Why Millenial Entrepreneurs Will Be the Real Drivers of Alternative Finance

Long after the word “recession” stopped populating media headlines, the various forms of alternative, non-bank financing have continued to generate a more mainstream appeal , and this trend is only going to get stronger as the millenial generation continues to mature. This is good news for the alternative business finance industry, since this trend will likely lead to an increase in the number of young entrepreneurs and business owners in need of start up financing or a business loan.

Millennials represent one of the biggest demographic sectors in the U.S. Yet, according to a recent Bankrate survey, this group seems to be less active in traditional credit and financial markets. Among 18 to 29 year olds, 63 percent don’t have a credit card, and 33 percent are considered “under–banked.” This is compared to the 35 percent of adults 30 and over who don’t have credit cards.

Why is this happening? Many industry experts point out that after the recession, most banks severely tightened their lending standards and have yet to go in reverse. On top of this, millennials tend to have inconsistent income as a result of temporary employment, self-employment, career changes, or because they have started their own business. They come off looking financially unstable- to the banks at least. These trends, in addition to new financial regulations, such as the Credit Card Act of 2009, have made it much harder for millenials to obtain a credit card and thus begin to build their credit profile.

So, it’s not that millenials aren’t looking for credit. Many are; they just can’t get approved for it.

This opens the door wide for alternative lenders, particularly those that operate online. Many of these alternative online lenders, which include micro lenders, p2p platforms, and for business owners, and assortment of asset and revenue-based financing arrangements, rely proprietary algorithms to help them quickly determine who is fundable and how much of a financing risk a given borrower presents. Instead of looking primarily at a prospective borrower’s FICO score, these lenders consider other factors, such as financial account activity and in some cases even a borrower’s social media circles.

As the millenial generation of entrepreneurs and small business owners gets ever more comfortable accessing financing online instead of heading to their local bank, and as the banks continue to keep the funding pipeline closed, we should see even more players entering the field. There is little doubt that the alternative financing landscape will look vastly different ten years down the line- so different, that alternative finance may well be the new traditional.

Are You Prepared for the Credit Card Fraud Liability Shift?

On October 1st of this year, Visa, MasterCard, Discover and American Express are changing the way they will respond to certain types of payment fraud. From that point on, if merchants are not accepting EMV chip cards (i.e. they don’t have a terminal capable of processing these payments), then they will be held liable for any card-based fraudulent activity made with EMV chip cards used at their business.

The use of EMV chip cards has been rapidly expanding worldwide. Outside of the U.S., currently 44% of all cards have an EMV chip, and 74% of all credit card terminals are capable of processing EMV chip cards. The goal of October’s credit card fraud liability shift, is to encourage merchants to update their point of sale payment processing systems so that customers can make credit card payments with added security.

In contrast, to the standard magnetic strip cards that do not encrypt payment information, EMV chip cards store payment data on an encrypted computer chip embedded in the card. Instead of swiping a chip card, customers insert the card into a slot and leave it there until the transaction is complete. The encryption makes it much harder for credit card information to be stolen during a transaction and reused by thieves in the future. If a merchant is not yet equipped to accept chip transactions, customers can still use their chip embedded cards by swiping it. But in this case, the customer won’t get any of the new security benefits.

Why Small Business Owners Need to Respond

Many business owners may be tempted to simply ignore the rule change because they think that fraud would never occur at their business. Yet the truth is that many businesses are currently processing fraudulent transactions; they just don’t know it. The majority of the time the fraudulent charges are actually being handled by the banks without the involvement of the merchants themselves. By ignoring the push to upgrade their point of sale payment processing, smaller merchants will be exposing themselves to a potential financial loss. This loss can quickly outweigh any money the merchant was trying to save by not upgrading.

The bottom line is that these changes will come whether or not small business owners are willing to adapt to them right now. But, it definitely pays to respond to them as quickly as possible.

