What's a Good Use for a HELOC?

by Nerd Wallet 8. July 2016

When you take out a home equity line of credit, you're offering your house as collateral to secure another loan. The upside: You can gain access to up to 80% of your home's value, minus your current mortgage balance and adjusted based on your creditworthiness.

The downside? If you can't make your payments, you could lose where you live.

Because the stakes are high, you want to make sure you use a HELOC for the right reasons. Here are a few.

Making home improvements 

Most people who take out a HELOC do so to make home improvements. Experts say you should only do this if the improvements you're considering will increase your home's value. This way, the money you're borrowing will be returned when you sell your house at a higher price.

The National Association of Realtors' 2015 Remodeling Impact Report lists these six changes as the ones with the best return on investment:

  • Installing a new front door.
  • Installing new siding.
  • Upgrading your kitchen.
  • Adding on to your deck and patio.
  • Making an attic into a bedroom.
  • Installing a new garage door.

These improvements can range from a few hundred to tens of thousands of dollars, but they don't change the footprint of your home and tend to be what future buyers look for.

Supplementing an emergency fund

Everyone should have an emergency fund to cover events such as unexpected car repairs and appliance breakdowns. Most people keep these in savings accounts, but you might consider a home equity line of credit as another source of cash. You only pay interest on the amount you borrow, and you could pay the loan off quickly to save money. Still, it makes more sense to have an emergency fund that's earning a little interest rather than one that charges you interest.

Paying off high-interest debt

Because the average interest rate on a HELOC is much lower than the average credit card interest rate, many people think about using a HELOC to pay off their credit cards. This is a great strategy if you're committed to never carrying a balance again. Otherwise, you're just adding another debt at a lower rate.

Regardless of how you use a HELOC, remember that the interest rate is variable and may change each time you tap it. And you'll have to repay the entire loan by the end of the payment period set by the lender. On the upside, the interest you pay on a HELOC is tax deductible*, like your mortgage interest. If you use a HELOC for the right reason, that's just one more benefit.

*You may be able to deduct 100% of your Home Equity Line of Credit interest on your income tax returns. Remember to consult your tax advisor to determine whether your Home Equity interest is tax deductible.

NerdWallet is focused on helping people lead better lives through financial education and empowerment. When it comes to credit cards, insurance, loans or expenses like hospital costs, NerdWallet provides accessible online tools and useful information to help consumers take control of their financial choices.

Why You Didn’t Get That Business Loan

by Lance Johnson 8. June 2016

Business Loans

“We keep getting turned down for loans, but we don’t know why. The bank gave us nothing further to go on.”

I hear laments like this all the time from potential loan applicants who tell me they don’t know why a previous application at another institution– usually a large bank – was rejected. 

The truth is that banks are looking for ways to approve loan applications. But big banks are both more risk-averse than community banks and deal with a higher volume of loan applications, so it doesn’t surprise me that rejected applicants are often left in the dark about the reasons.

So here’s a guide to some of the top reasons banks deny business loan applications – and one pretty effortless thing you can do to improve your chances of getting a “yes.” 

Insufficient Operating History

With community banks approving just over 50 percent of business loan requests (and big banks approving only 21 percent), a clean balance sheet isn’t enough to land a loan these days. Banks are looking for businesses with operating histories of at least three years, a sufficient level of success and credibility, and sustained profitability. If you don’t have a track record, you’ll have a hard time getting a loan. 

Inadequate Management Team 

Business loans are investments, and investments are made as much in the people at the top as they are in the business itself. How long has the CEO been in his or her role at the company? What is his or her prior experience? What about the CFO and other top managers?

Of course, there are some very successful businesses being run by their original founders, who may not have had previous senior management experience. But for every Mark Zuckerberg out there, there are many businesses that suffer, and even fail, when they outgrow the experience and acumen of their founders.

Banks are also looking to see if there’s a succession plan. Many businesses have floundered after a key executive or founder unexpectedly dies or becomes incapacitated, so we naturally want to know what your plan is in such a case – and I’m surprised by how many businesses I see that don’t have any succession plan at all. 

Too Much Customer Concentration

Just as investors are well advised to maintain a diverse portfolio, businesses are healthier when their revenue comes from many different sources. It may feel great to land that “whale” of a client, but when your livelihood depends on too few relationships, you’re at risk. How much concentration is too much? That depends on the business – and it’s a great subject for a conversation with your bank’s representative.

Insufficient Personal Guarantees

If there’s a hiccup in the business, can the people guaranteeing the loan fill the gap until the business gets back on its feet or rights itself? Banks pull personal credit scores, so it’s important to keep that number in line. We also review your personal financial statements and about three years of tax returns because we want to be sure you have enough assets and liquidity to meet personal expenses – and the funds to help your business out if it needs it.

