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.

Defaults

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 Gaebler.com, 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.

Solution

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

Tip

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.

 

Example:

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.

Study Hacks Proven by Science

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.

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.

3. Exercise before study

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 hippocampus is stimulated during exercise. Research has shown that the hippocampus is important for reasoning and memory. Besides short-term boosts in cognition, regular exercise can actually slow down age-related shrinkage of the hippocampus.

4. 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.

 

 

Secret Study Hacks to Improve Your Memory

1. Walk Before An Exam

It’s been proven that exercise can boost your memory and brain power. Research conducted by Dr. Chuck Hillman of the University of Illinois provides evidence that about 20 minutes exercise before an exam can improve performance.

2. Speak Out Loud Instead of Simply Reading

Although this may make you look a little crazy, give it a go! You will be surprised how much more you can remember when you’ve said it out loud. Warning: Do not do this at library.

3. Reward Yourself With A Treat

There are many ways to integrate a reward system into your habits so you learn how to study for exams more efficiently. Simple way to motivate yourself to study with chewing gums and or snacks.

4. Teach What You Have Learned

The best way to test if you really understand something is to try to teach it to someone else.

5. Create Mental Associations

The ability to make connections is not only an easier way to remember information, but it’s the fuel of creativity and intelligence. Steve Jobs famously saidCreativity is just connecting things. When you ask creative people how they did something, they feel a little guilty because they didn’t really do it, they just saw something”.

Mind Maps are an easy way to connect ideas by creating a visual overview of different connections

6. Draw Diagrams

Drawing diagrams will help you to visualize information which would be hard to describe. This creates a visual memory in your mind which can be recalled in an exam. You may even be asked to draw or label diagrams such as the human heart in your exam so get practicing!

7. Watch a Documentary on the Topic

Documentaries are an entertaining way of compacting an entire story into a short time frame. This will help you remember key details from a story plus you may even get extra credit for mentioning that you took the initiative and watched a film about the topic!

8. Search Google Like a Pro

Save time when researching sources online by mastering the biggest search engine in the world; Google

9. Take Regular Study Breaks

When your brain is working, you need to take regular study breaks to help your brain absorb more information but also to keep you motivated and focused when you are working. Take a short break after 45-50 minutes study as your focus and concentration will become impaired after this period, anything new after 1 hour 30 minutes does not get assimilated.

10. Study in a Group

Studying in a group can help you collect new insights to enhance your learning experience. Groups study helps you share resources, discuss ideas and interact with members of your team or group project.

 

A Degree in CyberSecurity – Is it worth the time?

Yes, education is significant. The more you have, the better you perform. According to Cyber security Ventures, the demand for cyber security professionals is expected to reach three and a half million globally by 2021. If you are a cyber security degree holder, then you are eligible to apply for these jobs globally.

On one side, where certification gives expert knowledge, a degree program will help you with in-depth learning. By attaining credentials, you can improve your job prospects, whereas a degree helps you retain and grow in your job.

Therefore, few universities offer the opportunity to attain both a degree and credentials. This allows students to acquire both knowledge and skills simultaneously and get job-ready before completing their degree. Online degree programs with certifications embedded enable students to pursue higher education and industry-recognized credentials while working.

A survey on students pursuing a degree program revealed that a degree backed by credentials would help the student realize and achieve career goals.

EC-Council University brings degree programs with industry-recognized credentials embedded in them. This means that while pursuing a degree, students can also attain up to four credentials.

EC-Council University has superior educational programs that will equip cyber security graduates with the knowledge to assess cyber threats and the skill to combat them successfully. The university offers degree programs at undergraduate and graduate levels, namely, Bachelor of Science in Cyber Security (BSCS) and Master of Science in Cyber Security (MSCS). Both programs offer industry-recognized EC-Council credentials to enable students to obtain skills in the domain of their choice. The bachelor program comes with three certifications, whereas the master program certifications differ based on the specialization you pursue.

EC-Council University is accredited by the Distance Education Accrediting Commission (DEAC), which is a recognized accrediting agency by the U.S. Department of Education and is also an acknowledged member of the Council for Higher Education Accreditation (CHEA). The faculty members are industry practitioners who guide them at different levels of your career. The university also gives the facility to access iLabs so that the students can real-time exposure