 

Want to Retain Key Employees in 2015? Promote Collaboration & Career Development

One of the biggest challenges that small businesses are facing today is in hiring employees that can truly help their business grow… and getting these people to stick around long enough to see that growth happen. Not only are today’s workers more likely to job hop then those of the previous generations, but small businesses must often compete with larger companies that can afford to offer an alluring package of benefits and career opportunities.

Retain Key Employees in 2015 with Collaboration & Career DevelopmentSo what can small business owners do to attract talented employees and get them to stay? Often the solution is to find creative ways to tap into the talents you are looking for, and that process starts with understanding what your employees really want out of their work and life in the first place.

In a recent study from Addison Group, it was found that Millennials (those aged 20 to 34), which represents the biggest, growing section of the workforce, prefer work environments that foster development and collaboration. When asked what qualities they want most in their managers:

  • 63% said the ability to give honest feedback
  • 58% said experience in the field
  • 56% said trustworthiness
  • 37% said the ability to makes time for employees
  • 36% said collaborative

Millennials also tend to place more value on collaboration and relationship building among co-workers and even managers than their Gen X and Baby Boomer peers. In LinkedIn’s latest Relationships @Work study, Millennials rely on workplace friendships to boost their mood and output:

  • 57% said friendships make them feel happy
  • 50% said friendships were motivating
  • 39% said friendships made them more productive

On the other hand, almost half the workers surveyed between the ages of 55-65 reported that friendships at work had nothing to do with their performance on the job.

Moreover, Millennial workers are looking for companies that can provide them with a defined path for career development as well as interesting and useful training opportunities.

How does this all translate to your small business? With fewer employees and a less formal structure, small businesses tend to be more intimate and collaborative by nature. Plus, the smaller number of employees often means that workers get to cross train in various different aspects of the business. They also have more opportunities for meaningful input and ownership over the results. But at the same time, many small businesses trip themselves up by not promoting these opportunities to potential new hires.

In short, success will be dependent not just on your budget, but on your ability to give your employees a sense of ownership, camaraderie, purpose, and personal development- qualities that they can’t always easily achieve in a bigger company. In the end they will be more likely to want to build and grow with you because they will get a sense of who they could become as a result.

Is Your Business Ready for Small Business Saturday?

If you own a brick and mortar store, then one of the biggest boosts you can give to your holiday sales is to be an active participant in Small Business Saturday which falls out on November 29th this year. It’s a day when communities across the US celebrate and support their local small businesses.

Is Your Business Ready for Small Business Saturday?I find it amazing how many small business owners spend a lot of time and effort trying to tap into the buying momentum of Black Friday, the mega shopping event that immediately follows Thanksgiving. The truth is the celebrated first day of the Christmas shopping season has absolutely nothing to do with small businesses. It’s meant for the big box retailers that can afford to offer steep discounts on inventory in an attempt to lure bargain-hungry holiday shoppers. You can read about the history of Black Friday here.

Small business owners, stay away… far away. Trying to lure shoppers to your small business with the promise of steep discounts or “door-buster” deals will only hurt your business and leave you with little to show for it- similar to how those Groupon deals did a few years back. Instead, the focus should be on rewarding loyal customers while trying to attract the buyers who will appreciate what your business has to offer (and come back for more.)

This is exactly the attitude behind Small Business Saturday which is a shopping event held on the first Saturday after Thanksgiving. The initiative was started by American Express four years ago and has gained in popularity ever since. In this event, small businesses are encouraged to join forces under the “Shop Small” brand and where possible host community-wide events that will appeal to local shoppers.

If your community has yet to participate in this event, American Express offers an assortment of helpful resources on their website, such as a bunch of useful free marketing materials for both online and offline promotion. There are also several stories of businesses that were able to capitalize on the day to increase sales and brand awareness.

If you would like to get updates about local Small Business Saturday events or are looking for a little inspiration, you can follow the Small Business Saturday communities on both Facebook and Twitter.

Why Hasn’t the Number of Incorporated Self Employed Gone Up?

