Billionaire hedge fund manager Alan Howard paid $59 million for a Manhattan townhouse in March. Just two months later he obtained a $30 million mortgage from Citigroup Inc.
Denis Sverdlov, worth $6.1 billion thanks to his shares in electric-vehicle maker Arrival, recently pledged part of that stake for a line of credit from the same bank. For Edgar and Clarissa Bronfman the loan collateral is paintings by Damien Hirst and Diego Rivera, among others. Philippe Laffont, meanwhile, pledged stakes in a dozen funds at his Coatue Management for a credit line at JPMorgan Chase & Co.
In the realm of personal finance, debt is largely viewed as a necessary evil, one that should be kept to a minimum. But with interest rates at record lows and many assets appreciating in value, it’s one of the most important pieces of the billionaire toolkit — and one of the hottest parts of private banking.
Thanks to the Bronfmans, Howards and Sverdlovs of the world, the biggest U.S. investment banks reported a sizable jump in the value of loans they’ve extended to their richest clients, driven mainly by demand for asset-backed debt.
Morgan Stanley’s tailored and securities-based lending portfolio approached $76 billion last quarter, a 43% increase from a year earlier. Bank of America Corp. reported a $67 billion balance of such loans, up more than 20% year-over-year, while loans at Citigroup’s private bank — including but not limited to securities-backed loans — rose 17%. Appetite for such credit was the primary driver of the 21% bump in average loans at JPMorgan’s asset- and wealth-management division. And at UBS Group AG, U.S. securities-based lending rose by $4 billion.
“It’s a real business winner for the banks,” said Robert Weeber, chief executive officer of wealth-management firm Tiedemann Constantia, adding his clients have recently been offered the opportunity to borrow against real estate, security portfolios and even single-stock holdings.
Spokespeople for Howard, Arrival and Laffont declined to comment, while the Bronfmans didn’t respond to a request for comment.
Rock-bottom interest rates have fueled the biggest borrowing binge on record and even billionaires with enough cash to fill a swimming pool are loathe to sit it out.
And for good reason. With assets both public and private at historically lofty valuations, shareholders are hesitant to cash out and miss higher heights. Appian Corp. co-founder Matthew Calkins has pledged a chunk of his roughly $3.5 billion stake in the software company — whose shares have risen about 145% in the past year — for a loan.
“Families with wealth of $100 million or more can borrow at less than 1%,” said Dan Gimbel, principal at NEPC Private Wealth. “For their lifestyle, there may be things they want to purchase — a car or a boat or even a small business — and they may turn to that line of credit for those types of things rather than take money from the portfolio as they want that to be fully invested.”
Yachts and private jets have been especially popular buys in the past year, according to wealth managers, one of whom described it as borrowing to buy social distance.
Loans also allow the ultra-wealthy to avoid the hit of capital gains taxes at a time when valuations are high and rates are poised to increase, perhaps even almost double. Postponing tax is a “significant benefit” for portfolios concentrated and diversified alike, according to Michael Farrell, managing director for SEI Private Wealth Management.
Critics say such loans are just one more wedge in America’s ever-widening wealth gap. “Asset-backed loans are one of the principal tools that the ultra-wealthy are using to game their tax obligations down to zero,” said Chuck Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies.
While using public equities as collateral is the most common tactic for banks loaning to the merely affluent, clients further up the wealth scale usually have a bevy of possessions they can feasibly pledge against, such as mansions, planes and even more esoteric collectibles, like watches and classic cars.
One big advantage for the wealthy borrowing now is the possibility that rates will ultimately rise and they can lock in low borrowing costs for decades. Some private banks offer mortgages on homes for as long as 20 years with fixed interest rates as low as 1% for the period.
The wealthy can also hedge against higher borrowing costs for a fraction of their pledged assets’ value, according to Ali Jamal, the founder of multifamily office Azura.
“With ultra-high-net worth clients, you’re often thinking about the next generation,” said Jamal, a former Julius Baer Group Ltd. managing director. “If you have a son or a daughter and you know they want to live one day in Milan, St. Moritz or Paris, you can now secure a future home for them and the bank is fixing your interest rate for as long as two decades.”
Securities-based lending does comes with risks for the bank and the borrower. If asset values plunge, borrowers may have to cough up cash to meet margin calls. Banks prize their relationships with their richest clients, but foundered loans are both costly and humiliating.
Ask JPMorgan. The bank helped arrange a $500 million credit facility for WeWork founder Adam Neumann, pledged against the value of his stock, according to the Wall Street Journal. As the value of the co-working startup imploded, Softbank Group Corp. had to swoop in to help Neumann repay the loans and avert a significant loss for the bank.
A spokesperson for JPMorgan declined to comment.
Still, for the banks it’s a risk worth taking. Asked about securities-backed loans on last week’s earnings call, Morgan Stanley Chief Financial Officer Sharon Yeshaya said they’d “historically seen minimal losses.” Among the bank’s past clients is Elon Musk, who turned to them for $61 million in mortgages on five California properties in 2019, and who also has Tesla Inc. shares worth billions pledged to secure loans.
“As James [Gorman] has always said, it’s a product in which you lend wealthy clients their money back,” Yeshaya said, referring to Morgan Stanley’s chief executive officer. “And this is something that is resonating.”
For America’s biggest banks, the past twelve months have been one of the biggest tests of their resilience in history. The Coronavirus pandemic all but shuttered the U.S. economy for months, spurring enormous shifts in business and consumer habits. Lenders big and small, from America’s four megabanks to small regional firms, have passed their test with flying colors.
Despite some of the sharpest drops in gross domestic product and employment ever witnessed, banks were able to serve their customers and remain profitable. In 2020, there were just four bank failures in the U.S., despite the extraordinary economic circumstances. Only about 5% of banks nationwide were unprofitable, according to data from the Federal Deposit Insurance Corporation, and about 53% of banks reported annual increases in profits in 2020.
The pristine shape is thanks to effective emergency measures implemented by Washington that thawed corporate and mortgage credit markets, offered stimulus and small business aid to Main Street, and allowed for widespread forbearance. These factors helped firms play their role as the financial cog that lubricates the American economy.
Corporations used low rates to issue and refinance debt at record rates in 2020, creating a cash cushion. Homeowners did the same, taking advantage of near-record-low interest rates to purchase homes or cut their interest costs. Technology also played a big role as the banking industry undergoes a digital transformation. Consumers could handle their finances on mobile apps during quarantine, instead of at temporarily closed bank branches, and digital change is helping to bolster profitability.
Not only did the stellar performance help the economy through the pandemic, it has positioned the United States for an enormous economic boom as Americans are inoculated from Covid-19 and the economy reopens in full. Millennials are entering the housing market in droves, industries like software and technology are growing rapidly, and businesses will soon be on the offensive in areas like travel, entertainment and retail.
There are more than 5,000 banks and savings institutions in the U.S., but assets are increasingly concentrated at the top. The 100 largest have $16.4 trillion in assets, representing over 80% of total U.S. bank assets. Asset quality and profitability vary wildly among those institutions. With that in mind, Forbes examined the financial data to gauge America’s Best and Worst Banks.
Born out of the financial crisis of the late 2000s, this is the twelfth year Forbes enlisted S&P Global Market Intelligence for data regarding the growth, credit quality and profitability of the 100 largest publicly-traded banks and thrifts by assets. The ten metrics used in the rankings are based on regulatory filings through September 30. The data is courtesy of S&P, but the rankings are done solely by Forbes.
Metrics include return on average tangible common equity, return on average assets, net interest margin, efficiency ratio and net charge-offs as a percentage of total loans. Forbes also factored in nonperforming assets as a percentage of assets, CET1 ratio, risk-based capital ratio and reserves as a percentage of nonperforming assets. The final component is operating revenue growth. We excluded banks where the top-level parent is based outside the U.S.
