Monthly Archives: June 2013

How to Retire Early?

Some time or the other, almost everybody, on getting tired of work related travel and stress, thinks of retiring early in life, though, unfortunately, most can ill afford to realize that dream. Though you may find a lot of information on the web or through books telling you how to retire early, they all emphasize on detailed planning.

Retiring early doesn’t always mean leading a leisurely life, comprising of travel and pursuing hobbies. While some look at the prospect of retiring early, others may be forced to retire earlier than planned. Then, we also have professionals in the fields of law enforcement and military personnel who are obliged to retire early.  Thee days, one can also consider retirement in the form of reduced hours of working, taking a break for sometime and going back to work or getting self-employed.

On going through Bogleheads Guide to Planning, you may realize that successful retirement calls for creating viable plan and following the same. Yet there can be many differences.

The major factor deciding when to retire is your capacity to make sufficient income for paying your bills. Expenses after retirement vary a lot with individuals. These are influenced by individual’s household expenses, state of health and thus the expense thereof and expenses towards hobbies and travel. Yet, there is one item that doesn’t differ with respect to individual’s options and that is the safe rate of withdrawing funds from their investment.

The safe rate of withdrawal for people retiring at the normal age, in their mid sixties, is about 4% of their original portfolio, keeping adjustment for annual inflation. However, this rate is very high for people retiring early in life, looking forward to spending forty to fifty years in retirement. In their case it needs to lower, say in the neighborhood of three percent of their portfolio. So, on an initial portfolio of one million dollars, it would come to thirty thousand dollars, compared to forty thousand for someone retiring in their sixties. There is a clear reduction of twenty-five percent in annual outlay for those opting to retire earlier.

Here’s a suggestion that makes living easier after retirement when inflow of money slows down. Start living on less money for quite sometime before your planned date of retirement. Other than getting used to a different lifestyle, you also save money for retirement in the process. Start keeping a detailed account of your expenses for a prolonged time before arriving at the final date of retiring. If your calculations show that your present portfolio will fail to support you during retirement, look ways for filling the gap. Some of the options that will most likely come to your mind are: tapping of retirement accounts, using the 72(t) exception for avoiding ten percent penalty on premature IRA withdrawals, withdrawing contributions from Roth accounts, annuitizing taxable investments or looking for another job. You may also consider selling your present house and moving to a smaller one in the same city or relocate to a not so expensive city. Be ingenious and you may realize that early retirement is indeed possible.

It’s not difficult to see that the question, how to retire early means different to different people, depending on their age, investment portfolio and present lifestyle etc.

But don’t forget that circumstance can change things and your life!  Even the most carefully made plan on how to retire early may be thrown out of gear, the markets might crash or there may be an earthquake. Should the worst happen, go back to work once again. It’s not unusual for many to start working in the later part of their life and face the challenges that life has in store for them after they have had enjoyed retirement for a couple of years.

How to Calculate a Bond Return?

ROI, meaning return on investment is among the frequently used terms by investors to arrive at the return on various financial ventures and that includes bonds too. Readers who do not know how to calculate a bond return should know that it’s calculated by dividing the total sum paid to bondholder during the duration of bond by the price of bond and multiplying the result by 100. So, the final result you get is in percentage and used for making comparisons of ROI from diverse investments to determine your best options.

Instructions

1. Know the coupon rate, which is generally mentioned on the face and title of the bond. That’s the percentage rate payable by the bond issuer.

2. Find out the sum paid for buying bond, which is often $1,000 but may vary. You can buy certain bonds at par, meaning its face value. You may also buy bonds by paying a premium, meaning you’ll need to pay excess of $1,000. Likewise, certain bonds are sold at discounted price also, meaning less than the face value of the bond. The price is mentioned on trade ticket that investor gets on buying a security. Else, you can get a copy from your financial advisor or broker.

3. Work out the annual payment by way of coupons. For example, if you posses a bond having a face value of $1000 and carrying a coupon rate of seven percent, you’ll get 7X1,000/100=$70

 4. The next step of How to Calculate a Bond Return involves computing profit on selling the bond at its maturity. In case you bought the bond by paying a premium or at a discounted price, meaning above or below its face value, make sure to include the difference in the prices that you get paid on its maturity. For example, if you bought a bond for $950 and its redemption price is $1,000, you need to include $50 to the full return price of that bond.