Earlier this week I saw an interesting post by Scott Shane over at Small Business Trends. In it, he pointed out an interesting trend based on data from the Bureau of Labor Statistics. According to the data, the number of incorporated self-employed individuals was 4 percent lower in September of this year than it was in June 2009.

Why Hasn't the Number of Incorporated Self Employed Gone Up?

While the actual number of incorporated self-employed (ie those who work for themselves in corporate entities) represents a relatively small percentage of entrepreneurial activity and an even smaller part of the American workforce (unincorporated self employed make up about 6 percent of the labor force versus incorporated self employed at only 3.5 percent), the stagnant growth seems puzzling.

After all, several economic indicators and respected reports, such as the Small Business Economic Trends report conducted by the NFIB, all point to an improving, expanding economy. Given that the incorporated self employed tend to earn twice as much as the unincorporated, why aren’t more aspiring entrepreneurs being encouraged by the rising sales at existing businesses to start their own ventures?

I think there are several possible explanations:

  • There is less financing available to get these start up businesses up and running. Let’s not forget that small businesses and start ups are still dealing with an extreme credit crunch. For most aspiring entrepreneurs, there are only two main options: rely on personal assets (which have also taken a hit due to the crash in the housing market, rock bottom interest rates, and stagnant wages), or turn to more expensive (and thus more risky) alternative lenders.
  • Fewer personal assets or access to outside financing means that starting up a business these days is a lot more risky than it was prior to the Recession when cash was flowing more freely. Since incorporated self-employed tend to be older and have a family, many may postpone starting a business or avoid working on it in a full time capacity because a business failure could affect their financial stability.
  • Even for all the rosy indicators and reports, the truth is that the economic recovery has been very uneven. Consumer demand is still very weak in important areas such as retail, and that’s likely due to the fact that wages and employment have not recovered anywhere close to their pre-recession levels even as taxes for small business owners and the middle class have gone up.

So, what do you think? Have you or people you know been considering starting your own business, but have held back due to the reasons mentioned above?

Image Credit: Small Business Trends

The NFIB Will “Certify” Candidates As Small Business-Friendly this Election

NFIBThe National Federation of Independent Business (NFIB), has been quite publicly announcing that it will play an active role in the upcoming congressional elections, and this will likely be a warm up for the 2016 presidential vote. According to the NFIB on it’s new website Vote for Main Street, “The 2014 elections are set to serve as a critical referendum on Washington’s ability to restore trust with Main Street businesses and workers.”

In order to determine which candidates really fit the bill as small business advocates, the NFIB has developed a “test” based on the candidates support of the following five key issues:

  1. Requiring Congress to pass a balanced federal budget each fiscal year
  2. Repealing the annual fee on health insurance providers enacted by the Patient Protection and Affordable Care Act (ACA)
  3. Returning to the original definition of a full-time work week to 40 hours, instead of the recently recognized 30 hour work week in the Save American Workers Act
  4. Requiring the federal government to certify that the ACA is not having a negative economic impact on the nation’s small businesses
  5. Enacting “reasonable” limits on the Environmental Protection Agency’s ability to regulate utility plant emissions

Though all of these measures have been introduced in Congress, none of them have made it into law. The NFIB believes that voting these five bills into law will create a significant positive impact on U.S. small businesses and result in the creation of millions of jobs. The organization has stated that it will begin listing a roster of “Small Business Certified” candidates on it’s website as the elections draw closer.

The NFIB has further promised to put some political muscle behind the candidates who pass the test. According to Kent Hoover, Washington Bureau Chief, at The Business Journals, “NFIB will be putting money and manpower behind candidates who pass this test, and telling voters about candidates who fail it. The organization plans to spend more than $1 million on political ads in its “Vote for Main Street” campaign, and some staff and NFIB members will directly work on campaigns as volunteers…”

What do you think? Do you consider the five issues above to be the most pressing for small business owners heading into the 2014 congressional elections?

Surprising Small Business Tax Facts

When it comes to recording and managing their finances and reporting tax obligations, many small businesses owners are surprisingly ill-equipped and unprepared, and this oversight can end up costing them thousands of dollars.

