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When consulting with clients around the country regarding business credit and setting up the proper entity, many get side tracked on the ‘asset protection’ issue.  I believe this is because there are so many scams in the asset protection world.  In fact, there are many myths about tax planning, business credit and asset protection sold by inexperienced and non-licensed professionals.  The primary reason why I wrote my first book “Lawyers are Liars- The Truth About Protecting Our Assets”, was to set forth the truth and what actually works.

But before we talk about what asset protection is, let’s talk about what it is not. You will certainly encounter numerous misconceptions and urban legends on this subject. It’s important to dispel these dangerous and damaging lies because, as the proverb states, “Show me a liar, and I’ll show thee a thief.”  Let’s begin our asset protection journey by first destroying these myths.  Just like there are many myths about unsecured business credit there are many asset protection myths as well.  In my upcoming blog post, I’ll discuss “Real Asset Protection Strategies”.

Myth #1- Asset Protection is an all or nothing proposition. Wrong. You can start now by taking small steps to protect your assets and add additional protective barriers as your income, assets, and your needs change and grow. Small steps help lead us to take bigger financial steps.  You will find there is no single correct formula or ‘quick fix.  It truly is a process of starting with basic planning and doing “the little things” until your circumstance becomes more complex.  Ultimately, you will tailor systems, structures, and strategies to your particular situation.

Myth #2- I need to set up my business entity in Nevada or Delaware if I want real asset protection. Although there are some legitimate companies out there setting up Nevada and Delaware corps we see a lot of mis-information around this topic!  Please know that you won’t save taxes by incorporating in those states, nor will you get better asset protection if you are actually operating in a different state.  The reason being is that if you are doing business in Colorado for example, you are going to have to register your company there anyway and pay taxes there.  All you do by incorporating in Nevada is increase your administrative costs and headaches with additional state filings. Set up your company in the state you are doing business and follow your state laws for maintaining the corporate veil.  You’ll receive plenty of protection and won’t waste your hard earned dollars.  It doesn’t always help with lenders either so listen up if you’re planning to apply for a small business loan or a business line of credit.  Occasionally, as part of their underwriting strategy, lenders like to verify ownership with the Secretary of State in the state you formed your entity.  This is hard to do in states like Nevada and Delaware and can work against you when that verification step is difficult or impossible for the lender to complete.

Myth #3- I don’t have anything to protect, so I don’t need to worry about asset protection yet. Remember, wealth is relative and you don’t have to have millions of dollars to require asset protection planning. The equity in your business, rental property, personal residence, or simply the money in your bank account could only be $50,000 to $100,000, but that could represent years of hard work and struggles. You can certainly take a few simple steps to protect your net worth without creating an elaborate structure.

Myth #4- I have an insurance policy and thus I’m completely covered. This is completely false. Do you really want to risk all of your assets on the opinion and whims of an insurance adjustor as to whether or not your claim should be paid? While liability insurance was once the trusted shield from potential economic devastation resulting from a civil judgment, individuals with “deep pockets” are increasingly susceptible, irrespective of their insurance coverage. Now please don’t misunderstand me. Insurance is an important part of protecting our assets. I highly recommend its use and carry various types of insurance policies myself. However, I also think it is ridiculous to put all of our “eggs in one basket.” Please don’t think that insurance is the “be all and end all” to a properly conceived and implemented asset protection plan.

Myth #5- I can do it myself or use a service to avoid attorney fees. Please be careful with this mentality. There are so many scam artists out there that call lawyers liars and often charge even more than what most legal fees would be for the same service.  Also, please realize that sometimes we can be our own worst enemy by thinking we are saving money by doing complex planning without professional help. Please retain at least the opinion of an asset protection lawyer for an hour’s time to lay out a game plan and make sure you are headed in the proper direction.  Don’t purchase a pre-packaged asset protection plan…everyone is different.

Mark J. Kohler, CPA, Attorney at Law and Author of the Best Selling Book Lawyers are Liars- The Truth About Protecting Your Assets and his new book What Your CPA Won’t Tell You. For more information about Mark’s books and videos visit www.markjkohler.com. For a legal consultation in any of the 50 states on how your Corporation or LLCs should be structured and maintained, please contact my office at 888-801-0010.

The term “Factoring” has gotten a bad reputation in the world of small business credit over the years.

Many small business owners view it as financing of a “last resort” and worry about what their employees or customers will think about the longevity of the business once they learn their employer/supplier has entered into such a financing arrangement.

While business owners should be concerned about how their customers perceive their business, entering into a factoring arrangement is rarely the “red flag” that many fear it will be due to the fact that factoring has become a much more common means of providing a company with access to working capital.  The odds are excellent many of your customers are RIGHT NOW paying many of their invoices to factoring companies in lieu of their suppliers who have taken advantage of this valuable financing tool.

Since access to business credit has obviously contracted over the last few years, it has become more challenging for small businesses to obtain business credit lines.  Many lenders reserve secured or unsecured business lines of credit for only their “best” customers, which are often defined as those who have strong profits, increasing revenue trends and high balances on deposit.

Financing may still be available to these strong companies who also have “hard assets” to pledge as collateral.  These are often defined as property, plant and equipment.  In other words, if you own a business with good profits and stable revenue trends and have equity in a commercial building filled with valuable equipment, you may qualify for a small business loan.  However, if a business owner operates out of rented space and provides a product or service which does not require much in the way of equipment, small business loans can be elusive.