5. Interest on bond is compounded rate of interest, meaning you earn interest over interest. Here’s an illustration. Suppose you had a bond of face value $1,000 with coupon rate of 7 % and a maturity period of five years. It means every year you are entitled for $70 for the duration of bond. So you would earn $350 as interest for five years. But in fact you’ll earn more than $350 because of compounded rate of interest. On using a calculator for compounding interest, you’ll realize that the interest earned by you is $430.64 over a period of five years! This is because interest gets compounded every year and additional amount is paid at the end of every compounding year.

6. Now, let’s find out the entire return form the bond. It’s equal to the total of coupon payments over five years plus the difference of face value of the band and the actual price you paid for the bond. In the ongoing example it come to $430.64+50=$480.64

7.  This is the final step of How to Calculate a Bond Return.  The total returns should be divided by the sum paid for buying the bond and multiply the result by 100 to get percentage bond return. So, in the present case it comes to $480.64X100/950=50.6%

Now that you are aware of How to Calculate a Bond Return, you are prepared for making judicious investments.

Advantages of Issuing Bonds Compared to Common Stocks

Primarily, there are two options for companies looking to raise funds. One is issuance of bonds and the other is of issuing stocks. These two sources of raising funds are quite different. Though stocks prove to be better under certain circumstances, the advantages of issuing bonds can’t be overlooked.

Ownership

One major difference between issuing of stocks and bonds is that the latter are debt securities while the former mean selling part of equity. On issuing stocks, the company sells part of its ownership of the company as shareholders get voting rights that could affect it business. One of the significant advantages of issuing bonds is that the company doesn’t part with its equity and continues to hold total control over its business affairs. So, it amounts to the company utilizing funds of others to meet its financial requirements without losing its hold on the company.

Interest

On issuing stocks, the company may distribute dividends by using cash on which it has paid taxes already. On the other hand, the interest the company is obliged to pay to bondholder can be deducted from its taxable income. So, from the point of view of taxes, bonds generally work out cheaper.

Predictability

On offering stock, the company entitles the buyers to own a part, howsoever small, of the company till they keep holding on their stock. There is no restriction of time for which the buyer of stock can hold on to it and it is not unusual for many stockholders not to put their stock for sale in their lifetime and further transfer the ownership of stocks to some other person after their death, making use of their wills. Nevertheless, stock holders have the option of selling their stocks anytime they deem fit, meaning that the ratio of ownerships of the company keeps floating and it becomes difficult to keep a track of that. Moreover, despite his right to transfer his share of stock to another person, it’s necessary for the stock holder to inform the company of his decision. That makes it easy for the company to handle payments.

Profit

Among the advantages of issuing bonds   is that the company is not obliged to share its profits with bondholders. It just needs to pay promised rate of interest and the principal amount on maturity of the bond. It implies that those holding stocks of the company get bigger share of money that the company produces by utilizing funds.

Bankruptcy

When a company issues bonds, those possessing bonds turn into its creditors. In case the company files for bankruptcy, it needs to pay its creditors before paying its shareholders. For investors, it is one of the significant advantages of investing in bonds as thee are not as risky as stocks.

How can Small Comapnies Take Advantages of Issuing Bonds by Large Comapnies?

Big businesses get many options for raising funds, of which issuance of long term bonds is an important one. Long term bonds are classified among debt instruments and have a maturity period of four to five years. However, bond markets are not accessible to small companies, especially the newer ones. Yet, such companies derive financial benefits from long term bonds.

Basics

Important issues concerning issuance of long term bonds are various conditions stipulated by governments, publically traded companies and private companies. Compared to short term financial instruments like treasury bills and deposit certificates, the rates of interest for long term bonds are usually higher. Bonds involving high element of risk, like junk bonds, need to pay superior rates of interest to remain attractive for investors.

For small business, one of the advantages of issuing bonds by big companies is that by investing its surplus funds in long term bonds it can count on getting a regular income by way of interest payable by the bond issuer. Usually, such interests are paid twice a year. When the market rate of interest goes up, the prices of long term bonds come down, whereas their yield, arrived at by dividing the interest payment by market price, goes up to match the ongoing market rates. On the other hand, when market rates of interest start falling down, the price of bonds starts going up and their yield is reduced. Here’s an example to explain this phenomenon. Consider a bond worth $100,000 having a maturity period of ten years and paying @ 5 percent/annum. So, annual income from this bond will be $5,000. With rising rate of interest, the market price of bond is reduced to $97, 5000, but its yield becomes $5,000/$97, 5000=5.13%.

