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Real estate agents deal with hundreds of tasks throughout the property buying and selling process. They have costs to market themselves, improve properties, pay a variety of fees, and split the commission.

By the time a property closes, there are dozens of transactions related to the realtor and their clients. This can be an accounting nightmare if you don’t have a clear system in place. 

Fortunately, you don’t need an accounting background to be successful in real estate—but you should have a general understanding to help you make the best strategic decisions for your real estate business.

Keep reading to learn more about real estate accounting. Even if you’re just starting out, you can create processes that help you to scale—and to keep as much commission as you can.

What is real estate accounting?

Real estate accounting is a specialized branch of accounting that focuses on managing the financial transactions related to a real estate business. This includes tracking income from property sales or rentals, expenses such as maintenance costs, commission payouts, and property improvements, and any other transactions related to real estate activities. 

A comprehensive real estate accounting system not only ensures compliance with tax and financial regulations, but also helps realtors make informed decisions to improve their profitability and growth. Whether you're a solo agent, a property manager, or a large real estate firm, understanding the basics of real estate accounting is integral to your financial success.

Why real estate accounting is important.

Understanding the importance of real estate accounting is crucial if you want to maintain financial health and propel your business forward. It not only helps track performance, but also aids in strategic planning and decision-making.

• Transparency - Real estate accounting gives a clear and transparent view of your financial situation, allowing you to understand your income, expenses, and profitability at a glance.
• Compliance - Real estate accounting ensures compliance with tax laws and financial regulations, preventing you from facing penalties or legal issues.
• Decision making - Real estate accounting aids in strategic decision making by providing vital financial data, facilitating operational improvements and expansion plans.
• Cash flow management - Real estate accounting helps in effective cash flow management, which is critical for the smooth operation of any real estate business.
• Cost management - With proper real estate accounting, you can identify areas of excessive spending and implement cost-saving measures.
• Investor confidence - Accurate and up-to-date accounting can increase investor confidence, which can be crucial if you're seeking external funding or partnerships.
• Profit maximization - Real estate accounting enables you to track and control your expenses, allowing for better budgeting and ultimately maximizing your profits.

Real estate accounting is an invaluable tool for anyone involved in the real estate industry. Its ability to provide a clear financial picture facilitates strategic planning, regulatory compliance, and ultimately, business growth. Ignoring its importance can lead to disorganization, legal issues, and missed opportunities for profit maximization.

Elements of real estate accounting.

Real estate accounting comprises several key elements that work together to provide a full picture of your business’ financial health.

1. Revenue tracking - This includes all income generated from property sales, rentals, or other services offered. It's crucial to accurately record all revenue transactions to have a clear view of your business’ profitability.
2. Expense management - These are costs incurred in the running of the business. They include maintenance costs, commission payouts, marketing expenses, and property improvements. Proper management of expenses helps to identify areas where costs can be reduced to increase profitability.
3. Financial reporting - Regular financial reports help realtors monitor the business’ financial performance over a specific period. These reports include profit and loss statements, balance sheets, and cash flow statements.
4. Tax preparation - A substantial part of real estate accounting involves managing tax-related matters. This includes determining taxable income, identifying tax deductions, and ensuring timely tax payments to avoid penalties.
5. Budgeting and forecasting - This involves making financial projections for the future, based on past and current financial data. Budgeting and forecasting are essential for strategic planning and decision-making.

Understanding these elements of real estate accounting can help you navigate the financial landscape of your business, ensuring that you are making informed decisions to drive growth and profitability.

Real estate accounting basic steps.

The financial backbone of a real estate business revolves around effective accounting practices. These practices maintain the flow of funds, enabling the business to thrive even in fluctuating markets. Even though real estate accounting might seem intricate, a clear understanding of the basic steps can simplify the process dramatically. 

Let's delve into the core steps of real estate accounting that can effectively manage your financial transactions and provide a clear picture of your business' financial health, regardless of the size of your real estate portfolio.

1. Choose an accounting method.

You can choose between cash-based and accrual-based accounting to track your expenses and income. 