Factoring can be a convenient alternative to businesses which cannot meet today’s stringent criteria for small business loans but have a strong base of customers.  Under most factoring arrangements, the factoring company ignores the financial condition of the client and strictly focuses on the credit quality of their customers.

If the customers are creditworthy, there is an excellent chance a factor will be interested in “factoring” the accounts receivable.  When factoring a receivable, a business sells the right to be paid by their customer to the factoring company in order to receive the bulk of the amount due (usually 75%) shortly after issuing the invoice, with the balance, less a factoring fee, remitted to the business once their customer makes payment to the factoring company.

Fees can range from 2% – 5% of the invoice amount for each 30 days an invoice is outstanding.  In other words, if a customer typically pays their invoices in about 40 days, the business would take on average about a 3% discount on their invoices in exchange for the factoring company advancing 75% of the invoice amount shortly after it is issued.

Like any industry, there are also unscrupulous factoring companies out there.  It is important to ask for references and to Google the name of the factoring company you select to see what, if any, complaints are out there.  Many factoring companies are run by long-time veterans of the business and are often the best choice with which to develop a financing relationship.

While many business owners fear what they do not understanding, the truth is that factoring can provide businesses which cannot yet qualify for secured or unsecured business credit lines with the working capital bridge they need until they can meet the standards for traditional business credit lines.

About the author:

Chris Lehnes is a 19 year veteran of the small business lending industry. He has held positions in commercial loan documentation, credit analysis, operations management and business development  at one of the country’s largest small business lenders.  Currently, Chris is a Business Development Officer at Versant Funding where he provides non-recourse factoring to businesses in a wide variety of industries with annual revenue from $1 – $50 Million.  You can reach Chris at 203-493-1663, clehnes@VersantFunding.com, or www.ChrisLehnes.com.

Are you wasting your time looking for VC money? Odds are the answer is, “yes”, unless you are building a company that fits what venture capitalists look for. If you’ve tried obtaining business credit or a small business loan and thought it was difficult then try going after VC money!

Here are four things that most venture capitalists want in their VC deal:

The typical VC deal has a set of common characteristics. First, the expected return on investment (ROI) has to be extremely high. Rule of Thumb: for every 10 deals a venture capitalist funds 1-2 are expected to provide incredible returns, even 100x the initial investment. A few more may turn a marginal profit, but maybe half will liquidate as a total or near-total loss. So, issue number one: you must have an idea that the VCs will think is a blockbuster.

Second, VCs like deals in a few industry sectors that they know well and can thus evaluate with some degree of certainty. This is mostly high tech and biotech, with some interest in “green tech” that may be a passing fancy. What these sectors have in common is that they need LOTS of cash to become profitable and dominate the market. VCs want to put lots of cash to work. So, issue number two: you should have a capital-intensive blockbuster idea.

Third, VCs like lots of certainty. Some say they like to take the “Venture” out of “Venture Capital”. With thousands of business plans flooding the mail slot and the email inboxes of a typical VC firm each year, it’s actually difficult to thoroughly evaluate each prospective deal. Additionally, there’s still a labor-intensive component to each deal AFTER the funding happens. It’s not a passive investment. To the contrary, VCs are usually actively involved – at least actively informed. There’s lots of business risk in an equity investment like this. While new platforms like ActSeed are starting to help VCs filter prepared deals from the unprepared ones, it’s still largely an issue of trust, which weights the decision criteria on the relationship between the partners of the VC firm and the founders and leaders of the prospective investment. So, issue number three: if you don’t personally know a venture capitalist or know someone well who knows a venture capitalist well, then your odds of a serious consideration for investment have dropped significantly.

The fourth and final parameter covered here is the stage of the company. Venture capitalists are moving farther from the “pre-revenue” company and more toward companies that have already proven to have significant customer traction. This final parameter fits with the earlier ones, where customer traction and a familiar industry sector where there’s a huge market potential that’s already showing momentum – all of which increases the certainty of investment.

I’ve now outlined four issues that are important to VCs. Most of us can look at this and honestly conclude that our promising venture may not fit enough of the parameters above. As a result, we should not “burn too many cycles” on pursuing institutional venture capitalists, but what are the alternatives?

If at all possible, bootstrap your venture; in other words use a reasonable amount of your savings and consider sharing some of your company’s equity with others who can make a material contribution and contribute their savings for hard costs. Consider “crowdfunding” to collect funds in the form of non-debt donations, but know that the average crowdfunding project nets less than $5,000. If you need equipment, then a lease may be a cost effective way to finance your needs, if you have the credit and the equipment is common enough to have a secondary market. Another very attractive avenue to consider is an unsecured business credit line that can help you gain access to $100,000. With seed funding, you may be able to achieve profitability or gain enough customer traction to change the answer to our original question and attract the attention of VCs.

Whichever course you choose, I wish you success in building your company.

ABOUT THE AUTHOR

Bill Attinger is the founder and CEO of ActSeed Corporation. For over 20 years, he has been a leader and innovator in growing, financing and grooming young companies. His specialty is helping early stage companies develop a sound strategy, install the building blocks for business formation and then execute a focused plan. The ActSeed community is open for all to join at http://www.actseed.com. You can reach Bill at bill@actseed.com.