SBANC
Small Business Advancement National Center University of Central Arkansas — Conway Arkansas
115H, College of Business - University of Central Arkansas - 201 Donaghey Ave. Conway, AR Issue: 802 - January 28th, 2014
Upcoming Conferences ABR
Who: Academy of Business Re- When: March 26-28, 2014 search Where: New Orleans, LA What: New Orleans Conference
Who: Allied Academies
When: March 26-28, 2014
AA
What: Spring Int’l Conference
Where: Nashville, TN
sponsibility Conference
CSR
Who: Society for Education & Research Development What: Corporate Social Re-
Where: Jakarta, Indonesia
Who: International Council for Small Business
When: June 11-14, 2014
ICSB
When: June 02-05, 2014
Where: Dublin, Ireland
What: ICSB World Conference
ICSM
Who: International Conference on Services Management What: Int’l Conference
When: December 10-12, 2014 Where: Macau S.A.R., China
Announcements SBANC
ISBE
AA
ICSB
USASBE
The Small Business Advancement National Center is pleased to tell you that we have revamped our website and newsletter recently. ISBE will be hosting this one day event at Ulster Business School, Belfast Campus during March 13, 2014.
Allied Academies will be hosting their Spring 2014 Conference in Nashville, TN during March 26-28, 2014.
ICSB will be hosting their annual conference in Dublin, Ireland during June 11-14, 2014.
USASBE will be hosting their annual conference in Fort Worth, TX during January 9-12, 2014.
Call for Papers IABE
IGDO
HICB
IETC
Who: International Academy of Business and Economics
When: March 16-18, 2014
What: 2014 Winter Conference
Deadline: February 10, 2014
Who: Institute for Gender and Diversity in Organizations
When: May 22-24, 2014
What: IGDO 2014 Conference
Deadline: February 6, 2014
Where: Orlando, FL
Where: Vienna, Austria
Who: Hawaii International Con- When: May 22-25, 2014 ference on Business Where: Honolulu, Hawaii th What: 14 Annual Conference Deadline: April 11, 2014 Who: International Educational Technology Conference
When: September 3-5, 2014
What: IETC 2014 Conference
Deadline: July 20, 2014
Where: Chicago, USA
Negotiating a Loan
In negotiating a bank loan, a small business owner must consider the terms tat will accompany the
Tip
of the Week
loan. Four key terms are included in all loan agreements: the interest rate, the loan maturity rate, the repayment schedule, and the loan covenants.
“Bank’s lending policies are not uniform. Some bankers are extremely conservative, while others are willing are more willing to accept some limited risks.” of prime plus 2 and the prime
Rate. If a banker does impose
rate is 3%, the interest rate for
a floor, you might request a
the loan will be 5%. Alterna-
ceiling that the rate cannot go
tively, a banker might state the
above. If the bank agrees to a
rate as “prime plus 200 basis
ceiling of 6.5%, for example,
points.” A basis point is
you will know that your inter-
1/100th of 1%; thus, 200 basis
est rate cannot go any higher
points are the same as 2%.
than that.
rate, is the rate of interest
The interest rate can be a
Although a small firm should
charged by banks on
floating rate that rises over the
always seek a competitive in-
loans to their most credit
loan’s life—that is, as the
terest rate, concern about the
worthy customers. The
prime rate changes, the inter-
interest rate should not over-
LIBOR (London Interbank
est rate on the loan changes—
ride consideration of the
Offered Rate) is the inter-
or it can be fixed for the dura-
loan’s maturity date, its re-
est rate that London-
tion of the loan. A banker may
payment schedule, and any
based banks charge other
also impose a floor on the in-
loan covenants.
banks in London, which is
terest rate so that it cannot go
considerably lower than
below a given rate. For in-
the prime rate.
stance the floor might be set
If a banker quotes a rate
at 3.5%, no matter the prime
Interest Rate The interest rate charged by banks to small companies is usually stated in terms of the prime rate or, occasionally the LIBOR. The prime rate or base
“
(Continued from Previous Page)
for collateral. However, the
borrower’s creditworthi-
Loan Maturity Date
banker may have the option of
ness at the end of the
imposing a balloon payment
third year if the business
before the loan is fully repaid.
is not going well.