With cash-based accounting, you record income only when the cash hits your account. You also only record expenses when your business is billed for them. With this model, you can see clearly how much money you have within your organization.

With accrual-based accounting, you record income and expenses when they occur, not when money exchanges hands. For example, you can record the costs to stage a home, even if you don’t pay the stager until the following month. Accrual-based accounting is a better option if you want more visibility into the finances of your business, including future expenses and revenue streams. 

However, many realtors prefer to use cash-based accounting for their firms. First, most expenses related to real estate are immediate. If you need to hire a photographer, you can cut a check for their services or request an invoice immediately. Because there isn’t a delay between the service and payment, the cash-based model works. 

Many realtors also prefer the cash model because of their income sources. Sales fall through, contracts are renegotiated, and renters cancel their leases. All of these changes can harm your cash flow, especially if you already recorded the income through your accrual-based system. With a cash model, you can record the income when the sale closes or when the renter’s check hits your account. The payment is a sure thing—and the money is yours to spend. 

Every business model is different, so consider your specific needs before selecting an accounting process.

2. Separate personal and business funds.

Blurring the lines between personal and business funds can lead to complicated tax issues and potential financial confusion. For transparency and accuracy, it is essential to set up separate bank accounts for your personal finances and your business transactions. This allows you to clearly track your real estate-related income and expenses separately from your personal expenses. Remember, mingling personal and business funds can raise red flags during audits and may impact your ability to accurately analyze your business’ financial performance. Keeping these funds separate is a best practice in real estate accounting that contributes to the overall financial health and integrity of your business.

3. Categorize your expenses and income.

Clear organization is the foundation of good bookkeeping. As your real estate business grows, you’ll need healthy bookkeeping habits to forecast growth and understand your financial opportunities. Consider a few of the different types of expenses that come with operating a real estate business, along with the different sources of income you can expect. 

Expenses

• Realtor association fees
• Commission fees
• Marketing costs
• Administrative assistant services
• Staging expenses
• Photography and video costs for homes
• Gas and wear on your car

Income

• Commissions earned
• Commissions from realtors you add to your team
• Rental income or sales income from investment properties
• Property management fees (if applicable)

With growth comes complexity. You may bring on an assistant or purchase an investment property to flip for a profit. To prevent confusion, establish clear accounting codes related to your business. Each purchase will have a category and a code number associated with it.

If your real estate business has multiple arms (like an agent arm and an investment property arm), you may want to consider establishing multiple LLCs or keeping the books for each business channel separate. This delineation can prevent confusion, while helping you to manage each aspect of your business individually.

4. Understand your commission model.

If you’re working with a real estate brokerage to build up your business and brand name, make sure you have a clear idea of your commission fees and opportunities. Each brokerage charges its own commission structure and creates opportunities for real estate agents to negotiate their percentages, signing bonuses, and other earnings.

Consider the commission systems of a few of the largest real estate brokerages in the country:

• Keller Williams - This brokerage offers a 70/30 split with agents, where the brokerage takes a 30% cut of your commission. However, agents also pay a 6% franchise fee on their sales (up to $3,000). This means you actually have a 64/30/6 split until you pay $3,000 in fees. Additionally, each Keller Williams office has its own commission cap (typically around $28,000). Once you hit that cap in commission fees, you take home 100% of your commissions.
• RE/MAX - This company has multiple commission plans that you can choose from. First, they have a 95/5 plan where realtors take home 95% of their commissions, but pay a 5% desk fee each month. With this option, there’s no commission cap. Realtors at RE/MAX can also opt for a commission split range of 60/40 to 80/20 depending on their previous sales. Once they hit their commission cap, they move up to the 95/5 model. 

If you’re still deciding which brokerage to work for, consider their commission structure and their brand name in your area. You may be able to earn more money by working for a specific firm—even if you pay them more commission than with another option.

A large part of real estate accounting is tracking what you earn in commissions and the fees you’re expected to pay over the course of the year. These numbers determine your take-home pay and your budget for marketing expenses and other investments.

