Efforts to reduce business operating costs are always advisable, but this is even more important in light of current economic circumstances. A coordinated business cash advance and credit card processing strategy will contribute significantly to any attempts to minimize costs.

Credit card processing is often one of the most overlooked working capital management issues for a business owner. By using more appropriate working capital management options, a successful credit card processing program is likely to eliminate most credit card factoring complications.

Improvements to credit card financing services should result in several working capital benefits by producing better cash flow and simultaneously eliminating credit card processing problems via more advanced business financing approaches. The total cost benefits of combining programs in this manner can be impressive and valuable in efforts to increase business profitability.

As I noted in an earlier commercial loan article, for any business that accepts credit cards as a method of payment, a business cash advance (obtained via credit card processing and credit card financing) is a critical working capital financing tool that is often overlooked. Even thriving businesses frequently need more capital than they can borrow via a business loan from a bank. However, what is typically even more overlooked by many business owners is the opportunity to reduce their operating costs at the same time that they obtain additional cash.

Credit card receivables financing is an excellent alternative to consider when a merchant is seeking a short-term business loan, an unsecured commercial loan and improved strategies for credit card processing and management. However, there are a number of working capital management difficulties to be avoided with all of these programs. As with most successful business financing strategies, there will typically be only a few lenders that are effective at properly executing the combined tasks.

Because of this, the prudent choice of an appropriate provider of credit card processing and credit card factoring is of critical importance to any business owner that accepts credit cards. I published a special report describing the ten critical problems to avoid in an effort to advise about the importance of avoiding several prominent providers of these services.

For merchants either displeased with their credit card processing services or wondering if cost reductions are achievable, a receivables financing program which eliminates all of the ten critical working capital management difficulties described above should be seriously considered. A key reason to evaluate these strategies in a coordinated way is due to the likelihood that the low-cost provider of business cash advance programs is partnering with the best and lowest-cost processing providers.

In many cases, the best and lowest-cost providers of credit card processing are simply not available to the average business owner other than as part of a working capital management plan encompassing both factoring and processing. The efforts to combine these services will usually justify the coordination because of the resulting economies of scale.

Merchants should not lose sight of the substantial working capital management advantages which are likely to accrue to their business by effectively combining credit card financing and credit card processing services. As described above, reduced costs and cash flow improvements are major goals of successful funding alternatives, and the prudent coordination of financing strategies should accomplish both of these difficult goals together.

The best results provided by a combined approach to working capital management as discussed above will be realized by a business which is seeking to reduce operating costs and raise more capital. While these joint goals are likely to be desirable for any successful business, the approaches noted here will only be available to businesses which accept credit cards as a regular form of payment for their products or services.

The Federal Reserve Board has been raising rates for two years now. Bottom line, this activity has meant higher rates for the investor. It follows a period in which America experienced the lowest rates in several decades. Therefore, it’s no wonder that many investors purchased or refinanced their properties in the past five years.

The result of these low rates and other demographic factors? We experienced a real estate boom not seen in the history of our country. Many purchased properties while prices were rising and even though rates were at historic lows, they chose adjustable rate mortgages in order to increase cash flow when they purchased or refinanced. And as the Federal Reserve has raised rates, the rate on their adjustables have also risen and increased their payments. To exacerbate this situation, real estate taxes and insurance rates are also going up as the values of properties rise, putting pressure on cash flow. Together, your “payment” can rise as much as $2,500 per month per $1,000,000 in mortgage amount. If an investor “reached” to purchase a property, this increase can wreak havoc on the P&L.

However, there is good news on two fronts. First, although the Federal Reserve has raised short-term interest rates, long-term rates are still historically low. In fact, fixed rates are very close to the start rate of many adjustables for the first time in decades. This means that 10-year fixed rates are still a bargain. It makes sense that someone who has experienced an increase in the rate of their adjustable would chose to move into a fixed rate mortgage. For example, if your adjustable has moved to 6.5% and the rate for fixed rate mortgages is 6.5%, your refinance into a fixed rate will lock in this rate and protect you from future adjustments. Note that these rates are for comparison purposes only and you should call me for an actual quote.