Diversification

For taking advantages of issuing bonds, small businesses, rather than keeping all their surplus funds in long term bonds, should have a versified portfolio, comprising of stocks, treasury bills plus mutual funds.  That is because with diversified portfolio small business gets an opportunity of maximizing returns from its surplus funds, yet having sufficient liquidity for taking care of its operational requirements and tactical opportunities. Another significant advantage of such portfolio is that it reduces the elemental risk, so that even if the value of one of their assets comes down, their investment portfolio in totality is not so harshly affected.

Considerations

Upcoming small or medium sized companies, unlike big companies, can’t take advantages of issuing bonds to raise funds through equity markets or long term bonds. Nor they can approach friends and family for financial support, like newbies. Though businesses falling in these categories are unable to access capital markets, they can certainly look forward to getting financial help from some of the regulations such as 504 fixed-rate long-term loans for expansion plans and capital investments and Certified Development Company as set forth by U.S. Small Business Administration.

Advantages of Issuing Bonds

There are two ways for companies to raise funds. An excellent way is through sale of stock, meaning selling a little part of your company. In case the company’s performance is good, its stockholders benefit by way of dividends, but when the performance of the company isn’t to expectations, the price of its stock nosedives. Bonds represent debt that the company owes to its investors and pays them a predetermined rate of interest, depending on the type of bond.

Features:

One of the advantages of issuing bonds is that it allows the company to raise funds without allowing investors to have any control over its operations. Usually, it’s safer to invest in bonds. That’s because of their certainty to pay interest to investors and convenience of selling. It’s always safe to buy bonds of companies with good credit rating.

Function:

The chief purpose of issuing bonds is to collect funds from the market. On issuing bonds, the company is obliged to pay interest to investors and payback the invested amount at the expiry of bond period. This could cause financial strain to struggling companies, which may fail to payback principal and or interest to their investors. Nevertheless, bonds assure regular income for investors in the form of interest to be paid by the company every three or six months, enabling investors to plan their finances. This assured return on investment prompts people to prefer this mode of investment, compared to stocks, the prices of which keep fluctuating.

Benefits:

Advantages of issuing bonds also include the opportunity for company to enhance it credit rating by issuing limited quantity of bonds that it can manage expediently. Firms experiencing pressures of cash flow and performance can significantly enhance their credit rating by issuing bonds, thus attracting investors to invest their funds with the company.

Consequences:

Issuance of bonds carrying fixed rate of interest brings the company under debt but benefits the company. On the other hand, bonds that do not carry a fixed rate of interest could cause financial problem to issuing company when the market rates of interest go up as the company would be required to pay an increasing rate of interest as well the principal amount. So, it’s easier for companies to manage bonds carrying a fixed rate of interest. When there is no apprehension of increased rates of interest or inflation, it’s advantageous to issue bonds.

Considerations:

The income as interest from bonds falls under tax deductibles. That’s certainly among the most important advantages of issuing bonds.  Companies are not required to disburse dividends on capital stock as they can certainly utilize that additional cash for expansion.  The drawback is that investors will not be prompted to invest in such companies as they like to get dividends, necessitating the need of variable dividends.  Payment of dividends doesn’t fall under tax deductibles.

How To Get a Small Business Loan With Bad Personal Credit?

Perhaps you thought a small business loan with bad credit is almost impossible! You were wrong. Yes, you can really get small business loan despite your bad credit. This article intends telling you how to get a small business loan with bad personal credit.

Do your homework

The first step towards reaching your goal is to find out your credit rating. You would know that attaining 640-680 on FICO means your credit rating is ‘fair’ and majority of American possess that. Anything lower than 640 is thought to be bad, while everything above 680 is indeed good. You can check your credit rating using any of the major agencies like Experian, Equifax, and TransUnion. However, it’s imperative for you to verify the report for any error or inaccuracy, which could worsen your score.

In case your credit rating happens to be low or is a borderline case, you need to start making efforts to improve the same. Get an internet account, a phone and a secured credit card in the name of your business. Ensure that credit bureaus get reports from these accounts. It’s vital for you to make timely payments. That puts you on track to improving your credit score.

Secured Loans for Small Business

Irrespective of their credit history almost anybody can get secured loan for small business. Secured loan means the lender is assured of getting his money back because of the collateral provided by the borrower, should he fail to payback the borrowed amount. Collateral may be by way of inventory, receivable amount, equipments or some property, which is seized if the borrower fails to payback the lender. The positive aspect of providing collateral is that the rate of chargeable interest is much lower, compared to unsecured loan.

Unsecured Loans for Small Business

Even owners of small businesses can avail of unsecured loans, despite their bad credit. This is like getting cash in advance against your prospective sales through credit card. The prerequisites for such a loan include having retail or service oriented business like a restaurant which recognizes credit cards. The borrower needs to give lender bank statements for six months along with statements of credit card and a valid lease agreement.