5. Establish your operating costs.

The finances of a real estate professional can fluctuate significantly over the course of a year. You may experience a high number of expenses at the start of the year and then close multiple sales within a few weeks. This means that realtors need to balance their expenses so that they always have enough funds in the bank to cover basic expenses, regardless of the market. 

As you establish your accounting systems, start with your operating costs. Operating expenses (OPEX) are costs that aren’t directly tied to your services. They differ from your cost of goods sold (COGS), which are costs directly related to your services. 

For example, if you keep a marketing agency on a monthly retainer to maintain your real estate website, you will factor this expense into your OPEX. It doesn’t matter whether you sell a dozen houses this quarter or none—you’ll still need to pay the flat marketing fee. Additional OPEX listings include rent, a lease on a work vehicle, and utilities like internet fees or your electric bill. 

Meanwhile, if you hire a photographer to help you market a house on a per-property basis, their services are part of your COGS. If 10 new listings are added within a month and you need to photograph each of their homes, then your photography expenses will be higher than if you have only two clients another month. 

With the uncertain nature of the real estate business, you can use your OPEX to identify predictable costs related to your company. Your electric bill might fluctuate and gas prices might drive up your monthly bills, but you can anticipate costs related to those operating expenses every single month, regardless of your business.

6. Track all of your business expenses.

Once you have your operating costs sorted in your accounting system, you can take steps to track all of your business expenses. 

Real estate agents have some of the most diverse expenses in business. They face costs ranging from landscaping services that improve curb appeal to lunches for clients and gifts for buyers. Realtors’ expenses can reach a few hundred dollars a month or into the thousands, depending on their listings, marketing strategies, and many other factors. Real estate agents also accrue these business expenses daily—which means you can easily get overwhelmed if you don’t have a system in place. 

There are a few ways to keep your expenses in order as your real estate business grows. The first step is to get a business credit card. This card will separate your business expenses from your personal charges, while keeping your monthly costs all in one place. You can also get a business bank account to isolate your business transactions. 

The next step is to look for software that can record your business expenses. With tools like BizXpense Tracker, you can upload receipts and track costs related to certain projects—even if you have to use your personal card. You can also download a gas mileage tracker to log how far your drive. This information will be essential when separating personal and professional gas costs, insurance payments, wear and tear, etc. 

If you set aside a few minutes each day (or an hour or two weekly) to evaluate your charges and business expenses, you can keep your accounts clearly organized. This practice prevents an end-of-month scramble to reconcile your business costs with your bank account balance.

7. Set up double-entry accounting.

Regardless of whether you choose the cash or accrual model for your real estate bookkeeping, you’ll want to establish a double-entry system for your accounting materials.

A double-entry system is based on the idea that every credit has an equal and opposite debit. In accounting, a debit increases the value of accounts (a positive number) while a credit decreases the value of accounts (a negative number). 

For example, let’s say you order business cards and other giveaways to market your business. These cost $500. With a double-entry bookkeeping system, you’ll credit your cash account $500, because that is how much you paid while debiting your marketing assets $500—because you now own cards, magnets, koozies, and other fun items.  

The purchase of marketing materials is a simple example, but double-entry accounting also becomes valuable when you start adding assets to your real estate firm. For example, you can purchase a house to flip for $200,000. You now have $200,000 less in cash, but a significant asset worth that amount. If you flip the house for $350,000, then you can track your profits using the expense accounts in your double-entry recordings.    

Double-entry bookkeeping also provides a series of checks to ensure that each entry is correct. If the two lines of credits and debits don’t align, then something was recorded incorrectly. While it might not seem like a big deal if you mistype your electric bill or are off a few dollars on your commission income, these errors can add up—and might affect your taxes and cash flow. Plus, you will have to return to your books and redo them to ensure that they’re error-free. 

If double-entry accounting seems intimidating, keep in mind that many online systems will fill in the backup entry for you. Your accounting system will ask for a copy of the invoice and the expense category, then do the rest.

8. Reconcile your accounts.

Reconciliation is a crucial part of accounting that ensures all the transactions in your books accurately reflect the transactions in your bank statement. The process involves comparing your internal financial records against the monthly statements issued by your banks and credit card companies to check for discrepancies.