The second part of the good news? With property values rising, the refinance can include cash out to help you with these higher payments, pay off other debts, or even shorten the term of your mortgage!

For example, if your payment increases by $2,500 each month and you lock in a fixed rate, an acquisition of $125,0000 in cash can help you “afford” these payments for up to four years. Or, if you have credit card and other debts of $125,000 and your payment on this debt is $3,750 each month, the refinance can actually lower your total payments by $1,250 monthly even taking into consideration the fact that your mortgage payment went up with your adjustable rate increase.

How would you actually shorten the life of your mortgage? Let’s say you can pay the higher mortgage payment after the adjustable goes up, that you are over 40 years old, and would like to retire with no mortgage sometime in the future. You could refinance into a 20-year mortgage. This would increase the payments by approximately $1,135 each month on a $1MM mortgage. Now the $125,000 you obtain in cash can make the payment for approximately one-half of the 20-year mortgage term. In other words, you can be halfway to paying off your mortgage in 10 years!

The Federal Reserve increasing interest rates is bad news for the investor in the short-run. In the long-run, your ownership of real estate gives you plenty of options to deal with the present and the future.

Most people would be able to create personal financing plans if they understood how finance charges affected the purchase price of the things they buy for personal or business use. Being aware of how an interest rate will affect finance charges would help people make personal financing plans that saved them money and not make decisions based on promises that came from a carefully planned out marketing campaign. Personal financing plans made on the spur of the moment can have detrimental influence on a sound financial future.

People are realizing that personal financing plans can affect any plans for the future. Without a solid financial plan in place, people are realizing that nothing worth having can be gained from financing offers that promise low rates for only six months, which then turn into financed luxuries that will take many years to pay for. A financial plan that allows buyers to use the six months of interest free payments to reduce debt to nil makes buying something on credit a worthwhile venture, that can be used again through other credit card marketing campaign offers.

Consumers finance products to achieve an end to a need. By doing research and comparing interest rates on various credit cards, people can usually take care of several financial plans from one credit lending institution. While a home refinance might help the homeowner achieve a lower interest rate and a reduction in monthly house payments, the homeowner could stipulate a cash out on that refinance that would make many debts disappear without applying for cash through any other financing plan.

People have changed their buying habits to accommodate personal financing plans established by a financial planner. They establish a plan to pay cash for all large purchases and forego paying high interest rates that come with long-term financing plans. A financial plan might have designated a monthly allotment into a savings account at a local bank. That money can be used to purchase items for the home or office and the business owner would still have an available line of credit to draw on if the business plan identified expansion in the future.

People have used personal financing plans to purchase automobiles with deep discounts applied to the final price simply by selecting a credit card that offered rewards that have been widely recognized and promoted by a major automobile manufacturer. Every credit card purchase earns a cash rebate that can be applied to an automobile purchase and consumers are learning how to make personal financing payment plans from these benefits of automobile ownership.

Personal financing payment plans can put emergency cash within reach whenever people are traveling. People can use the title of the automobile they drive to pay for repairs in a strange city. Other personal financing plans would earmark funds for use in emergencies and those funds are often kept in an interest bearing account at a banking institution. People that use personal financing payment plans through places where they work, can use the health insurance plans can save money on medical emergencies that occur anywhere in the world.

Depending on whose stats you pay attention to, approximately 80% of small businesses fail within their first 5 years of  operation.

In many cases, its not that a particular business could not succeed; there just wasn’t sufficient time to figure out how to succeed.

Which brings us to the worst small business financing strategy ever.

Here’s how it work.

The would be entrepreneur develops what they believe to be a sure fire business plan that can’t fail.