CVB Financial, the parent company of Citizens Business Bank, was the top-rated bank in America for a second consecutive year, The Ontario, California-based small business lender was in the top-20 across every metric Forbes tracked, and it shone brightest in its efficiency ratio (39.%), operating revenue growth (41.5%) and posted a negative net charge off ratio. The median bank on Forbes’ list, by contrast, had a 57% efficiency ratio, posted operating growth of just 5.4%, and experienced a charge off rate of 0.17% of average loans. CVB, founded in 1974 and with over $13 billion in assets and over 50 branches across the state of California, has been profitable for 174 consecutive quarters, though a long streak of rising profitability was temporarily broken.
Smaller banks, and those focused on commercial lending, continued to dominate the top levels of the Forbes Best Banks list. Just one bank inside the top-20 had more than $100 billion in assets.
Houston-based Prosperity Bancshares ranked at #2, rising six spots from our 2020 list, thanks to its surging growth. Operating revenue rose 54% in 2020, and the lender performed well in efficiency and capitalization. Rounding out the top-5 were Kalispell, Montana-based Glacier Bancorp, Colorado Springs-based Central Bancorp and Conway, Arkansas-based Home BancShares. Average assets in our Top-5 was just $20 billion.
In the top-10 were McKinney, Tx-based Independent Bank Group, #6, DeWitt, NY-based Community Bank System, #7, Bank of New York Mellon, #8, Santa Clara, CA-based SVB Financial Group, #9, and Wilmington, DE-based WSFS Financial. Bank of New York Mellon was one of our biggest risers, gaining 44 spots, and outperforming on loan quality.
For the first time ever, the Big Four of U.S. banking—JPMorgan Chase, Bank of America, Citigroup and Wells Fargo—saw their combined assets exceed $10 trillion, or more than half the U.S. total. None of these banks finished in our Top-50, generally falling due to below-average growth as they set aside massive provisions to deal with the pandemic and were hit by plunging interest rates. JPMorgan Chase ranked highest at #51, dropping eight spots. Citigroup gained 10 spots to place at #65. Bank of America and Wells Fargo both slid, placing at #74 and #98, respectively.
JPMorgan, led by CEO Jamie Dimon, ended 2020 on a high note, reporting a record $12 billion profit as it released reserves built up to handle Covid-19 related economic stress. Despite the extraordinary circumstances, the lender saw average loans and its capital position rise to end the year, and it reported a surge in bank deposits. During 2020, the bank raised over $2 trillion of credit and capital for its clients, spanning ordinary U.S. households to the biggest corporations on the planet.
“In general, the banks have so much capital, so much liquidity and so much capability,” Dimon recently told investors in a December conference, weeks before the bank reported record annual revenues. While Dimon remains concerned about the pandemic as vaccines are distributed, and sees a varied recovery for consumers and businesses, he added of the banking industry, “I think we’re coming out of this looking great.”
Wells Fargo continued to fall in Forbes’ rankings in the wake of a 2016 fake accounts scandal that has cost the bank billions of dollars and led to dramatic change atop the lender. Wells dropped twelve spots in 2019, placing #98, due to a pronounced slump in revenues as the Federal Reserve limits its asset growth.
Over the past 12-months, JPMorgan’s stock has fallen 0.4%, making it the best performer among big banks, which all saw their stocks drop and underperform the S&P 500 Index. Citigroup shares have shed 19%, while Banks of America dropped 7%. Once more, Wells Fargo was the big laggard, falling by a third in value over the past year.
Rounding out the top-100 was Texas Capital Bancshares, #99, and CIT Group, #100.
New York-based business lender CIT Group is in the process of acquiring family-controlled First Citizens Bancshares, which ranked #62. The merger that will create a new diversified consumer and business lender with over $100 billion in combined assets, and a large presence in booming Sun Belt markets like Florida, Georgia and Tennessee. The merger comes a year after the combination of SunTrust and BB&T, which created $499 billion in assets Truist Financial, #48, which created a dominant lender in the Mid-Atlantic and Southeast.
I’m a staff writer and associate editor at Forbes, where I cover finance and investing. My beat includes hedge funds, private equity, fintech, mutual funds, mergers, and banks. I’m a graduate of Middlebury College and the Columbia University Graduate School of Journalism, and I’ve worked at TheStreet and Businessweek. Before becoming a financial scribe, I was a member of the fateful 2008 analyst class at Lehman Brothers. Email thoughts and tips to email@example.com. Follow me on Twitter at @antoinegara
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There are several student financial aid provisions in the pandemic relief package that was included in the Consolidated Appropriations Act of 2021 that passed the House and Senate on Monday, December 21, 2020.
Student Loan Relief
Student loan borrowers are disappointed that the legislation did not include an extension to the student loan payment pause and interest waiver, nor did it provide any student loan forgiveness.
The payment pause and interest waiver is set to expire on January 31, 2021. President-elect Joe Biden will be able to extend it further after he takes office on January 20, 2021. Several possible extension dates have been floated, including April 1, April 30 and September 30, but Joe Biden has not yet said anything specific about the extension, just that it is needed.
Nevertheless, there are some changes in the legislation that affect student loan borrowers. In particular, the tax-free status of employer-paid student loan repayment assistance programs (LRAPs), which was set to expired on December 31, 2020, has been extended for five years through the end of 2025. Such LRAPs will be exempt from income and FICA taxes for both the employee and the employer.
SULA, a complicated set of limits on subsidized Federal Direct Stafford loans, has been repealed. SULA mostly affected students who transferred from a 4-year college to a 2-year college.
In addition, there have been a few changes concerning the U.S. Department of Education’s Next Generation Processing and Servicing Environment (NextGen) for federal student loans.
New student loan borrower accounts must be allocated to loan servicers based on their past performance and servicing capacity.
Borrower accounts must be reallocated from servicers for “recurring non-compliance with FSA guidelines, contractual requirements, and applicable laws, including for failure to sufficiently inform borrowers of available repayment options.” Applicable laws include consumer protection laws.
NextGen must allow for multiple student loan servicers that contract directly with the U.S. Department of Education.
NextGen must incentivize more support to borrowers at risk of delinquency or default.
Borrowers must be allowed to choose their loan servicer when they consolidate their federal loans.
The U.S. Department of Education must improve transparency through expanded publication of aggregate data concerning student loan servicer performance.
The legislation changes the income phaseouts for the Lifetime Learning Tax Credit (LLTC) to be the same as the income phaseouts for the American Opportunity Tax Credit (AOTC), starting with tax years that begin after December 31, 2020.
The Lifetime Learning Tax Credit will start phasing out at $80,000 for single filers and $160,000 for taxpayers who file as married filing jointly. The tax credit is fully phased out at $90,000 (single) and $180,000 (married filing jointly). Married taxpayers who file separate returns are not eligible.
For comparison, the 2020 income phaseouts for the LLTC were $59,000 to $68,000 (single) and $118,000 to $136,000 (married filing jointly).
The new income phaseouts will not be adjusted for inflation.
In addition, the legislation repeals the Tuition and Fees Deduction, effective with tax years that begin in 2021. This is a permanent repeal, so the Tuition and Fees Deduction will not be resurrected by the next tax extenders bill.
New Funding for Higher Education Emergency Relief Fund
The $81.88 billion for the Education Stabilization Fund includes
$54.3 billion for the Elementary and Secondary School Emergency Relief Fund
$22.7 billion for the Higher Education Emergency Relief Fund (HEERF)
$4.05 billion for the Governor’s Emergency Education Relief Fund, of which $2.75 billion has been earmarked for Emergency Assistance to Non-Public Schools
The Higher Education Emergency Relief Fund previously received $16 billion as part of the CARES Act.
The allocation formula for the HEERF funding is more complicated than the one in the CARES Act, but the allowable uses are similar. Public and private non-profit colleges are required to use at least half of the money for financial aid grants to students. Private for-profit colleges are required to use all of the money for financial aid grants to students. Colleges must provide at least the same amount of emergency financial aid grants to students as they did under the CARES Act provisions, even if their total allocation is lower.
The emergency financial aid grants to students can be used for any element of the student’s cost of attendance or for emergency costs related to the pandemic, such as “tuition, food, housing, health care (including mental health care), or child care.”
The grants must be prioritized to students with exception financial need, such as Pell Grant recipients.
The emergency financial aid grants to students are tax-free.