To execute this process, you should start by making sure the beginning balance of your records matches the beginning balance on your bank statement. Now, compare each individual transaction: the date, the recipient, and the amount. If you detect any discrepancies, such as missing transactions, double entries, or discrepancies in amounts, flag them immediately and investigate.

Remember, reconciliation should be performed regularly, preferably on a monthly basis. This is not just a good practice for keeping your books clean, but it's also an effective way to detect any potential fraud or errors early.

If you opt for financial software, most modern systems have an automatic reconciliation feature that simplifies this process. However, it's essential to understand the process and check the reconciliation report to ensure accuracy.

Remember, accurate bookkeeping is not just about compliance—it also gives you a clear picture of your financial health, thus aiding strategic planning and decision making.

9. Evaluate your performance monthly.

The purpose of bookkeeping in real estate provides two benefits: improving your future performance and forecasting your upcoming costs and income. In both cases, you’ll want to evaluate your accounts monthly to make sure your business is operating at its best. 

First, review your expenses and income to understand your profit margins. For example, if you bought a property for $200,000 and sold it for $300,000, it looks like you made a nice profit. However, if you spent 12 months and $90,000 on renovations and marketing, then your $10,000 profit doesn’t seem as impressive. 

Evaluating your profit margins can help you to understand how much money you really make on the sale of homes and renovations of properties. You may decide to adjust your fees or focus more on investment rentals in order to grow your profits. 

Next, forecast your income and expenses for the future. This exercise isn’t always easy in the real estate field. Take your static expenses and OPEX estimates to get an idea of what you can expect to pay in the next few months. You can also use your pending listings to estimate your commissions and income. Depending on the market, you can also create forecasts for your COGS based on your average monthly leads.

Your forecast numbers aren’t meant to be exact figures. However, they serve as informed estimates on your future income and costs. These forecasts can help you understand whether the coming months will be ideal for making major investment purchases or if you’ll need to seek temporary funding sources to cover upcoming costs.

10. Organize your documents.

It's essential to maintain an organized record of your real estate business transactions, contracts, and other related documents. This includes documents related to property purchases, sales, rental agreements, and invoices for any expenses incurred. 

Digitizing your documents can be highly beneficial, as it provides easy access, reduces the risk of loss, and allows for efficient categorization. Utilize document management software or cloud storage solutions for an organized, searchable collection of your important business documents. Regularly backing up these digital files can help prevent data loss. 

Remember, a well-organized document system not only simplifies your business operations, but also streamlines the auditing process and ensures you comply with tax regulations.

11. Prepare early for tax season.

You can benefit from healthy accounting practices throughout the year, but one of the main time-savers for your real estate firm is having your books in order for tax season. There are multiple reasons why your taxes may be more complicated as a real estate professional:

• You will have to sort your business and personal expenses into two separate categories and may need to file taxes for both your business and personal arenas depending on your company’s structure. 
• You will have multiple sources of income as you diversify your revenue streams. You’ll need to account for your commissions, any rental fees, and any profits from the sale of renovated houses that you flipped. 
• You will need to record your deductions and relevant business expenses. 
• You may have to pay real estate taxes on any properties you own during the renovation process. Buying and selling homes as a business can make your taxes more complicated. 

If your business expenses aren’t clearly recorded and labeled, you may miss out on a significant amount of deductible income. If you lack clear balance sheets and P&L statements, it may take longer to file your business taxes. Good accounting habits can make the tax process easier and faster—while also optimizing your tax deductions.

If you want to streamline your tax filing, start reviewing your books in the fall. Make sure all expenses and sources of income are clearly recorded. Pull your receipts and relevant sales documents. Review your income statements. When your CPA or tax-prep service requests this information, you’ll already have it on hand. 

Real estate accounting best practices.