Surprising Small Business Tax FactsIn a recent survey conducted by internet domain registrar and web hosting company, Godaddy.com, 600 small business owners were asked to describe how they manage their finances and how those habits are effecting their tax reporting. The survey revealed that over half of respondents still use manual processes, such as a spreadsheet or paper files, to record their income and expenses, and close to 40% set aside several days in order to complete their tax return.

Here are a few other interesting small business tax facts from that study:

  • Almost half (46 percent) of small business owners reported they do not work with an accountant.
  • Of those small business owners who do work with an accountant, 47 percent see their accountant once a year at tax time or only when they have a question or need help.
  • 32 percent of small business owners do not set aside money throughout the year to pay income taxes.
  • 12 percent of small business owners have no idea how much they will owe in income taxes, while 74 percent reported that they usually know the “ballpark” of what they owe, while just 15 percent know exactly how much they owe.

These are some pretty shocking statistics, and it seems to corroborate reports that have come from a variety of other sources, including the IRS and the National Small Business Association. Here are a few eye-opening statistics about small business tax habits from around the web:

  • According to the 2014 Small Business Taxation Survey from The National Small Business Association (NSBA), some business owners spend up to three weeks a year dealing with payroll taxes. Eleven percent of those surveyed spend over 10 hours every month working on payroll taxes, while 43 percent spend between three and 10 hours a month. The survey also found that forty percent of small business owners spend 80 hours preparing their Federal income taxes.
  • According to the IRS, 106,776 small businesses were audited last year. These were these were non-farm businesses that reported less than $25,000 in gross receipts and didn’t claim the earned income tax credit. Auditors demanded on average $5,500 from these businesses
  • There are more than 15,000 tax codes in the United States and from 2001 to 2012, there was an average of one change a day to the tax code.
  • A third of small businesses get fined for doing payroll incorrectly, typically do to unintentional mistakes.

If you are running a small business, take these numbers to heart. As we head into the middle of the summer, you have a lot of time to make some changes to the way you manage your finances that can potentially save your business a lot of money down the road. If you can, hire an accountant or a bookkeeper, or at the very least use accounting software, such as Turbocash, GnuCash, or Quickbooks, to keep track of your cash flow. You’ll be glad you did come tax time.

5 Signs That The US Recession Isn’t Over Just Yet

For the past few years, there have been plenty of signals from Washington supported by an assortment of economic experts, that the economic recovery within the U.S. is moving along. But completely detached from the optimistic headlines the media keeps feeding us, the story on the street is totally different.

graphOn the surface, the contradiction seems puzzling. Several recent reports seem to give us a lot to feel optimistic about. The unemployment rate is now below 7%, its lowest level in five years. The housing sector seemed to be rebounding. Home sales and prices in December 2013 were their highest since 2006. Auto sales are up, gas prices have gone down, and Wall Street is roaring with stocks up more than 26%.

But, there are several, pretty poignant signs that our recovery is not all it’s cracked up to be:

1. Many people just don’t feel it. According to a recent CNN poll, only 24% of respondents believe economic conditions are improving, while almost 40% believe that the economy is actually getting worse. Meanwhile, the Consumer Confidence Index has been on the decline.

2. The number of people on food stamps is on the rise. As of March of this year, 47.7 million Americans are now on some form of food stamps. From the year 2000 till 2012, this number has increased more than 171%.

3. The housing market is starting to crumble. While the media is already drawing attention to a recent slow down in the housing sector, many industry experts point out that home prices are actually being driven upward by institutional investors. Big financial institutions like The Blackstone Group have become major home buyers. So far, Blackstone has spent more than $4.0 billion for 24,000 homes in the U.S. that it plans to rent out. But, the same rising home prices that seem to have created a rebound last year, are now accounting for a decline among individual buyers who can no longer afford to buy.

4. The rich are getting richer, the poor are getting poorer. According to a recent report by the Pew Research Center, the bottom 93% of households in the U.S. economy saw their net worth drop by 4% between 2009 and 2011, the richest 7% of U.S. saw their wealth increase by 28% in that time.