Most College Students Remain Ineligible for Stimulus Checks
Most college students will remain ineligible for the recovery rebate checks, also known as the stimulus checks.
The legislation includes the same restriction that limits the $600 per qualifying child to children age 16 and younger. Only 0.1% of undergraduate students are age 16 or younger.
College students who are under age 24 are also ineligible, because they can be claimed as a dependent on someone else’s federal income tax return. The remain ineligible even if they are not claimed on someone else’s tax return.
A college student might qualify if they are married and file a joint return with their spouse or if they provide more than half of their own support. About 15% of undergraduate students are married. College students who are 24 years old or older may also qualify. More than 40% of undergraduate students are 24 years old or older.
College students can still claim the $1,200 stimulus checks from the CARES Act in addition to the new $600 stimulus checks, if they are eligible.
Increase in the Maximum Pell Grant
The maximum Federal Pell Grant has been increased to $6,495 for the 2021-2022 academic year.
Eligibility criteria will be pegged to a multiple of the poverty line starting with the 2023-2024 academic year. Students will be eligible for the maximum Pell Grant if they and their parents/spouse, as applicable, are not required to file a federal income tax return or if their adjusted gross income (AGI) is less than 175% to 225% of the poverty line. The higher threshold is reserved for households involving a single parent.
I am Publisher of PrivateStudentLoans.guru, a free web site about borrowing to pay for college. I am an expert on student financial aid, the FAFSA, scholarships, 529 plans, education tax benefits and student loans. I have been quoted in more than 10,000 newspaper and magazine articles about college admissions and financial aid. I am the author of five bestselling books about paying for college and have seven patents. I serve on the editorial board of the Journal of Student Financial Aid, the editorial advisory board of Bottom Line/Personal, and am a member of the board of trustees of the Center for Excellence in Education. I have previously served as publisher of Savingforcollege.com, Cappex, Edvisors, Fastweb and FinAid. I have two Bachelor’s degrees in mathematics and philosophy from the Massachusetts Institute of Technology (MIT) and a Master’s degree in computer science from Carnegie Mellon University (CMU)
How to pay for college is a pressing question for all applicants from the class of 2020. COVID-19 has caused financial uncertainty and many are having to rethink their plans. Jodi Okun, an expert in financial aid, joins Steven Mercer to talk about how the pandemic is impacting financial aid awards, what to do if your family’s financial situation has changed, and how to plan for the future in uncertain times. [Show ID: 35963] More from: STEAM Channel (https://www.uctv.tv/steam) UCTV is the broadcast and online media platform of the University of California, featuring programming from its ten campuses, three national labs and affiliated research institutions. UCTV explores a broad spectrum of subjects for a general audience, including science, health and medicine, public affairs, humanities, arts and music, business, education, and agriculture. Launched in January 2000, UCTV embraces the core missions of the University of California — teaching, research, and public service – by providing quality, in-depth television far beyond the campus borders to inquisitive viewers around the world. (https://www.uctv.tv)
While the overall economic climate is not the most robust at the time of this writing, the grant industry has never been bigger. While applying for grants used to be reserved for niche operations, it is now something that all businesses should consider. Below, we’ll outline the best small business grants so you can get the finance that you need without wasting any time on redundant applications.
A small business grant is a form of financial remuneration awarded once the applicant meets the criteria of the grant. The difference between a loan and a grant is that a grant does not have to be repaid, while a loan does. There are grants available for every possible field that you can think of. Typically, they are granted to people in disadvantaged areas or from specific groups – veterans, women, Hispanics, African Americans, etc.
Many grants are also industry-specific. If your business is involved in assisting a minority group in some way, or in helping the environment, then there are certainly going to be grants available. Keep in mind that there are local, state, and federal grants. Many grant programs are available for those doing business in rural areas.
It takes a long time to submit a relevant grant application. Do your research beforehand and make sure that you are applying to the right program. Federal grants are listed at Grants.Gov, and you can even track these grants on IOS and Android applications. However, there is no Federal grant for the simple growth of a business unless you are a minority group or hoping to solve a very specific problem.
How to Find a Grant for a Small Business
For Federal grants, the place to look is Grants.Gov. It is the chief repository of Federal grants. To apply for federal grants, you typically need to have something special to offer in comparison to state or local grants. You’ll also need to register through this online portal and submit the application form.
The SBA offers a number of State & Federal grant programs, and this is also an excellent place to look for eligible grants. Veterans, minority groups, and women-owned businesses should look on the SBA grant list page to see the available options. You can also find the eligibility criteria through the same site. Other places to spot State and Federal grants include:
#1 – Find the Grant(s) Many grants will have similar application procedures. Search Local, State, and Federal grant databases of all grants that you are applicable for. Once this is done, compile a spreadsheet of relevant grants. It’s best to apply for a number of grants at the same time to increase your chances of success. But each grant should be well-researched and given the utmost attention. Make your proposal as strong as possible for each.
#2 – Read the Criteria A significant amount of grant applications are a complete waste, as the applicants do not meet the minimum eligibility criteria. Before you go ahead and apply for a grant, ensure that you read over (twice, preferably) all the conditions upon which the financial compensation is to be awarded.
#3 – Choose Your Grants Where possible, review how many people applied to each grant last year, and how many prize winners there were. If there were 20,000 applicants for a single prize fund of $5,000, it may not be worth it unless you have a particularly strong application. Try to gauge your chances of success and narrow down to the grants that are really worth applying for. It’s definitely a good idea to investigate what kind of businesses have won in the past and see if yours is a match.
#4 – Request Forms and Information For state grants, you will need to contact the relevant agency and ask to be sent the application forms. For local and commercial grants, the information is readily available and the forms can be downloaded from the website.
If you happen to be applying for a Federal grant, you will first need to register as a member on their website. You will be given a username and password, submitting the information through the Federal online portal.
#5 – Have a Clearly Defined Business Plan A business plan is something that all businesses (large or small) should engage in. The plan does not have to be long or comprehensive. But it has to be precise, concise, and coherent. It should outline who you are, what you care about, what the problem is, and how your company intends to solve the problem. You can submit this plan along with your application in many instances.
#6 – Write the Grant Proposal To a large extent, the business plan should sum up your business and can constitution much of the grant proposal. The business plan defines what your business really does. But it will need to be tailored to each grant you are applying to.
Grant proposal writing is a niche area, and you can hire a skilled grant writer if you are going after larger grants. The proposal should detail why your business is best suited to the grant, how it intends to assist, what the numbers and statistics are, the skills of the people running the company, and best policies to tackle unforeseen events.
#7 – Fill Out Additional Forms While this is not mandatory, all information that you can supply to the reviewers will increase your chances of success. If there are any question marks over your business, then it leaves room for doubt. Increased transparency is always preferred.
#8 – Review Missing information will reduce your chances of success. Read over the application to ensure that all data is correct. Once you have submitted the application, all you have to do is wait for the results. You will typically be notified by email. For Federal grants, you will be given a tracking number to monitor your application.
#9 – Reapply If you did not qualify for a particular grant in a specific year, then don’t get too frustrated or doubtful about the process. You are against many applicants. Apply to the same grants next year, and mention in your proposal that you got declined last year, but have done much good in the interim period despite the odds. Grant writing is a skill – the more you do it, the better you get. You could be leaving money on the table if you avoid this industry completely.
Best Small Business Grants for 2020 (by Categories)
If you’re looking for a shortcut on grant applications, we’ve listed the best grants per category to shorten down on the research time needed. But keep in mind that the more popular a grant is, the more applications it will tend to receive – and the better your application will need to be.
Best General Small Business Grants
1. Bill and Melinda Gates Foundation Grant Global Challenge
The Bill and Melinda Gates Foundation global grant challenge is mainly awarded to non-profit organizations created under 501(C)(3) of the IRS tax code. However, this grant is only available to non-profit organizations. The main stipulation is that your business is orientated towards solving health issues. There are a large number of grants available depending on what problem needs to be resolved. The grant prizes vary, but some of the problems include mental health issues in Africa, hormonal health, economic opportunity, child welfare in impoverished communities, etc.