Financial Concerns

Of course, a bad balance sheet will kill your chance of landing a loan quicker than anything else. I could easily spend this entire blog post going over the financial reasons, beyond those already discussed, that a loan might be rejected. But if you own a business, then you probably already know them:

• Lack of consistent cash flow

• Insufficient collateral

• Lack of working capital

• Weak equity position

• Too much existing debt

What some business owners don’t know is how much debt is too much. The rough benchmark almost every bank uses is three times your cash flow. That’s 3 × (net income + interest expense + depreciation - withdrawals). 

The One Thing Every Loan Applicant Should Do

I always recommend that business owners sit down in person with a bank representative in advance of applying for a loan for a candid conversation. The subject: whether you’re a good candidate. If you are, he or she will help you navigate the process and advise you on ways to boost your chances of approval. 

Then, when you do apply for the loan, have everything in order. Banks usually look for three years of business and personal tax returns and financial statements, accounts receivable and payable. That will expedite the time it takes to get a decision; here at 1st Mariner, for example, we can make a decision very quickly after receiving everything we need. 

Like I said up top, banks want to make loans. The surest path to getting there is to cultivate a relationship with your bank. 

If you have any questions, we’re here to answer them.

Online Business Banking: Making Sense of All the Services

by Elizabeth Sherman 2. June 2016

Are you still using paper checks to pay vendors? If so, you’re taking a big risk with your security.

Thieves who get hold of one of your checks can do more than just cash it and pocket the funds; they also have your account number and routing number. With that information in hand, they can easily print counterfeit checks in your name or make online purchases with your money.

If you’re not one of those people who look at your account balance every day, it could be a long time before you realize what’s happened. And your bank may or may not be able to get the money back.

Fortunately, there is a simple yet effective service called Positive Pay that can help business owners prevent such check fraud before it happens. Yet many businesses neglect using this service until it’s too late.

Here’s how Positive Pay works. Each day, you tell your bank which checks you’ve issued. As those checks are presented for payment, your bank reconciles the information you’ve entered and makes sure everything matches. If it does, the bank pays the check. If it doesn’t, an exception is created and the bank lets you know about it. You can then go online and determine whether or not you want to pay the check.

It takes just a few minutes a day and costs a fraction of what you might lose to fraud.

Positive Pay is just one way that the age of internet banking has made life easier and money safer for business owners. Yet for so many businesses, banking services exist that remain a mystery. Here’s a guide to some of the most common online business-banking options.

1. Information Reporting

The cornerstone to your online business banking, information reporting makes access to your account and its entire history from your computer and mobile devices easy. Anything related to your account is available: copies of checks, deposit tickets, what’s coming into your account tonight, any debits that are posting. 

With this (usually) free basic service, you can also manage your checks, transfer funds between your accounts, and check the status of any commercial loans you have through the bank.

2. Automated Clearing House (ACH)

This network for financial transactions makes electronically transferring funds between banks a breeze. With ACH, you can instruct the bank to pay a certain amount of money to a vendor, an insurance company, or your employees on a regular basis. You’ll be able to view these “standing orders” and then change or cancel them as needed.

Using ACH will save you time and make it easier to track funds transfers. It’s not for everyone, but most businesses who have employees, or who make a significant number of regular large payments should consider it.  

3. Bill Pay

For smaller onetime payments, look to Bill Pay services, which are usually free with basic online business banking. Using Bill Pay rather than cutting a physical check has several advantages. It’s quicker and almost fraud-proof, and you can set the day you want the bill to be paid. And don’t worry if the entity you’re paying doesn’t accept online payments. If they’re not in the network, your bank will cut them a check – you don’t need to do anything else.

4. Wire Transfer

The business world has operated at “real time” speed for some time now.  As such, you’re likely to find yourself needing to make real-time payments frequently. In these instances, Wire Transfer is your best bet. You can use it to set up a onetime payment or regular payments. And it provides the convenience of initiating transfers from your office rather than making a trip to the branch.

5. Remote Deposit

Depositing your checks at the closest branch probably sounds easy… until it isn’t. And think about this. It may take an hour to drive to a branch and then back to the office or to home. It takes 30 seconds to scan a check at your desk and another minute to deposit it remotely.

Talk It Over

The most important thing to remember when it comes to making the most of your online banking is to leverage the advice of your banker. I’ve noticed that many business owners may know the services available but may not understand them or think they are only for larger companies. While it can be said that certain services are better for some kinds of businesses more than others, the core business banking services will help businesses of any size. However, I’ve seen many businesses that pay for services they have little use for, while ignoring those they could benefit from.  The irony of making the most of your online business banking services is that it requires that occasional live conversation with a trusted advisor. For a conversation about what’s right for your business, let’s talk.

 



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