Unable to locate any form of start up capital, they start their business with credit cards as the only source of financing, and an expectation of sustainable business results within 3 to 6 months.

If everything goes well, the debt will be retired within a year and funds will start building in the bank account.

Sounds Good, right?

I mean the thinking lines up perfectly with all the get rich quick business opportunities that exist on and off the internet today where some of them even try to convince you to use your credit cards because the opportunity is soooooooo good and can’t miss.

The problem is that every business can miss.

Every single one.

And the vast majority do fail.

Have you ever spoken to someone who runs a successful small business; perhaps one that’s been around for 10 to 20 years?

If you take the time to ask one of these entrepreneurs about their start up period, what you learn may shock you.

Even some of the most successful small and medium sized businesses out there today had some hairy moments making a go of it in the early years.

And some times the difficult early years lasted for several years.

The point here is simply this.

The process of getting a business operating and successful can take many unexpected twists and turns, no matter how diligent you are in creating a thorough business plan and business financing strategy.

Therefore, to increase your probability for success you need to allow for the unknown, the unplanned, and the unfair.

A business financing strategy that cannot accommodate unforeseen events is not much of a strategy.

A business financing strategy that is based on high interest credit cards that can destroy both your cash flow and your personal credit is also not much of a strategy.

To improve your odds of small business success, here are some tips for developing a solid business financing strategy.

>>> Invest Your Own Cash

If you have some of your own cash penciled into your business financing strategy, it will immediately increase your likelihood of getting some sort of start up loan.

The more “skin” you have in the game, the more interested a lender will be in approving your loan request.

There is also something to be said about the psychological incentive of losing your own money and the motivation it creates for you to work harder to keep it.

>>> Create Contingencies in Your Cash Flow

Whatever you estimate your working capital requirement to be, double it. At least increase it by a factor larger than 1.

Things can and will go wrong, so give yourself a fighting chance and develop a business financing strategy that allows for less than perfect results.

>>> Use Credit Cards Wisely

Used properly, credit cards can be the cheapest form of working capital that you have at your disposal.

Some business credit cards provide 40 days of interest free financing. If you pay off the entire balance every month, you have an extremely low cost of working capital financing.

But if you start carrying large balances without paying them down monthly, you will go from the cheapest source of working capital to one of the most expensive, and you will likely also destroy your credit rating in the process.

>>> Make Timely Government Remittances

Small businesses are by default tax collectors. And the taxes collected can sometimes wind up funding the business for longer periods of time than they were ever intended.

Using government remittances as a business financing strategy is basically a bad idea.

Government agencies that are assigned to collect from you have large budgets and enough broad sweeping authority to create plenty of grief for you if you are too slow in paying.

If you apply for a business loan while you have an overdue balance with a government tax agency, your loan request will likely be declined.

Even after the balance is paid up, you may have burned your bridge with the lender as a history of overdue government remittances can brand you as a bad credit risk.

>>> Watch Spending Closely At Startup

One of the things you can control early on is how much you spend and what you spend it on.

This is going to change in time, but if you can spend wisely in the beginning you may be able to avoid a cost cutting exercise further down the line.

While its normally true that you have to spend money to make money, you can still be smart about the spending process.

Real estate investors can be broken down into three categories with the distinctions between them based on the length of time the property is held. On the short end, you’ve got flippers. These guys look for properties on the cheap, maybe put some money into fixing them up and then selling for a profit. For the most part, they have no intention of renting the property out and work as quickly as possible to complete the deal. This category represents a lot of the people chasing foreclosures and probate sales. From the lending perspective, their biggest motivators are low down payments and NO prepayment penalties. They’ll even pay exorbitant Subprime interest rates to put these deals together without penalties.

Next up, you’ve got speculators. These guys look for quickly appreciating markets. The idea is to get in, buy a bunch of properties, keep them for 3 to 5 years and then move on to the next booming market. For that length of time, they have to rent out their properties but are not particularly interested in paying down the principle balance on the mortgage. In fact, if they’re confident in the appreciation potential, they may be willing to accept negative amortization loans in order to keep the cash flow on their properties positive.