Money is the engine of the economy. It is the facilitator of trade and specialization. However, few people ask themselves: where does our money come from? This article discusses the process of money creation at banks and central banks. The analysis is based on the respective balance sheet.
How the Federal Reserve creates money out of thin air — a balance sheet analysis
This section shows how money is created at the Federal Reserve (Fed), the central bank of the United States. The Fed acts as the bank for the government and as bank for other commercial banks. The Federal Reserve is known to be the “lender of last resort” with the ability to bail out commercial banks. The following analysis is based on the balance sheet of all Federal Reserve Banks combined as published in the annual report 2019 by the Federal Reserve.
The balance sheet of the Fed consists of assets on the one side and liabilities on the other side — just as any company’s balance sheet. The sum of all assets must always be equal to the sum of all liabilities. This is based on the concept of double entry bookkeeping which requires two entries in the balance sheet for every transaction. Assume you are keeping a balance sheet for your personal finances. When you go shopping and pay with cash for food, then there are two entries: a reduction in cash and an increase in food. This fact of every transaction requiring two entries will be important in the further analysis.
Treasury securities and the general account of the treasury
First, we discuss the entries of the Fed’s balance sheet relating to treasury. On the asset side there are „Treasury securities“. On the liability side there is the entry „Treasury, general account“. Treasury securities are bonds issued by the government with varying length and interest rate. The Federal Reserve Bank bought more and more of these government bonds over time thereby providing funding to the government. In 2019, the Fed has claims on the government of more than USD 2.4 trillion. The government is expected to pay this sum with future tax payments by the people since this is the major revenue stream of governments.
But how did the Federal Reserve fund the money for buying government bonds? By creating it out of thin air. Here comes the double entry bookkeeping into play. On the liabilities side, we find the operational account of the treasury which sums up to USD 403 billion. We see that the Fed can easily create new money by expanding the credit sheet. The book value of the government bonds is placed under „treasury securities“ as assets . This process involves an intermediary bank that buys the government bond from the government which is then sold to the Federal Reserve. Thus, the process is in fact even more complex. An illustration of the process can be found in the end of the article.
The central bank also creates money by issuing a credit to banks. The value of the loan is noted on the asset side of the central bank and the money loaned is added to the deposit account of the bank on the liabilities side.The process is explained in the figure below.
The government may issue unlimited amounts of government debt and thereby finance its activities. The Fed may infinitely buy government bonds thereby closely collaborating with the government. The annual report states that any surplus of the Fed’s income is transferred to the Treasury which clearly lines out that the Fed works for the government (see screenshot below). In contrast, any company who takes on more and more debt would face higher interest rates due to increased risk. At a certain stage, the company would not be able to take on more debt. On the other side, the government can loan money infinitely through collusion with the Fed who buys treasury securities to the lowest interest rate.
Federal Reserve Notes
Printing new money can be either exercised through book money or by literally printing new money, i.e. Federal Reserve notes. The annual report of the Fed says that “Federal Reserve notes are obligations of the United States government“ which means that by holding a Federal Reserve note one owns a claim on future tax payments — this concept lies at the heart of government backed money. Essentially, the taxpayer is the collateral for Federal Reserve notes. In 2019, the Federal Reserve notes outstanding accumulate to more than USD 1.7 trillion.
Mortgage-backed securities in the Federal Reserve balance sheet
We have discussed the most important entry on the balance sheet of the Federal Reserve which is the claim on the government bonds on the asset side and the general account of the treasury on the liability side. The Federal Reserve, however, does not only hold government bonds as collateral for the Federal Reserve notes. The second largest entry on the assets side of the Fed’s balance sheet are mortgage-backed securities. The entry „Federal Agency and Government-Sponsored Enterprise Mortgage-Backed Securities“ comprises purchases of mortgage-backed securities from “government-sponsored enterprises” such as the Federal National Mortgage Association (Fannie Mae) & Federal Home Loan Mortgage Corporation (Freddie Mac). This means that the Fed owns the claims on house owners’ debt obligations. In general, the buyer of a mortgage-backed security (MBS) has a claim on the real estate in case of credit default. So in case of defaulting MBS, the ownership of the real estate is transferred to the Federal Reserve Bank.
But where did the Federal Reserve receive the funds for buying MBS? The central bank may simply create the money to buy assets as discussed in an article from the Bank of England. The central bank does so by adding the value of the assets on the asset side of the balance sheet and by inserting the funds for the assets to the seller’s bank account. Quantitative Easing works according to the same principle: The central bank buys government bonds from other banks thereby creating the funds out of thin air. The bank accounts can be found in the row “Depository institutions“ which is further explained in the next section.
Bank accounts at the Fed and the reserve requirement
Banks are obliged to hold a certain percentage of their liabilities as reserve at the central bank called “reserve requirement”. The reserve requirement of all banks combined is noted in the row “Depository institutions” on the liability side of the central bank. The central bank primarily holds government bonds and MBS as a reserve for the banks’ deposits. This means that the people’s savings are not more secure with higher reserve requirements since these savings are backed by not necessarily “safer” investments. Essentially, savings can be only considered “safe” when assuming unlimited bank bailouts.
In 2019, the total sum of bank deposits at the Fed accounted for more than USD 1.5 trillion. The percentage of reserves banks need to hold in reserve at central banks is set by central banks. In March 26, 2020 this percentage was set to zero. This means that banks are not required to hold any money in reserves for the debt they give out. However, for being able to serve the claims of customers, they should hold a certain amount of money as reserve. The amount of money which banks hold at central banks that exceed the minimum reserve is called “excess reserve”. The Fed has not charged negative interest rate for excess reserves yet but the ECB has already started to do so. This means that banks holding money at the ECB have to pay for doing so. This puts great strain on banks so they have an incentive to give out more debt to make money from the debt related interest.
Can commercial banks create money individually out of thin air?
There is an ongoing discussion on whether commercial banks may create money individually out of thin air in the process of credit creation. This section first discusses the theoretical background followed by empirical evidence supporting the hypothesis that commercial banks create money out of thin air. It also reflects the view of central banks, which clearly shows that banks can create money from nothing.
Banks as custody providers and investment vehicles
The theoretical part refers to Rothbard’s analysis on money creation in his book „Man, Economy, and State with Power and Market“ first published in 1962, page 801 forth following. Rothbard started his argumentation with banks acting as custody providers during the gold standard which means that gold was used as a currency (in contrast to government-backed fiat money which is essentially backed by future tax payments).
Rothbard explains the concept of money creation with the hypothetical example of the „Star Bank“ offering custody services to the public. For storing 5000 ounces of gold, the bank issued warehouse receipts covering exactly 5000 ounces.
Now the bank decided to perform investments with their clients’ money to increase their revenue. The bank lends out the saver’s money to others, in turn the bank offers an interest rate to their customers. The bank now acts as an investment vehicle. Since the savers want to withdraw their money every now and then, the bank holds some gold in reserve. This gold in reserve is not used for investment purposes. So the bank acts as both: custody provider and investment vehicle.
If more people want to withdraw their money than the bank has reserves, then the bank goes bankrupt. This happened in the past in so-called „bank runs“. This problem could have been mitigated by the bank clearly separating their business as investment vehicle and as custody provider. In such a scenario, the customer can decide which portion of his money he aims to invest and get interest for and which portion of the money he aims to place in custody where he needs to pay custody fees for the service. Also, the bank should be required to be transparent about which investments the people’s money flows to, which is not the case in the current financial system.
The process of money creation through credit creation at commercial banks
In the process of credit creation, an entry on the asset side of the balance sheet is created depicting the claim of the bank on the debtor. Since the system is based upon double entry bookkeeping, a corresponding entry is required. This means that the money that is lent out has to come from somewhere.
The process of credit creation is explained with another example of the Star Bank illustrated in the screenshot below. The asset side shows that 5000 ounces are kept in custody and 1000 ounces of gold were given out to debtors (I.O.U’s from Debtors — I.O.U. refers to “I owe you”). The liability side shows that warehouse receipts worth 6000 ounces of gold were given out. We assume that exactly 1000 ounces more gold were inserted by customers which was then lent out. This means that the debt money originates from the savers depositing their money in the bank. So, the money was merely shifted from saver to debtor where the bank acts as financial intermediary.