Since the risk involved with this type of lending is considerably more, the rate of interest is very high and may go up to thirty percent or even more. This may mean parting with your profits towards paying back the entire loan. Make sure that you can cope with such a situation and deal with a lender of good reputation.

Loans from Family and Friends

In case the banks refuse to offer your loan, it may be advisable to test out if any of your friends or a member of family is prepared to fund your business. If it is so, do make as formal an agreement as possible that is signed by all concerned and make payments like you would have paid to any bank. Taking loans from family and friends could hurt feelings at a later date, making it imperative for you to treat the entire deal in a thoroughly organized manner.

Be aware of the options available to you and find out just how bad is your credit score. Once you understand the prevailing financial circumstances, you will be better educated in deciding how to get a small business loan with bad personal credit that best meets with your requirements.

How to get a small business loan for a woman?

Many women prefer to be on their own by running a business and making a successful career as a businesswoman. However, for staring any business one need funds, depending on the kind and size of business and most entrepreneurs lack the required funds for getting started with a personally owned business. Fortunately, there are quite a few options for women when it comes to seeking funds for starting their business. They can seek help from many government sponsored agencies in the US, as also from non-profit organizations and business centers. Here we’ll talk about how to get a small business loan for a woman.

Using the three key credit rating agencies, you should verify your credit rating. It’s imperative for every woman to be aware of her credit rating and thus know her standing with credit rating companies. In fact, it’s very elementary for any woman seeking loan is to clear her debts, and thus get improved credit rating.

Approach Women’s Business Center of your state. The website of The U.S. Small Business Management provides links to various Women’s Business Centers of the United States. Such centers are meant to help women keen on going ahead with their business venture by educating them on various aspects of beginning an innovative business and also help them in getting loans.

Women interested in starting new ventures can get useful information and financial assistance on visiting Business.gov: Women Owned Businesses to get access to loans that the US Government offers to businesswomen. The website provides helping hand to people, planning to begin their own business in different states and also gives information to women associated with businesses. This is easily among the best sites for women looking for government funds for getting started with their business.

Visiting website of Springboard Enterprises: Business women can benefit by visiting this website that contains many helpful programs committed to offering loans to women entrepreneurs.  It also has educational programs, providing information about loans. They help women trying hard to make their business really successful.

Study availability of government loans on the website of National Business Women’s Council: This website provides the information as to the amount of money that the government has already loaned to women and if any funds are available for helping your business. An interesting and helpful feature is that they focus on interconnecting community of business women, wherein they can share their experiences and help one another.

Seek loan from non-profit organizations or credit unions: Such small entities are generally willing to offer financial assistance by way of loans to women venturing into new businesses. One such prominent organization is Angel Investors that offer loans to women. They get involved in helping financially and also working with women beginning their own business.

How to get a small business loan without collateral

Many a time business loans become unavoidable for keeping the business running as it may need funds for procuring stocks or for paying staff. Usually, one needs to provide collateral like property or other valuables for procuring loan. Nevertheless, there are way ways to getting loans without offering collateral. Here we’ll tell you how to get a small business loan without collateral.

The very first thing you need to do is to ensure having a good credit score, for having a good credit score allows you to get unsecured loan more conveniently than if you had a less than average credit score. You can get a copy of your credit score from without charge.

Should the report contain any negative remark, you’ll need to take care of that. If you find any negative remarks not belonging to you, it is imperative that you point out the error in writing to key credit card bureaus.

Look for unsecured loans: You can look for lenders willing to provide loan without taking consideration of your credit score. Usually, such lenders operate through companies which put the lenders in contact with loan seekers who are not willing to offer any collateral. You will need to do your own research on the Internet to locate a company that most suits your requirements.

Look for people to people lending platforms: This is a rather new venue for people looking for unsecured loans and worth exploring. Here, you’ll have rich people willing to offer loan to individuals needing the same. These people are just looking for a way to get reasonably good returns on their investment and are willing to provide loan for longer durations too. The rate of interest charged varies with lender, amount of loan and the duration for which you require it. Since a number of lenders are available, you can often get unsecured loan at reasonable terms.

Seek help from friends and family: Another avenue you should try for your financial needs is to check with a friend or member of your family who may be willing to help. In such cases, you should decide beforehand the rate of interest, which may be a bit lower than the interest, charged by bankers but allows your personal lender to earn some money for helping you in your hour of need. It’s an excellent way that helps avoiding any collateral. Many a time, one can find a friend or member of family willing to extend the much needed help.