5. The recovery is a whole lot of hot air. Many people point to the fact that the rosy numbers Washington keeps promoting are nothing more than smoke and mirrors once you consider things like: how much money the U.S. government borrowed versus produced, the Fed’s obsession with printing money, as well as how key indicators, such as the unemployment rate, are calculated.

In short, though the economy does show some signs of rejuvenation, much of it is due to a thick layer of makeup. Wash it all away, and the picture we are left with ain’t so pretty.

Big Banks Are Lending More: Is It a Real Sign of Economic Recovery?

According to the most recent results of the Biz2Credit Small Business Lending Index, small business loan approval rates at the nation’s biggest banks rose to 19.4% in April 2014. This is up from 18.8% in March, and it represents a record high since the start of the recession.

ID-10015674While this is certainly good news, is it a telltale sign that the economy is steadily improving? If more established businesses are starting to seek out loans which presumably would be used for hiring, expansion, and capital purchases, it would seem so. The truth is that banks generally look at three years worth of sales history. This year marks three years after the recession officially “ended” in 2011. To qualify for bank financing, these businesses had to have performed well post recession.

But, a closer look at the results of the survey may reveal that the recovery may not be so great after all. Small business loan approval rates at small banks actually decreased to 51.1% in April 2014, down from 51.6% last month, and the same pattern was seen with credit unions (43.5% down from 43.6%). Perhaps most telling is that lending approval rates at alternative lenders dropped for the fourth consecutive month to 63.5% in April from 63.6% in March 2014.

What does this all mean? It may mean that there is a growing schism among America’s small businesses. Big banks tend to attract and approve only the most credit-worthy businesses. These businesses usually have more assets and are more established and… they tend to be bigger as well. The definition of a “small business” among the nation’s biggest banks is a company with less than $20 million dollars in sales!

On the other hand, small banks, credit unions, and alternative lenders, in particular, get more requests from newer, less asset-rich businesses as well as those struggling with bad credit. If these institutions are approving fewer loans, chances are good that the pool of applicants are more risky and worse off than they were even a few months ago.

Changes the whole picture, doesn’t it?

What do you think? Do you feel there has been some real recovery since the recession or is it mostly smoke and mirrors?

(Image Credit)

Senate Rejects Minimum Wage Increase: A Good Move or Political Posturing?

Last week, a bill that would have raised the federal minimum wage from $7.25 to $10.10 failed to pass in the Senate. While many small business groups were quick to applaud the move, the question remains: does this really help the economy or are we once again witnesses to the greatest political show on earth?

SenateMany small business leaders were vocal about their disapproval of the proposed wage increase. In an official statement published shortly before the vote, NFIB Manager of Legislative Affairs Ashley Fingarson claimed that “…lawmakers are targeting the nation’s economic engine – small business owners – with an anti-employer agenda. With increases to health care costs, higher taxes, more costly regulations, and now a dramatic minimum wage increase, small business owners simply can’t afford another excessive government mandate.”

Shortly after the bill was defeated in the Senate, International Franchise Association President and CEO, Steve Caldeira, had this to say:

“We commend the Senate’s decision to reject legislation to drastically raise the minimum wage, and thank the Senators who took a stand to protect our nation’s small business franchise owners. Congress’ own economists at the Congressional Budget Office have said that an increase in the minimum wage would reduce employment, and thankfully enough Senators heeded this dire warning in a sluggish and still fragile economy.”

They make it sound like a catastrophe was averted. But, the reality is that the minimum wage has failed to keep up with inflation for the last four decades. Instead of completely shutting the initiative down, why not make a counter proposal for a more digestible increase to the minimum wage? The Democrats’ proposal may have just been too large in too short a period of time. On the other hand, the Democrats gained massive brownie points by showing Republicans as greedy and out of touch with the people. So, maybe real change wasn’t the goal here. At the end of the day, we’re left with nothing but a few good headlines.