This is no problem when the bank first asks their customers whether they agree with this particular investment because in the end, these customers bear the risk of default. The bank becomes the investment vehicle and intermediary for this particular transaction.
But what if the bank creates more warehouse receipts than the total sum of the gold the bank holds in custody and the gold lent out? This is „the creation of new money out of thin air, by issuing receipts for nonexistent gold“ which is called „monetization of debt“ (Rothbard, 1962, p. 809). We use the example above, however, now assuming that the bank created 1000 pseudo warehouse receipts that are not covered by gold. In fact there are only 5000 ounces of gold but the bank acts as if there were 6000 ounces of gold by giving out 6000 pseudo warehouse receipts. In the process of lending out money, 1000 new warehouse receipts were created which are not covered by gold. These are fake money certificates created in the process of debt issuance. So essentially, the bank has issued more money certificates than it can actually redeem. If more customers claim their gold than the bank holds in custody, then the bank goes bankrupt if it is not bailed out.
According to Rothbard „It is, in fact, difficult to see the economic or moral difference between the issuance of pseudo receipts and the appropriation of someone else’s property or outright embezzlement or, more directly, counterfeiting. Most present legal systems do not outlaw this practice; in fact, it is considered basic banking procedure.“ (Rothbard, 1962, p. 809)
When banks engage in fraudulent behavior, they would normally lose customers. Also, other banks would stop lending money to the fraudulent bank. This allows sound checks between banks on their risk and credibility. This was stopped through the nationwide check-clearing system called „Federal Reserve“ which can bail out even the most fraudulent bank. The Federal Reserve published a document explaining its purposes and functions which says the following:
„By creating the Federal Reserve System, Congress intended to eliminate the severe financial crises that had periodically swept the nation, especially the sort of financial panic that occurred in 1907. During that episode, payments were disrupted throughout the country because many banks and clearinghouses refused to clear checks drawn on certain other banks, a practice that contributed to the failure of otherwise solvent banks [Note author: if the banks were solvent they would not need a bailout]. To address these problems, Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system.“ (Source: Federal Reserve System Publication, Purposes and Functions)
For evidence on whether commercial banks may individually create money out of thin air, we may either look into the source code of the banking system or we look at empirical data. The source code is unfortunately undisclosed. So we may only look at empirical data.
Empirical study on whether commercial banks may create money out of thin air
This section refers to the study “Can banks individually create money out of nothing? — The theories and the empirical evidence“ by Professor Richard Werner. In this study, the cooperating bank granted a loan of 200 000 EUR of maturity under 4 years to Richard Werner. A snapshot of the balance sheet was taken before the transfer and on the next day when the transaction was completed. The study showed the following balance sheet movements of the „Raiffeisenbank”:
We see an increase of around 170 000 EUR on the liability side in the entry „claims by customers“. This entry corresponds to the „pseudo warehouse receipts“ in the analysis of Rothbard. It is quite unlikely that customers inserted so much money as savings on the day regarded. But what else could have moved this entry so much? Let’s remember the mechanism of how central banks created new money — maybe a similar mechanism is applied with commercial banks. Central banks create new money by recording the issued loan as an asset on the asset side and by entering the corresponding money into the banks’ accounts. Commercial banks could make use of the same principle: They can note the loan amount on the asset side and insert this money in the bank account of the debtor. In this process, the credit sum would be added to both sides of the balance sheet: the “claims on customers” on the asset side (the debt) and the “claims by customers” on the liability side of the bank (the loaned money).
A snapshot directly before and after the transaction would have given us more clarity but this is the best to work with for now. The 170 000 EUR of increase in claims by customers is close to the credit sum but does not cover it entirely. So let’s have a look at the other major movements on the balance sheet. Apart from the increase in the claims by customers, we see an increase in cash on the asset side and a decrease in „claims on financial institutions“. This indicates that other banks paid the debt they had with the „Raiffeisenbank“. Since we do not have the balance sheet of all customers and debtors of the Raiffeisenbank, it is not possible to say with absolute clarity which transaction was a pseudo transaction and which was not. But we can have a look at what the central authorities say on Money creation.
Central banks’ view on money creation in the banking system
Both articles have found that banks and central banks create money by issuing debt. More precisely, the debt is noted on the asset side as a claim on the debtor and the related money is inserted in the deposit account of the debtor. This fits very well to what was explained above.
Both articles have found another mean for money creation namely in the process of buying assets. When a bank or central bank buys an asset, the asset is placed on the asset side of the balance sheet and the related money is placed in the account of the seller of the asset on the liability side.
Concluding, we have great evidence that both banks and central banks create money out of thin air in the process of credit creation and also in the process of asset purchases.
Next, we look at the occurrence of pseudo receipts in history.
Pseudo receipts in the history of money
The most prominent case of pseudo receipts happened during the Bretton Woods System which was in place from 1944 to 1971. In this time period, the US dollar was fixed to gold at USD 35 per ounce of gold. All other currencies were in turn fixed to the US Dollar. The Federal Reserve held the gold in reserve to which the US dollar was pegged to. This means that the Federal Reserve was the only custody provider that held the gold in reserve which is an extreme centralization of trust. Everyone trusted that the Federal Reserve does not create pseudo warehouse receipts, i.e. more US dollars than are covered by the gold reserves. In the 1960s, the first speculators did not trust the Fed anymore and assumed that more US dollars were created than there were gold reserves. This has led to a revaluation of currencies and eventually to the collapse of the Bretton Wood System. Now, the US dollar is pegged to nothing and the Fed may print infinitely.
Note: Here you find one source on Bretton Woods (notice the framing „speculative attacks“ and „confidence problem“ by the public instead of „deception“ and „fraud“ committed by the Fed).
Money alternatives that cannot be created out of thin air
We learned that depositing one’s money in service custody allows the custody provider to easily instigate fraudulent behavior by issuing fake warehouse receipts. We can prevent this by holding our assets in self-custody. But which alternative money is most suitable for self-custody? In the following, Bitcoin and gold are compared as money alternatives.
Bitcoin can be sent over distance almost immediately without a third party. Gold either requires physical shipping which is very slow and comes with a great risk of losing the funds or the gold is held in service custody and merely the ownership is shifted. Storing one’s money in custody requires trust in the custody provider to not issue pseudo receipts. Bitcoin in turn can be held by the individual and can be sent over distance directly to the recipient. Bitcoin does not depend on a trusted centralized authority — Bitcoin is trustless. Moreover, if bitcoin are stored at a custody provider who gives every customer a separate Bitcoin address, then the customer may verify whether the bitcoins are still there 24/7 over the network. This is why Bitcoin is superior over gold even in the situation of custody.
According to Bloomberg, central banks have bought more and more gold just recently. Some people are arguing that the government may introduce a new coin that is backed by gold when the fiat system crashes. But wait! Didn’t the central banks create more US dollars than there was gold in reserve during the Bretton Woods System? Yes. If your government says that a new fiat is issued which is backed by gold where gold is stored in a centralized custody, why should you trust them not to create pseudo receipts if they did so in the past?
Bitcoin is the way out.
I would like to thank Murray Rothbard for his extraordinary logic in laying out the concept of money and its creation. I also thank Professor Richard Werner for conducting the empirical study on money creation at commercial banks. Great thanks to my proofreaders Ben Kaufman, Keyvan Davani and Márton Csernai. I highly appreciate your support in improving this article. Any feedback from subsequent readers is highly welcome!
Note on fractional reserve banking
It is important to differentiate between two different definitions of fractional reserve banking:
Reserve refers to the percentage of money held in custody which is not lent out. So, a portion of the savers money is held in custody (reserve) and the rest is invested.
Reserve refers to the percentage of money actually covered by the underlying asset. Gold standard: Only a portion of the money certificates is backed with the underlying asset, the rest are pseudo warehouse receipts. Fiat system: The bank may create money in the process of debt issuance.
Note that with fiat money, it is difficult to differentiate money and money substitutes because both are based on nothing and essentially fake. This is why the definition “money may be created in the debt issuance process” is used.