As already noted, a loan’s term should coincide with the use of money—shortterm financing, while long-
A balloon payment allows the bank to require the borrower to
Loan Covenants
pay off the balance of the loan
In addition to setting the
in full by a specified time, ra-
interest rate and specify-
ther than waiting the full term
ing when and how the
for the loan to be repaid. As-
loan is to be repaid, a
sume, for example, that you
bank normally imposes
borrow $50,000 at an interest
other restrictions on the
rate of 6%, and the loan is to be
borrower. These re-
repaid in equal monthly repay-
strictions, or loan cove-
ments over 84 months (seven
nants, require certain ac-
years). The amount of each re-
tivities (positive cove-
payment is determined to be
nants) and limit other ac-
$730 in order to pay off the
tivities (negative cove-
loan in full by the end of the
nants) of the borrower to
seven years. However, the
increase the chance that
banker may include a term in
the borrower will be able
the loan agreement giving the
to repay the loan. Some
bank the right to “call” the loan
types of loan covenants
at the end of 3 years, meaning
that a borrower might en-
the you will have to pay of what
counter include the fol-
you still owed at that time
lowing:
($31,100). The banker would
1. The company must pro-
have the choice of (1) requiring
vide financial statements
you to pay off the $31,100 at
to the banks on a monthly
the end of the third year, or (2)
basis or, at the very least,
With a term loan, the loan
allowing you to have the re-
quarterly (positive cove-
is set to be repaid over 5
maining four years to pay off
nant).
to 10 years, depending on
the loan. This provision per-
the type of assets used
mits bankers to reassess the
term needs demand longterm financing. For example, since a line of credit is intended to help a firm with only short-term needs, it is generally limited to one year. Some banks require that a firm “clean up” a line of credit one month each year. Because such a loan can be outstanding for only 11 months, the borrower can use the money to finance seasonal needs but cannot use it to provide permanent increases in working capital, such as accounts receivable and inventory.
Repay Schedule
“
(Continued from Previous Page)
personally guarantee the firm’s
You also need to be aware
2. As a way to restrict a
loan. A banker wants the right
of what happens when
firm’s management from
to use both the firm’s assets
you violate a loan cove-
siphoning cash out of the
and the owner’s personal as-
nant. Ultimately, the bank-
business, the bank may
sets as collateral. Even when a
er can make you repay the
limit managers’ salaries. It
business is structured as a cor-
loan in full immediately.
also may prohibit any per-
poration and the owner can es-
More often, the banker will
sonal loans from the busi-
cape personal liability for the
increase the interest rate
ness to the owners
firm’s debts—that is, the owner
or require you to repay the
(negative covenant).
has limited liability—most
loan in a shorter period of
banks still require the owner’s
time. What happens will
personal guarantee (negative
also depend on which
covenant).
covenant is violated. As
can handle its loan pay-
It is imperative that you pay
one banker noted, “Some
ments. For example, to
close attention to the loan cov-
covenants are like yield
ensure sufficient liquidity,
enants being proposed by the
signs, while others are
the bank may require the
banker. Ask for a list of the
firm’s current assets to be
covenants before the closing
words, bankers use cove-
at least twice its current
date, and make certain that you
nants as warning lights to
liabilities—that is, the cur-
can live with the terms. If you
address any potential
rent ratio ( [current as-
have an existing company, de-
problems before they be-
sets] / [current liabilities] )
termine whether you could
come fatal.
must be equal to or great-
have complied with the cove-
er than 2. Or the bank
nants, especially key ratios, if
might limit the amount of
the loan had been placed dur-
debt the firm can borrow
ing the recent past. Then, if
in the future, as measured
necessary, negotiate with your
by the debt ratio ( [current
banker and suggest more real-
assets] / [current liabili-
istic covenants. Bankers will
ties] x [negative cove-
negotiate, although they may
nant] ).
sometimes try to convince you
3. A bank may put limits on various financial ratios to make certain that a firm
4. The borrower will nor-
“
mally be required to
otherwise. After all, making loans is the primary source of profits for the bank.
stops signs.” In other
“Carpe per Diem— Seize the Check!” - Robin Williams
Feature Paper
”
ACTIVITY BASED COSTING FOR ENTREPRENEURS
SBANC Staff Director Dr. Don B. Bradley III
Development Intern James Vire
Development Intern
IN SERVICES INDUSTRY This paper was written by Osman Kursat Onat, Mehmet Akif Ersoy University, Ismet Anitsal, Tennessee Tech University, & M. Meral, Anitsal, Tennessee Tech University. The paper was presented at the 2013 Allied Academics San Antonio Conference.
Joshua Tucker
Comments?
Abstract Services industry attracts many entrepreneurs especially in developed countries. Recent recession showed that economic recovery and job gains were initiated in services first. Increase in entrepreneurial activities in service sector is critical for growth in gross domestic product. However, services marketing require different management approaches from manufactured goods marketing. Distinctive characteristics of services make cost control and pricing challenging for entrepreneurs. Traditional cost accounting methods do not completely fulfill requirements of services, as they focus on units produced. Activity based costing (ABC), on the other hand, focuses on activities that create costs, and classification and allocation of costs via cost drivers. In this paper, a framework of integration of ABC costing into service activities is provided for entrepreneurs and on how to achieve this objective is shared through an illustration of allocation of advertising and promotion costs for an insurance company. (Page 15)
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