Embracing accounting best practices can streamline your operations and simplify the financial management of your real estate business. Here are a few strategies to consider:

• Utilize real estate specific accounting software - Investing in a real estate-specific accounting software can automate your bookkeeping, making it easier for you to monitor income, expenses, and cash flow. It can also simplify your tax preparation and ensure your financial reports are accurate and up to date.
• Hire a professional accountant - If your budget allows, consider hiring a professional accountant who specializes in real estate. They’ll be able to navigate the unique financial challenges of the industry and can offer expert advice to optimize your financial management.
• Keep personal and business expenses separate - Always maintain a clear separation between your personal and business expenses. This not only simplifies your bookkeeping, but also ensures compliance during tax season.
• Regularly monitor your cash flow - Cash flow is crucial in the real estate business. Regularly monitor your income and expenses to avoid cash flow issues. This will help you make informed decisions about your business and can prevent financial difficulties down the line.
• Maintain accurate and timely records - Be diligent about recording all income, expenses, and financial transactions as they occur. This makes it easier to prepare accurate financial reports and will be invaluable come tax season.

Remember, effective real estate accounting isn't just about keeping books for tax purposes—it's about using financial information as a tool for strategic planning and decision-making in your business.

Common real estate accounting mistakes.

While handling the accounting side of real estate business, it's quite common to make a few slip-ups. Being aware of these mistakes can better equip you to avoid them. Here's a brief outline of the most common ones:

• Neglecting regular bookkeeping - Delaying or neglecting to update your books regularly can lead to inaccuracies and missed deductions, which can significantly impact your bottom line. Try to develop a habit of regular bookkeeping to maintain accurate and up-to-date records.
• Mixing personal and business expenses - It's crucial to keep your personal and business expenses separate. Mixing these can create confusion, make your bookkeeping more complicated, and potentially result in inaccurate tax filings.
• Inadequate record-keeping - Not maintaining comprehensive and accurate records of all transactions can lead to serious issues during tax filing or an audit. These records should include receipts, invoices, and cash flow statements.
• Not utilizing real estate specific accounting software - Real estate-specific accounting software can streamline your accounting process and significantly reduce the chances of errors. Choosing to do everything manually or using non-specialized software can increase your workload and the likelihood of mistakes.
• Failing to plan for taxes - Real estate professionals often overlook the importance of planning for tax season. Not setting aside funds for tax payments or failing to prepare your books in advance can lead to a frantic scramble during tax season.
• Neglecting to reconcile books with bank statements - Failing to regularly compare your bookkeeping records with your bank statements can mean missed discrepancies, leading to potential errors or fraud going unnoticed.

Remember, avoiding these common mistakes can save you from future headaches and ensure your real estate business runs smoothly and efficiently.

Streamlining your real estate accounting process is crucial not just for tax compliance, but also for accurately gauging the financial health of your business and making informed strategic decisions. Regular bookkeeping, vigilant record-keeping, and the use of industry-specific accounting software can greatly simplify this process and minimize the likelihood of errors.

Consider professional help if your budget allows fo it, and always keep business and personal expenses distinct. Remember, good accounting practices are not just about keeping the IRS satisfied—they provide valuable insights into your business, helping you strategize and grow. Avoiding common mistakes and implementing best practices in your accounting can set your real estate business up for lasting success.

Have you ever wondered why lenders pay such close attention to your credit score? It’s because they’re protecting their assets and want to determine whether they can trust you to consistently repay the money. If your credit score reflects a solid track record, you’ll get serious consideration. If you have major blemishes in your past, many lenders take defensive action.

Of course, we realize the life of an entrepreneur is full of risk. We’ve all collected our share of bumps and bruises along the way. So there’s no shame in a less-than-stellar credit score. And if you feel like your bad credit is keeping your business from achieving its potential, you’re not alone. However, don’t let one or two rejected loan applications keep you down. It is possible to get still business loans with bad credit.

Best business loans for bad credit.

The following list highlights lenders from our selection of best business loans that offer minimum credit requirements below 650 and have a lower minimum credit score requirement than their counterparts.

How a bad credit score impacts your business loan options.

Credit score requirements for business loans vary by lender and the type of loan. No credit requirements are the same, so you’ll always need to do your due diligence to find your best opportunities. This is especially true for bad credit loans online.