In a monetary system where money cannot be created through accounting fraud in the process of debt issuance, debt and credit simply show the obligations between people. In such a system, money would be distributed from e.g. the savers account to the debtors account where the bank acts as financial intermediary (see first example by Rothbard in this article). So, fractional reserve banking as per the first definition does not lead to more money created. However, money in custody and money invested should be clearly separated thereby laying on a sound monetary system that is scarce. Bitcoin enables this.
The implications of the second system where money may be created out of thin air by banks and central banks have found deep consideration in the article. We have strong evidence that banks and in particular central banks create new money in the process of debt issuance through accounting fraud. Even the reserves behind the central bank money, which among other things consists of the banks’ minimum reserves, can be used by the central banks for risky investments, which makes the whole concept of minimum reserves ad absurdum. We may conclude that both definitions of Fractional Reserve Banking hold in the current system. The first concept of Fractional Reserve Banking is organic to a sound monetary system. The latter is inorganic and can be only facilitated with fraud or unsound money coming with great distortions to the economy.
Note on whether fiat money is debt or money
Emil Sandstedt brought up the very interesting question on whether fiat money is money or debt during our Podcast with Keyvan Davani. I would consider fiat money as both: debt and money and I lay out why in the following.
Federal Reserve notes are per definition part of the “monetary base” which is the most superior money. Money is in fact differentiated into certain categories (monetary base, M1, M2, M3). So, Federal Reserve notes are money in the narrow sense. In general, the longer the deposit maturity of a savings deposit, the lower its rank in the monetary hierarchy per definition. However, Federal Reserve notes are a claim on future tax payments (see chapter Federal Reserve Notes). Since future tax payments are a form of debt, Federal Reserve Notes can be considered both: money and debt.
Per definition, the other forms of debt generated through credit creation are not considered money in the fiat system but rather as a “counterpart of M3”. On the other side, one can buy things with the money that one received through the credit. So this money can be used as a medium of exchange. This is a reason why this debt can be considered “money”.
This article has not focused on this differentiation for reasons of simplicity. In the end, what one calls calls “money” is based on definitions. Since money created through debt issuance can be used for payments, it is valid to consider it as money as it was done in this article. But also, it is justified to call central bank money as debt since these are a claims on future tax payments — claims on debt. Therefore, I like the term “debt money” implicating that the fiat system is based on debt and that this money is used as a medium of exchange.
Interesting side note: Only central bank money is considered money by government decree.
Illustration of quantitative easing
Quantitative easing involves the purchase of government bonds by the central bank. But the treasuries are first sold to the secondary market. In the process below the treasury is first bought by a pension fund, then by a bank called “Citibank” and then by the Federal Reserve. Alexander Bechtel explains this process very well in this video.
By Stefanie von Jan / Freedom and truth seeker, economist for a free market for money, deep into Austrian Economics and Bitcoin, advocate for safe and beneficial technologies
A brief look at how money has evolved over time from being printed on valuable substances (commodity money), to merely representing those valuable substances (commodity-backed money), to not representing anything at all (fiat money). Created by Grant Sanderson. View more lessons or practice this subject at http://www.khanacademy.org/economics-… AP Macroeconomics on Khan Academy: Welcome to Economics! In this lesson we’ll define Economic and introduce some of the fundamental tools and perspectives economists use to understand the world around us!
Khan Academy is a nonprofit organization with the mission of providing a free, world-class education for anyone, anywhere. We offer quizzes, questions, instructional videos, and articles on a range of academic subjects, including math, biology, chemistry, physics, history, economics, finance, grammar, preschool learning, and more. We provide teachers with tools and data so they can help their students develop the skills, habits, and mindsets for success in school and beyond. Khan Academy has been translated into dozens of languages, and 15 million people around the globe learn on Khan Academy every month. As a 501(c)(3) nonprofit organization, we would love your help! Donate or volunteer today! Donate here: https://www.khanacademy.org/donate?ut… Volunteer here: https://www.khanacademy.org/contribut
If you want to buy another business, don’t let a lack of capital hold you back. You’re unlikely to land on that killer idea the first time, so serial entrepreneurship is your best chance of success. When you spot a business for sale that would thrive under your leadership, but your funds are tied up in your current company, consider an SBA (Small Business Administration) loan to finance the acquisition.
Hang on – what’s the SBA?
The SBA is a federal agency that helps small businesses get loans. I doesn’t issue loans itself, but it works with lenders to overcome obstacles to business lending, such as guaranteeing loans, reducing risk and sourcing capital. On a deeper level, the SBA funds, licenses and regulates investment funds that in turn lend to small businesses.
Because the SBA helps foster competition and diversity in the U.S. economy, getting an SBA loan to finance an acquisition is relatively simple. Importantly, it doesn’t matter whether you’ve been declined credit before or have a poor credit history. You might still qualify for a loan with the SBA. That said, it does have certain eligibility requirements, including:
Your business must trade in the U.S.
You must have invested in the business yourself.
You must be a for-profit business.
You must have tried but been unable to source funding from traditional lenders.
When you’ve run out of other options, the SBA can save a potential acquisition deal. But that’s not all. SBA loans are also competitively priced (under 8 percent). As a federal agency, the SBA enforces responsible lending and risk management so lenders can afford to charge lower rates and fees. You’re arguably less exposed to predatory practices when you borrow from the SBA than from subprime business lenders. Terms vary from seven to 25 years, giving ample time to repay at an affordable monthly premium.
Because the SBA guarantees up to 85 percent of the loan, there’s less pressure on you and your current business to shoulder all the risk. You’ll rarely pay more than a 10 percent down payment, and if you’re borrowing less than $350,000, you won’t always need collateral. That said, you will need to sign a personal guarantee to repay the loan in full.
Help and support
The SBA can be a helpful sidekick during the acquisition process, too. You might hit a wall of due diligence and legal wrangling, which can deter even the staunchest entrepreneurs from moving forward. The SBA has a vested interest in your success here and can support you right until you sign the purchase agreement with counseling and learning resources.
The general-use 7(a) loan is the SBA’s most popular, and it’s ideal as acquisition finance. You can borrow up to $5 million which is more than enough for acquisitions of small or even medium-sized businesses. You can only borrow what you can afford to repay, however, which an SBA-approved lender will determine when you apply.
To begin applying for an SBA loan, you first need a list of SBA-approved lenders in your area. Head to the SBA website, fill in some basic details and its matching tool will produce a list of suitable lenders. Do remember this isn’t an application, and those in the list won’t necessarily give you a loan.
Next step is to apply, the specifics of which will vary from lender to lender. But be prepared to hand over or have scrutinized the following information:
The amount of money you want to borrow and its purpose.
A business plan. Because you’re acquiring a new business, this should include post-acquisition plans and why it’s the right acquisition for you.
Your financials. The lenders will want evidence you’re capable of repaying the loan. Expect to hand over tax filings, balance sheets, P&L statements and more.
Your experience. They’ll want to see your industry expertise in both your current business and the one you’re about to buy should it be in a different sector.
Your credit history. Again, don’t stress if your record has a few hiccups. The SBA underwrites a portion of loans and therefore can accept some poor credit applications.
Collateral. How will you collateralize the loan? Will it be stock, property or other assets? Depending on the lender, you might be able to choose what’s off and on the table collateral-wise.
The SBA and the lender will assess your application and return with a decision.
Some things to remember
Plan early as getting an SBA loan takes time
If you’ve already found a business you like, apply for the SBA loan now. As you might know, dealing with federal agencies is a long and bureaucratic process. It might be a few weeks before you receive a decision and perhaps a week or two more to receive funds. Get the ball rolling as soon as possible so you don’t lose out to another buyer.
7(a) interest rates are variable
The 7(a) SBA loan type is a variable base rate plus a markup negotiated with your lender. When this base rate changes, the rate on your loan changes, so be prepared for paying a bit more or less each month over the term of the loan.
Negotiate, negotiate, negotiate
You need to negotiate fees, repayments, collateral, interest and so on with the lender. The SBA limits what the lender can charge, but rest assured the lender will seek the best outcome for itself. Don’t be afraid to negotiate the terms – especially if you’re in a position of strength such as having a good credit rating.