The last category is investors. These guys try to accumulate a portfolio of properties and have the rental income pay down the principle balance over time. The idea, obviously, is to own a number of properties outright or with minimal mortgages and enjoy positive cash flow on each. From the lending perspective, these investors are looking for longer term loan products like intermediate ARMs or 30-year fixed mortgages. Clearly, a property with a 30-year fixed mortgage and a sustainable cash flow will eventually be paid off, leaving just the property taxes and insurance behind.

So, let’s talk about each of these a bit more. A lot of flippers do this stuff full time. In terms of underwriting, it makes it a lot easier if they’ve got a real job. But if they don’t, they don’t have a verifiable source of income either. Of course, if they’ve done it for more than two years, we can say they’re self-employed and get the loan done that way. But if they’re new at the game – and many of them are – we almost always have to use a No Doc program. That’s the lowest level of documentation and the pricing reflects the increased risk.

Meanwhile, if we say they’re self-employed, they obviously have an investment property as well as a primary residence – and maybe more than one – all without any rental income. So they’re supporting two houses. That means we’d have to show a VERY high income to fit within debt ratio limitations. The moral to the story is the vast majority of these deals end up in Subprime programs because it’s easier to get approvals, particularly for low or no down payment programs.

Now, the question is: does it matter? Well, not really because you’re only planning to keep the property for a few months anyway, so the monthly payment isn’t that important. Yes, the payment may be big but you only have to make three or four of them (hopefully) before you can get out. It’s just another cost of doing business. By the way, I’m not saying A-paper and Alt-A programs are impossible for these types of deals. They’re just harder to qualify for.

What about the speculators? People buying for 3 to 5 years. Well, the negative amortization Option ARMs are extremely popular. I’m not a big fan of Option ARMs because they’re risky and largely misunderstood by those who get into them. The big attraction the low initial monthly payment but that’s balanced by the resulting negative amortization and an interest rate that’s variable from the very first month.

Anyway, they do have advantages for speculative real estate investors because they make it more possible to have positive cash flow on investment properties. So we should really take a moment or two to fully understand how they work. First and foremost, the initial payment is an artificially low payment. In many cases, it’s based on a 1% interest rate but that definition is based more on marketing than reality. Fact is; the minimum payment is less than the accrued interest so the mortgage balance goes up every single month.

This minimum payment doesn’t stay the same forever. It’s fixed for the first 12 months and after that, it increases by 7.5%. Then it’s fixed for another 12 months and increases by another 7.5%. The minimum payment increases by 7.5% each year for the first seven years OR until the loan balance has reached its ceiling. Depending on the program, these loans can grow to either 110% or 125% of the original loan balance. Actually, the ones that can go as high as 125% are becoming increasingly rare. Most will only allow you to go as high as 110%. Anyway, once you’ve reach that ceiling, the loan starts amortizing right away – and that means a BIG payment shock at that point.

For obvious reasons, these loan programs are only justified if the real estate market is appreciating FASTER than the loan is growing. Although it depends on where interest rates go, most of these loan programs grow by 2% or 3% each year if you only make the minimum payment. So if the real estate market is appreciating faster than that, you’re still building equity. If not, you’re losing money every month. That’s the scary part. If it ever comes to that, you actually SAVE money by selling today – unless you’re okay making the larger interest only payment. And don’t forget the interest rates on these programs are variable so the interest only payment can be different each and every month.

But we also have to keep in mind that these loan programs will only go as high as 95% financing. In fact, on investment properties, some lenders won’t even go that high. Depends on the lender. Also, the 95% financing is generally split into two separate loans. The 1% start rate loan usually only applies to the first 75%. The 20% second mortgage makes up the difference and is usually a fully amortizing loan with a much higher interest rate. Sometimes, you can do an 80/15 but most are 75/20s. So that means you have to come up with at least 5% down payment to qualify for one of these loans. That makes it more difficult to buy more and more, unless you continuously refinance and take cash out of other properties.