Traditional banks typically require good or excellent credit to qualify for a business loan. This means you should have a personal credit score of at least 670, although some banks will consider applicants with credit scores in the low 600s. If you’re applying for a long-term or SBA loan, banks may want to check your business credit score in addition to your personal credit score. In this case, you’ll want to have excellent business credit, as well—a Dun & Bradstreet score of 80 or above should suffice.

Where to find business loans for bad credit.

There’s still hope for business owners with bad credit. While big banks tend to offer the lowest interest rates, plenty of other affordable lenders out there offer bad credit loans online.

Lending Marketplaces

Lending marketplaces have opened the door for a new range of business owners to access business loans. These marketplaces are home to a wide range of lenders and leverage technology to connect borrowers with a loan that suits their needs and credit profile.

Loans from these lending marketplaces have a much higher approval rate than those from traditional banks. They also tend to be much easier to apply for, and you’ll often receive funding very quickly. This makes them an ideal source of loans for people with bad credit.

Microloans

Microloans are exactly what they sound like⁠—small loans. These loans are geared toward entrepreneurs and are, therefore, easier to qualify for than traditional loans. 

No credit? That’s not necessarily going to be a roadblock. Your microloan will typically be fulfilled by several lenders pooling their money together, so each lender can spread their risk among many different small loans. This feature makes peer-to-peer lenders more willing to lend to people with bad credit. However, if you don’t have good credit, you will end up paying higher interest rates.

CDFIs

Community Development Financial Institutions (CDFIs) are non-profit or community-based financial institutions that offer loans to individuals and businesses in underserved communities. These institutions prioritize helping those who have historically been denied access to traditional financing options, which often includes business owners with bad credit.

CDFIs typically perform a more holistic evaluation of an applicant's creditworthiness, considering factors such as their character, community involvement, and potential for success. This approach to lending has made CDFIs a popular choice for business owners with bad credit.

Some examples of CDFIs include Accion and the Opportunity Fund. You can find more information about CDFIs through the CDFI Fund.

Types of loans for bad credit.

It’s important to know how to get a business loan if your credit isn’t in a great place. And there is a trio of financing products that often fit the bill perfectly. These loans for bad credit options are different from typical loans both in their structure and their low barrier to entry.

Let’s review each of the types of loans for bad credit and some of their unique attributes:

1. Business lines of credit 

A business line of credit is a financing option that functions a lot like a credit card. To qualify, you’ll need to have a credit score of 600 or higher, have a business that’s been operating for at least six months, and make $50,000 or more a year.

2. Business cash advance

A business cash advance is a strong choice for business owners with bad credit because the financing eligibility is primarily based on the company’s revenue and other financials. The approval process is typically fast, so it’s also good for companies that need immediate access to capital. Lenders usually require daily payments that are automatically debited from your business account. In addition to the principal balance, you’ll also pay a factor rate. Your daily payments are usually calculated as a fixed percentage of that day’s sales, which can help you avoid overleveraging your business.

3. Invoice factoring

Lenders who offer invoice factoring focus on your business’ future earnings based on your current accounts receivables, so most lenders won’t look at your credit score. Some will have other minimum requirements, such as time in business and monthly revenue. Most lenders will also have limitations on the industries with which they will work, with some specializing in e-commerce and others focused solely on B2B or B2G brands.

4. Equipment financing

Equipment financing helps you finance specific purchases, whether it’s a piece of heavy machinery or software to help run your company more efficiently. In the case of equipment leasing, the purchased asset is used as collateral, which helps to widen eligibility requirements and keep interest rates lower than with many other options. 

Most lenders have a one-year minimum time in business requirement, as well as a minimum annual revenue. A personal credit score is required, but minimums start in the 500’s.

Boosting your odds of qualifying for a business loan despite bad credit.

It's not just about finding the right lender—you also have to make yourself more appealing to them. Here are a few strategies to consider:

Improve your credit score - It’s easier said than done, but the most reliable way to make yourself attractive to lenders is by fixing your credit. Pay off outstanding debts, make sure you’re making all your current payments on time, and check your credit report for errors.