SBA loans are one of the best forms of credit available. The interest rates are low, and the repayment terms are fair. If you already own a business and are eyeing up another, don’t fret if you don’t have the capital to finance the acquisition. The SBA can help you seal the deal.
In this video, I am going to show you how to get small business loans in 2020. This is a sponsored video by https://mailrush.io/ Get 30% OFF the first month using code: COLDEMAIL Grab the Cold Email Optimization Checklist for free here: ➡️ http://email10k.com/checklist ⬅️ — Even though most of my businesses were bootstrapped, I did take loans for my businesses when I was low on dough. There are times when business loans are the worst thing you could get and times when it is a viable option.
Your credit score is a critical piece of your financial life. If you want a good rewards credit card, you’ll need a good credit score. If you want to get a low mortgage interest rate, you’ll need a good credit score.
There are also other non-obvious places where a good credit score can help – like when you want to get a new cell phone or when you’re getting car insurance.
Building credit can be a long process where good behavior helps increase your score gradually. Achieving good credit can take years but there are a few steps you can take to give your score a boost.
These won’t work for everyone because many solve specific problems (that you may not have) but review the list to see if you can take advantage of any of these ideas.
1. Reduce Your Credit Utilization Ratio
Several factors determine your credit score. Your credit utilization ratio is one of the most influential metrics because it makes up 30% of your score. Credit utilization is simply how much credit you are using divided by the total amount of credit you have access to. Recommended For You
If you charged $10,000 to your credit cards and your total credit limit is $50,000, your utilization is 20%. Credit bureaus use your statement balance in this calculation, so you have utilization even if you pay off your balances in full each month.
A general rule of thumb is to use up to a maximum of 30% of your credit card limit. Many experts suggest keeping it below 10%, if possible. Most credit cards report your credit utilization once a month to the credit bureaus. In many cases, your most recent statement balance is the number that goes onto your credit report.
Here are three ways to keep your credit card utilization ratio below 30%:
Only charge essential purchases like gas and groceries—or those that earn bonus points
Split your purchases between multiple credit cards
For large one-time purchases, make extra payments during the billing cycle
Continue paying cash for purchases that cause your balance the exceed the 30% threshold if you won’t be making an extra payment each month. If you’re going to make additional payments, schedule them to post before the billing cycle ends so the balance shown on your statement is lower.
2. Request Credit Limit Increases
Periodically, request an increase to your credit limit. Each credit card company will have a different process but it’s typically very easy and very quick. Most credit cards will let you do this online.
By increasing your credit limit, you lower your utilization.
Two things to keep in mind when doing this. First, don’t request an increase on a new card. Many companies will not increase your limit if it’s new.
Next, when you request an increase, you want to make sure you do it in a way that doesn’t require a hard inquiry on your credit report. If you request a relatively small increase, the company will usually approve it automatically.
If you ever request an increase and the company wants to ask for more information, decline the request. You don’t need the increase and so it doesn’t make sense to take the credit score decrease from a hard inquiry.
You can usually request an increase every six months.
3. Fix Credit Report Errors
Sometimes, banks make reporting errors that hurt your credit score. Even if you haven’t missed a payment, many consumers overlook the benefits of a periodic credit report review.
Reviewing your credit report is free and only takes a few minutes. You can request free credit reports from Equifax EFX-4.7%, Experian and TransUnion TRU-1.7% weekly through April 2021.
If you find an error, you will need to file a dispute with the credit bureau. No error is too small to dispute. I’ve disputed incorrect phone numbers, which are correctly in minutes, which led me to discover unauthorized accounts (a cell phone).
If the error affected your score, you should see a pretty quick change once the credit bureau corrects the error.
4. Be an Authorized User on a Credit Card
Having a family member with a higher credit score than yours can add you to their credit card as an authorized user. Doing so can positively affect your credit score when the card has a long account history, on-time payments and a low credit utilization ratio.
5. Periodically Use “Dormant” Credit Cards
As your credit history grows, you likely qualify for credit cards with better rewards and interest rates. Instead of closing your first credit card, make occasional purchases to keep it active.
When you keep the card active, banks are less likely to reduce your credit limit or close the card. The credit bureaus look at each revolving credit account’s credit utilization ratio as well as your overall credit utilization ratio.
A credit line decrease impacts your total credit utilization ratio.
Closing an old credit card account can also hurt your score. If your old card charges an annual fee, see if you can downgrade it to one without an annual fee. You maintain your account history and that continues to strengthen your credit.
6. Pay Off Cards with the Highest Balances First
In addition to limiting your future spending, work on paying off your credit cards. If you have several cards with a balance, focus on the highest card balance to reduce your credit utilization ratio.
Paying down your outstanding debt can also improve your debt-to-income ratio, which is not a factor in your credits core but is used by many lenders.
7. Make On-Time Payments
If you miss your payment due dates, stop.
Your payment history is the most influential credit score factor with a 35% weighting. Even if you can only make the minimum payment, your account remains in good standing—and you avoid late fees.
8. Have a Variety of Credit Accounts
While you should only borrow money when necessary, having a variety of credit accounts can demonstrate you can manage credit responsibly. You might have one credit card, a home mortgage and a car loan. Each type of account can benefit your credit score differently.
Loans that you repay in full can remain on your credit report for up to ten years. You can have an easier time qualifying for a similar loan in addition to having a higher credit score.
9. Sign Up for a Credit Boost Service
Having a credit card and installment loans are not the only ways to increase your score. Credit boost services like Experian Boost report your monthly bill payments like utilities or your cell phone plan to the credit bureaus. You can receive credit by linking your bank account.
10. Get a Credit Builder Loan
Credit builder loans can offer a small credit score boost as you lend money to yourself. You make monthly payments into an interest-bearing certificate of deposit (CD) for up to 24 months. The bank reports your monthly payment to the three credit bureaus. When the loan term ends, you receive the CD balance minus administrative fees.
These are just a few of the ways you can quickly increase your credit score – try one today and let me know how it turns out the next time you check your credit score. Follow me on Twitter. Check out my website.
Jim Wang I have been writing about money for over 15 years and recently at WalletHacks.com. I graduated in 2003 from Carnegie Mellon University with a Masters in Software Engineering and I use my analytical skills to navigate the financial world. It’s through this education that I try to distill complex financial ideas into simple steps regular folks can use to take control of their money and build wealth.
Learn how to increase your credit score 161 points in 30 days. This video show how Chandler helped his wife increase her credit score from 613 to 774 in under 30 days. Chandler also explains everything you need to know about how to increase and maintain a high credit score. Chandler David Smith has been investing in real estate for the last 6+ years. To enable success in real estate he needed to learn exactly how to increase and maintain a high credit score at a very young age.
In this video Chandler shows you a lot of the tips and tricks to getting and keeping your credit score up. Two months ago Chandlers wife was applying for a loan. Unfortunately, she had terrible credit. In this video, Chandler explains what he had his wife do so that she could dramatically increase her credit in under 30 days and get approved for her home loan. After showing how to quickly increase your credit score, Chandler also shows you everything that you need to know to increase and maintain a high credit score over time.
This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.
More than 50,000 SMEs have received working capital loans, with an average of 125,000 pesos each. And each venture has requested, on average, up to 2.5 credits.
Since the beginning of the pandemic, more than 15 thousand small and medium-sized companies (SMEs) found an option in Mercado Pago to keep their businesses running and 7 out of 10 who applied for a loan did so through Mercado Crédito.
The foregoing, according to a survey of 1,160 SMEs nationwide conducted by Trendsity, at the request of Mercado Pago. According to the survey, most of the resources obtained through Mercado Crédito allowed these business units to increase inventories (51%) and use it as working capital, which includes equipment and operating expenses, among others (46%).
So far, more than 50,000 SMEs have received working capital loans, with an average of 125,000 pesos each. And each venture has requested, on average, up to 2.5 credits.
“As part of the economic reactivation, credit has become essential to encourage the economic development of entrepreneurs. For that reason, we increase our offer every month and have placed more than 3,500 million pesos among SMEs so that they can get ahead in this difficult time, “said Jonathan Sarmina, director of Mercado Crédito México.