The speculative investors who use these programs are trying to keep their properties cash positive, or as close to cash positive as possible. But as we discussed a moment ago, the payments rise by 7.5% each year. After three or four years, the payment will be 24% or 33% higher (respectively) than it was at the beginning. If the market is still appreciating strong at that point, the investor may want to keep the property for another three or four years and refinance into another identical loan product, bringing the payment back down to the initial 1% point again. Doing so would increase the negative amortization but it may also keep the cash flow positive on that property.

You have to understand how underwriters evaluate investment properties. It really doesn’t matter how much equity you have. They only look at the cash flow impact of owning it. And you can show that impact in one of two ways. You can show lease agreements on the properties but the underwriters will always take the monthly rental figure and mark it down by 25% to account for periodic vacancies. It’s called the occupancy factor and most loan programs give you credit for 75% of the rental income listed on lease agreements. Incidentally, many Subprime programs will give you 90% or even 100% of such rental income – another example of easier Subprime guidelines.

The other way to show the cash flow impact is with the Schedule E of your federal tax return. That schedule details the income you make from rental properties but you clearly have an incentive to reduce that income as much as possible to limit your tax liability. Meanwhile, for underwriting, you want to show as much income as possible. So there’s a conflict there. Point is, there are disadvantages with both methods and you should usually look at both options to see which one will calculate the highest.

Each time you have a property that’s got negative cash flow, you have to show more income to squeeze into the same debt-to-income limitations for the next loan. It makes sense. If you’re subsidizing a property with your own income, it represents a monthly expense just like a car payment. So each time you add another property you have to subsidize, you have to show more income to qualify for the next loan. Depending on how much you’re subsidizing, you will quickly be claiming more income than you actually earn and will eventually be considered unreasonable by underwriters.

If a speculator wants to continue accumulating properties in hot markets, one of his or her top priorities is staying cash positive, or as close to it as possible. That priority exists for long-term investors as well but so does the repayment of the mortgage balance. As a result, these investors tend to consider more factors than just annual real estate appreciation. Appreciation is attractive but so is a healthy rental market, and the rental market depends on the types of jobs available in the local area and the health of the local economy.

There are plenty of companies that study this type of information and provide various reports and ratios to help identify healthy markets. I’m sure you could go to Google and find a lot of such offerings. I recently read an article that chose Charleston SC, Jacksonville FL and Austin TX as particularly attractive markets for long-term real estate investments. All three cities have diversified economies, good wages and affordable housing. Anyway, the motivation is clearly different then speculators or flippers. Long-term investors want a stable market where they can cover an amortizing loan payment – that’s principle AND interest – with the rental income from the property.

Now, a well planned real estate investment strategy may involve more than one type of investment. For example, a long-term investor may buy a property in a hot market using a negative amortization loan and keep the property for only three or four years. After realizing some appreciation, the investor may sell the property and use the profits to pay down a mortgage on a different property in a more stable market. Perhaps the reduced mortgage balance will bring that property from a cash negative situation to a cash positive one. For the right investor, this strategy can work well even for flipped properties.

There are plenty of promoters encouraging people to take these profits and leverage them even further into more and more properties. Many of these promoters encourage negative amortization on all their properties. That’s where I have to disagree. That would’ve been fine four years ago but I just don’t believe the real estate market will continue to appreciate the way it has in recent years. Given the current market conditions, I don’t believe it makes sense to expose yourself to that much risk. If real estate goes sideways, these loans erode your equity and add volatility to the market.

There’s always a balance. That balance will definitely be different for a sophisticated investor than it will be for an average homeowner but that doesn’t mean you have to stretch it to the absolute limit. At the end of the day, the ideal situation remains; owning properties free and clear and collecting monthly rent payments on each.