Offer collateral - If you can provide assets that the lender can seize in case you default on your loan, they may be more willing to work with you. These assets could be equipment, real estate, or other business properties.

Find a co-signer - If someone with a better credit score is willing to co-sign for your loan, that can greatly increase your chances of approval. However, remember that this person will be responsible for your loan if you can't make the payments.

Increase your cash flow - Lenders want to see that you'll be able to pay back the loan. If you can show that your business has a steady cash flow, you're more likely to secure the loan.

Build a strong business plan - As mentioned earlier, a solid business plan can go a long way. It shows that you're serious about your business, and it gives the lender confidence in your likelihood of success.

By following these steps, you can improve your chances of being approved for a business loan, even with bad credit. Remember, bad credit isn't a death sentence. It’s just a hurdle to overcome—and with the right approach, you can do it.

How to improve your credit score.

Improving your credit score takes time and effort, but it is worth it in the long run. Here are some steps you can take to improve your credit score:

Pay off outstanding debts - Focus on paying off any outstanding debts as soon as possible. This will not only improve your credit score, but also save you money in interest.

Make your payments on time - Late payments can significantly impact your credit score. Make sure you are making all of your payments on time, whether it's for a loan, credit card, or bill.

Monitor your credit report - Regularly check your credit report for any errors or discrepancies. If you find any, dispute them with the credit bureau to have them corrected.

Reduce your credit utilization - Your credit utilization ratio is the amount of available credit you're using. Aim to keep this below 30%, as it could positively impact your credit score.

Don't apply for too many new lines of credit - Each time you apply for a new loan or line of credit, it results in a hard inquiry on your credit report. Too many of these can negatively impact your score.

In conclusion, having a bad credit score isn't a dead end for business owners. There are several avenues available (Ex: lending marketplaces, microloans, and CDFIs) that are designed to help businesses with less-than-stellar credit histories. Compare small business loans from multiple lenders with a single application through Lendio.

*The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (December 8, 2023). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.

If you're considering purchasing commercial real estate, it's worth exploring the option of a commercial real estate loan, also known as a commercial mortgage. This type of loan can be a valuable tool for small business owners looking to expand their operations or acquire additional property.

But getting approved for a commercial real estate loan is not always easy. Lenders typically have stricter requirements compared to residential loans, and the process can be more complicated and time-consuming.

However, with proper planning and preparation, you can increase your chances of obtaining a commercial real estate loan. In this blog post, we'll discuss the steps you can take to secure financing for your commercial property.

What is a commercial real estate loan?

These small business loans have been precisely engineered for real estate projects. Here are some examples of relevant uses:

• Building a new office building
• Renovating your existing restaurant
• Opening a new retail space
• Purchasing an existing warehouse
• Getting out of a lease so you can become a property owner
• Refinancing for an extension of your payment term

As you can see, commercial real estate loans are more versatile than the name suggests. So if your project is real estate-related, there’s a good chance that it qualifies.

These loans are unique because they offer more generous interest rates than many other types of small business loans, largely because the real estate involved with the loan will actually be used as collateral.

When you secure a loan with such a valuable and readily accessible asset, you can expect rates that begin as low as 6.25%. As for the dollar amount, a commercial real estate loan can start at $250,000 and go as high as $5,000,000. Expect the repayment terms to fall somewhere between 10 and 25 years.

How to find the right commercial real estate loan.

Finding the right commercial real estate loan can be a complex decision, involving careful evaluation of your business needs, financial capacity, and long-term objectives. Let's dive into the key factors to consider in choosing the right loan for your business.

1. Determine your goals.

The first step of any loan process is identifying the financing option that best matches your purposes. To do this, you’ll need to decide exactly how much money your project will require and how soon you’ll need to get that money. These two factors help to narrow the list of viable options and save you valuable time.

After reviewing your loan amount and timeline, you may find that a commercial real estate loan is the ideal solution. You’ll then need to figure out the costs of various loans to separate the top contenders for your business. This process is done by lining up comparable elements between loans.