More online payments to keep trading
“50% of the SMEs that joined Mercado Pago do not have a physical store, so 65% of them chose to reinforce online sales and 55% to offer more payment options,” said Sergio Dueñas, director of Payment Market.
Among the payment methods preferred by SMEs, the Payment Link stands out (82%), followed by the payment through Mercado Pago with its own website (72%); the Point Blue card terminal (62%) and QR code payments in (49%).
He explained that, according to the results of the study, 92% of those consulted understand that offering a greater number of payment options allows them to reach more potential customers and the same percentage declares that they will continue to use Mercado Pago in a world without a pandemic.
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After a 56% rally off the March bottom, Goldman Sachs’ stock (NYSE: GS) seems to still have some room to grow based on its historic P/E multiples. Goldman Sachs, a leading U.S investment bank with a global presence, has seen its stock rally from $135 to $211 off the recent bottom compared to the S&P which moved a similar 55%.
The bank’s stock is closely following the broader markets as investors are positive about the strength of its Sales & Trading and investment banking operations. Notably, its Q2 2020 results saw a 41% y-o-y increase in revenues which was way ahead of market expectations, mainly driven by growth in trading and the investment banking business. Despite this, its stock is still 8% below the levels seen in late 2019.
Goldman Sachs’ stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. After the healthy rise since the March 23 lows, we feel that the company’s stock still has some potential as its revenues have benefited during the lockdown and its valuation implies it has further to go.
Some of this rise of the last 3 years is justified by the roughly 19% growth seen in Goldman Sachs’s revenues over 2016 to 2019, which translated into an 11% increase in Net Income. The net income was unable to capitalize on the rise in revenues due to higher non-interest expenses – especially due to a jump in compensation cost, which weighed on the net income margin reducing it from 23.2% in 2016 to 21.65% in 2019. While the net income did suffer, the earnings figure increased by 28% over the same period, thanks to the bank’s regular investments in share repurchases. Recommended For You
While the company has seen steady revenue and earnings growth over recent years, its P/E multiple has actually decreased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard Why Goldman Sachs Stock was stagnant between 2016 and 2019 has the underlying numbers.
Goldman Sachs’s P/E multiple changed from close to 14x in 2016 to around 11x in 2019. While the company’s P/E is down to about 10x now, there is some upside potential when the current P/E is compared to levels seen in the past years – P/E of 11x at the end of 2019 and 14x as recent as late 2016.
So what’s the likely trigger and timing for further upside?
Goldman Sachs has a loan portfolio of around $89 billion (as per 2019 data), which could lead to substantial losses if consumer activity levels fall and the economic condition further worsens, leading to a rise in loan default rates. Not to forget, it would make it expensive for the bank to secure funding, impacting its overall operations. Similarly, its asset management business is likely to suffer due to economic slowdown which was also evident from the Q2 2020 results – segment revenues down by 18% y-o-y.
However, there is a silver lining, both the investment banking and sales & trading businesses have seen significant growth over the first half of 2020. Fortunately for Goldman, it has a noteworthy presence in both segments, driving around 19% and 40% of the total revenues, respectively, (as per 2019 data). Given the level of volatility in equity & debt markets, the bank is well-positioned to report growth in its securities trading arm, coupled with higher investment banking revenues driven by growth in debt origination space. This, in turn, would offset the negative growth in other segments and benefit the revenue trajectory over the coming months. While Goldman Sachs’ results for Q2 saw unprecedented growth, we believe that Q3 results will also be positive.
Further, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.
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Goldman Sachs recently released their “Rule of 10” stock list. These growth stocks have shown sales increases of more than 10 percent each of the last two years, and are projected to grow sales over ten percent annually over the next two years. Stock lists like there can help investors build prospects for the next generation of FAANG stocks. 👍 GET MY FREE STOCK ANALYSIS GUIDE: “15 Minute Stock Analysis” https://40finance.com/free-report15/ This video reviews several Rule of 10 stocks in detail, including their PE ratio, earnings per share, and analyst price projections for the next year.. The following stocks are mentioned in this video: Align Technology, Inc. (ALGN) Adobe Inc. (ADBE) Netflix, Inc. (NFLX) Vertex Pharmaceuticals Incorporated (VRTX) ServiceNow, Inc. (NOW) PayPal Holdings, Inc. (PYPL) The Goldman Sachs Group, Inc. (GS) Are you interested in any of Goldman Sachs “Rule of 10” stocks? Let me know in the comments! Other 40 Finance videos you may like: Snowflake IPO Breakdown https://www.youtube.com/watch?v=6SZ09… 5 Value Stocks with Upside https://www.youtube.com/watch?v=JZ1Tb…
Starting a business is exciting. You get to be your own boss and pursue a dream. Beware, however, that the life of an entrepreneur isn’t an easy one. You’re going to need a lot of help along the way.
Many small businesses apply for loans. It takes a lot of money to start a company, and most entrepreneurs don’t have that kind of capital sitting around. Once they get the business off the ground, they pay back the loan and focus on turning a profit.
You can’t just walk into a bank and expect to be approved for a loan, especially when lending conditions are tight. In fact, about 80% of small business owners who apply for a bank loan get rejected.
Before you ever set foot in a bank, you need to learn whether your small business actually needs a loan. Getting into unnecessary debt can be like digging yourself into a hole you can’t climb out of. Look at all of your options before making a final decision.
First, take a look at your company’s budget. You might be able to make some cuts or rearrange funds to cover your costs. Selling a company car might hurt, but it beats paying thousands of dollars in interest.
Make a Plan
Once you’ve decided a loan is your best option, you need to make a plan. How are you going to use the money? How will you pay it back, and over what time frame?
Lenders want to hear thought-out answers to those questions. “We look at how it will improve the company in the long run, as it will just add a liability in the short run,” explains Stan Bril, founder and CEO of commercial lending firm MCG. “We also look at the founder’s exit strategy, if they have one, because that’s when we’ll get our loan back.”
Your plan will not only sway the bank in your favor, but also set you up for success once the loan is approved. Loan money is to be used wisely and with a purpose. Waste the money you’re lent, and you’ll struggle to get loans later on. Worse, your business’s reputation and brand will be damaged because of it.
Know What Banks Look For
When approving loans, banks look at many different factors. Knowing what they focus on will give you an advantage when making your pitch.
First, a bank will look at your company’s financials. “Banks want to know whether a business is currently growing,” says Alan Crystal, vice president of finance at SmartBiz Loans. “They assess the business revenue trend by calculating the average revenue growth over time. To limit the risk of default, banks look for revenue growth trends that match (or exceed) the industry average.”
Second, if for some reason you’re unable to pay the loan in full, the bank will look to see if you have any assets that it can use to regain lost capital. It’ll also take into account your company’s credit history and overall expenses, so be prepared.
Lenders want to invest in companies that show promise. If your company is struggling to make ends meet, it will be hard to get approved. You need to show lenders that you have what it takes to succeed, and that you recognize the consequences of failure.
Understand the Process
Understanding the loan process also gives you a greater chance at success. The more involved you are with the bank, the easier it is for them to work with you. Be prepared with all necessary documents, numbers and collateral you might need.
What’s the biggest mistake companies make when they reach out for a loan? “Most companies that come to us asking for a loan have no clue how intricate the approval process is,” Bril points out. “There is a lot of required documentation, and all the numbers have to match up. Collateral is important in case of default.”
When in doubt, over-prepare. The last thing you want is to be turned away because you were missing paperwork. Bring anything that might be helpful—it might just come in handy.
What happens once you’ve been approved for a small business loan? Use it thoughtfully, and pay it off quickly. Be sure to stay in touch with your bank: If things don’t go as planned, your lender is less likely to be understanding if they feel blindsided by bad news.
For entrepreneurs, planning and execution are critical. Small business loans are no exception.
Serenity Gibbons is a former assistant editor at The Wall Street Journal. The local unit lead for the NAACP in Northern California and a consultant helping to build diverse workforces, Serenity enjoys gathering insights from people who are creating better workplaces and making a difference in the business world.
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