Putting your credit cards to good use: If you possess good credit, you could surely make good use of those for procuring required funds.  Ask for a credit with high limit and low rate of interest. However, you should only withdraw funds that are essentially required for business purposes and payback the loan through minimum possible number of monthly installments. This is one more way of avoiding giving collateral.

So, those were some of the ways telling you how to get a small business loan without collateral.

How to get a small business loan with bad credit

It’s very much possible for small businesses to get loans despite their bad credit scores provided they know the way. The common feeling amongst businesses is that many financial companies claim to offer financial assistance to people having bad credit score but on being approached for loans, these companies simply don’t entertain their requests.

Even if your credit score is not good, you can avail loans. However, it may appear a Herculean task in the beginning as you are asked to meet one person after another, but finally you would realize that it was worth all the trouble.

Here are the steps telling you how to get a small business loan with bad credit:

Instructions

Assess your credit rating: It is not unusual for many to conclude that their credit score is bad without really seeking any confirmation from a reliable source. So, the first step should be to approach your bank or such financial institution that regularly handles credit history of consumers. This helps you to precisely know how bad or good your current score is.

Check with family and friends: A number of people generally are hesitant to approach a member of family or friend for seeking loans for their small business. They wouldn’t know perhaps some of their friends of members of family would be willing to help them by lending those funds or co-signing a loan for them.

Get business credit: It may be a time consuming process for availing loan, you may be desperate to get but this might be the best and most effective way for you. You’ll need to spend some time and effort for improving your credit score. One helpful way is to have something like a telephone connection or credit card carrying the name of your business, howsoever small. Make sure to make timely payment of bills received against this facility as it will finally go to prove that you are running that business honestly and paying your bills regularly.

The most important precaution you should take, apart from paying your bills in time, is to ensure that all your transactions through the facility in the name of your business are regularly and accurately reported to credit rating agencies. This helps you creating a first class impression, and that is among the most important aspect of telling you how to get a small business loan with bad credit.

You ought to repair your personal credit: When you would like to procure loan, first of all you have to repair your personal credit. Bank or financial institution you approach for borrowing money will first see you. In case your payment history is bad, you can’t expect anyone to lend you money. You have to look for ways to help improve your credit score. Spend sometime on the Internet and you’ll get many practical ways that help you doing the needful.

Now that you to know how to get a small business loan with bad credit, you would agree that getting loan for small businesses with bad credit is not impossible, though difficult.

Interpreting a Statement of Cash Flows

How are financial statements used as a management tool?

The three most frequently needed financial statements for assessing the financial health and overall performance of a company are: its balance sheet, a statement of cash flows, income statement. Though all these statements are prepared using the same data, each gives an insight to different areas of the company.

A statement of cash flows reveals how the company collected funds and spent the same during a particular period of time. It presents a systematic way of assessing how long it may take for the company to recover its outlay. It’s not difficult to make out that a company that continues to generate cash time and again will be worthwhile.

A statement of cash flows comprises of three parts, namely investing, operations and financing. Here is an actual cash flow statement of Target Corp. All figures are in million dollars.

Cash from operations: It represents cash that the company generated from its core operations during the year. Here, you can see the net earnings of the company appear in the beginning of the statement, followed by addition of depreciation and deduction of inventory and receivable amounts. This simply means that this is company’s income before taxes and interests.
Interpretation: It can provide a better pointer than earnings as non cash income can’t be utilized for payment of bills.

Cash from investing: It’s not unusual for companies to invest funds in business not directly connected to their main business. For instance, a company may invest for acquiring another company to enlarge their operations.
Interpretation: This part of the statement of cash flows gives an account of funds that the company employed for making new investment and also the earning from preceding investments. This figure in case of Target, for the year 2006 was -4693, indicating that the company made substantial investments in projects that it expected to grow in future.

Cash from financing: The last section here points out cash movement from financial activities. The financial activities include taking a loan and issuance of stock to fresh investors. Dividends to existing investors are also included here. For 2006, once again, Target shows a negative figure of -1004, but it need not be misinterpreted as the company paid its old debt of 1155 and a dividend of 380 and also repurchased its stock worth 910.
Interpretation: The last two items should keep the investors happy as they earned dividends. That shows Target is optimistic of the performance of its stock and would like to retain it for enhancing profit of the company in future.

The last step for evaluating cash flow will be to add cash balances from the previous year 2005 and the reporting year. In this case it is -835+1648=813. So, you can see that despite having shown negative cash balance for both the years, the company has had a positive balance finally as it had lofty cash surplus during 2004.