growing companies where high levels of growth cause the business cycle to outpace the collection of receivables.

Long-Term Debt

Long-term debt is one of the initial financing avenues a company should pursue. Most long-term debt takes on the form of a loan where the interest and part of the principal are paid back in equal installments over the life of the loan. Sources for these business financing solutions include:

  • commercial banks
  • government sponsored loan programs
  • small business investment companies
  • private lenders

Lines of Credit

A line of credit loan is designed to provide short-term funds to a company in order to maintain a positive cash flow. Then, as funds are generated later in the business cycle, the loan is repaid.

This is a fairly popular business finance solution. Most commercial banks offer a revolving line of credit, where a fixed amount is available. As funds are used, the “credit line” is reduced and when payments are made, the line is replenished. One advantage of a line of credit is that the no interest is accrued until the funds are withdrawn, but the line is immediately available for the company’s cash flow needs.

Letters of Credit

A letter of credit is a guarantee from a bank that a specific obligation will be honored by the bank if the borrower fails to pay. Letters of credit are useful when dealing with new vendors who may not be assured of a company’s credit worthiness. The bank would offer a letter of credit as an assurance to the vendor of payment. Although no funds are paid by the bank, the credit requirements for a line of credit and a letter of credit are similar.

Loan Workouts

A loan workout is the process of repaying a problem loan in a fashion that is most agreeable to the lender and the company. Among the steps involved in a successful workout are maintaining communication with the lender, creating a revised payment schedule, and forming a workout team composed of the company’s management, representatives from the lending institution, and legal counsel to manage the process.

Unlike a traditional small business loan, one of the initial steps in workout proceedings is to recognize that repayment of the loan will not occur. The earlier the company recognizes that a problem exists, the greater their flexibility in dealing with the problem. Financial consultants who specialize in loan workouts are also available to coordinate the efforts of the company and the lender. These consultants can direct the workout team’s efforts and suggest solutions to the problem.

Floor Planning

Floor planning is another asset based lending approach in which companies can finance their inventories. In floor planning, inventory is financed based on the credit of the vendor as well as the company receiving the financing. The inventory purchased acts as collateral until the sale is made.

Small Company Offering Registration

Another type of equity financing is a small company offering registration or SCOR. Of the various business finance solutions available, this option is not as popular. Since there are laws governing private sales of securities, SCOR’s provide a means of selling common stock to the public. Companies can trade their common stock over the counter rather than deal with the difficulties that initial public offerings face.



What is the difference between accounts payable and accounts receivable?

Definition of Accounts Payable

Accounts payable is a current liability account in which a company records the amounts it owes to suppliers or vendors for goods or services that it received on credit.

Definition of Accounts Receivable

Accounts receivable is a current asset account in which a company records the amounts it has a right to collect from customers who received goods or services on credit.

Examples of Accounts Payable and Accounts Receivable

Let’s assume that Company A sells merchandise to Company B on credit (with payment due 30 days later). Company A will record the amount of the sale with a credit to Sales and a debit to Accounts Receivable. Company B will record the purchase (perhaps as inventory) with a credit to Accounts Payable.

When the amount of the credit sale is remitted, Company B will debit its liability Accounts Payable and will credit Cash. Company A will debit Cash and will credit its current asset Accounts Receivable.

Symmetry with Accounts Receivable and Accounts Payable
Our examples show that there are two sides to every transaction (which some people refer to as symmetry).
At the time of the sale:

  • Company A reported a sale and a current asset, and
  • Company B reported a purchase and a current liability

At the time of payment:

  • Company A’s Cash increased and its Accounts Receivable decreased
  • Company B’s Cash decreased and its Accounts Payable decreased

Balance Sheet: Retail/Wholesale – Corporation

What is a Hedge Fund?

A Hedge Fund is a fund established by one or several partners with net worth of at least $1 million (although this maybe falling). It uses long and short positions to take speculative positions in multiple markets simultaneously. (Regular equity funds are not allowed by law, to short securities.) Hedge funds use leverage and trade derivatives in order to maximize returns. After the leverage effect Hedge Funds command large amounts of resources. Their positions can significantly affect markets, particularly those markets that are relatively less liquid.


Hedge Fund have been playing a no-lose game

In the simplest strategy a hedge fund borrows Hong Kong dollars(HKD) and
then sells them in the market against USD, i.e., they short the HKD. Note that this will cause the money supply to shrink. A decrease in money supply leads to an interest rates increase. Increases in interest rates have several effects on the stock market. First borrowing HKD to buy stocks becomes more expensive. Hence fewer investors would use margin. Second, an increase in deposit interest rates will draw funds from stocks to deposits. Third, interest rate increases are negative for businesses and their value will go down. Again stocks decline.

On the other hand, higher interest rates lure more investors to park their money in Hong Kong, boosting the currency. But they also slam the stock market because rising rates hurt companies’ ability to borrow and expand. However, many of these Hedge Funds involved in the speculation did not operate in the cash market. instead they shorted the HKD in the futures markets. This does not require borrowing HKD. It is the counter party who has to hedge the long HKD position who needs to “borrow HKD” from the banking system. In the particular case discussed here Hedge Fund managers believed that they were taking little risk:

•  The hedge funds bet on the collapse of the peg. If the peg breaks, the HKD is expected to fall. Given the psychology of those days, the casual view was that the HKD was overvalued. The only risk to Hedge Funds is that the peg holds. Under these conditions their loss will be the difference between the initial cost of entering the trade to sell HKD in futures markets and the pegged rate. The reading suggests that this cost is low.



Hedge Fund enters contract to sell HK$ in six month’s. At expiration the Hedge Fund needs to buy spot HKD and delivered these against the short future’s position. If the peg holds the cost of replacing the HKD it has sold is essentially the 6 month differential between USD and HKD interest rates. On Thursday August, 20th the difference in inter-bank interest rates was about 6.3%, (Hong Kong rates being higher due to heavy demand for HKD loans, which are needed to short the currency.) So a hedge fund manager making a USD 1 million bet Thursday against the HKD would have paid USD 63,000. If the fund manager believed that the peg would break and thus the HKD depreciate, say, about 30%, then the potential profit would be USD 300,000. Compared to the cost of making the trade, USD 63,000 this is a good profit.


MA Intervenes

HKMA intervened to defend the peg. Using its own FX reserves, MA sold USD. Normally, when a country with a pegged currency spends reserves to defend the currency’s value, the intervention will have to be “sterilized”. In other words, the central bank would buy local currency bonds from the banking system so the purchase will be roughly in similar quantities so that the overall monetary base remains constant. However, doing this in Hong Kong at that time would result in further increases in interest rates. This would be considered as severely harmful by real estate companies in Hong Kong.