2. Compare lenders.

There are a plethora of lenders offering commercial real estate loans, each with their distinctive terms, conditions, and rates. It's crucial to take time and compare various lenders, considering factors such as interest rates, loan terms, additional costs (like origination fees), and customer reviews. Traditional banks, credit unions, and online lenders all have different merits and demerits.

Before proceeding with the loan application, check whether you meet the lender's minimum qualifications. These may encompass your credit score, annual revenue, and years in business. In addition, most lenders will require a down payment of 10% to 30% of the property's purchase price.

3. Apply for the loan.

Once you've determined your needs and compared lenders, the next step is to apply for a commercial real estate loan. The application process requires you to provide various documents and data.

• Financial records - Lenders will want to see your business' financial records to assess your ability to repay the loan. You will need to provide business and personal financial statements, income tax returns, and a credit report. If your business is new, you may be asked for a business plan or revenue projections.
• Property information - You’ll need to share details about the property you wish to purchase or renovate. This includes the property's address, purchase price, appraisal value, and blueprints (or renovation plans, if applicable).
• Legal documents - Lenders may also request legal documents such as incorporation documents, commercial leases, and contracts.

Remember, every lender has different requirements, so it's essential to understand what is needed before starting the application process. The sooner you can gather and provide this information, the smoother the application process will be.

The approval process can take anywhere from a few weeks to several months. Once you've been approved, you'll need to review the loan terms carefully before agreeing to them.

Requirements for a commercial real estate loan.

To secure a commercial real estate loan, you must meet certain requirements that prove your ability to repay the loan.

• Credit score - Most lenders require a personal credit score of at least 650. This gives them confidence in your ability to handle credit responsibly. Higher scores can lead to better interest rates.
• Business plan - Lenders want to see a well-crafted business plan that outlines your strategies for growth and income. This should include market analysis, competitive analysis, marketing strategies, and detailed financial projections.
• Debt service coverage ratio (DSCR) - The DSCR measures your business’ ability to service its debt. A ratio of 1.25 or higher is typically considered good.
• Property value - The property's appraisal value needs to be high enough to cover the loan amount. Lenders will conduct their own appraisal as part of the application process.
• Down payment - You’re typically required to put down 10% to 30% of the property's purchase price.
• Business financials - Lenders will want to see at least two years of financial statements for your business to evaluate its profitability.

Remember, every lender could have slightly different requirements, so make sure to check with your lender to know exactly what you need to apply.

Additional qualification criteria for a construction loan.

In addition to the general requirements for a commercial real estate loan, obtaining a construction loan often necessitates additional qualifications.

• Construction blueprints and detailed plans - Lenders will need to see a comprehensive set of construction plans and blueprints before they can accurately assess the risk associated with your project. These should be prepared by a qualified architect or engineer.
• Qualified builder - A legitimate, licensed, and insured builder is a requirement for most construction loans. The lender will need to validate the builder's qualifications and reputation before approving the loan.
• Cost estimate - A detailed cost breakdown is necessary. This estimate should include costs for labor, materials, permits, land development, and contingencies.
• Appraisal - The lender will want an appraisal of the future value of the building upon completion. This is sometimes called the after-repair value (ARV).
• On-site inspections - Lenders will conduct periodic on-site inspections to ensure the construction is proceeding as planned and the funds are being used appropriately.

Remember, the qualifications can vary based on the lender and the specifics of the construction project, so it's essential to have a thorough discussion with your lender about what is needed.

Interest rates and fees

Just like any other loan, a commercial real estate loan comes with its own set of interest rates and fees.

Interest rate

Your interest rate—often expressed as an Annual Percentage Rate (APR)—is the amount you'll be charged for borrowing money, represented as a percentage of your loan amount. Commercial real estate loans generally offer more competitive interest rates, sometimes as low as 6.25%, because the real estate you're purchasing will serve as collateral for the loan.

Fees

The fees associated with a commercial real estate loan can vary, but some common fees include application fees, origination fees, and appraisal fees. Application fees cover the cost of processing your loan application, while origination fees are charged by the lender for creating the loan. Appraisal fees are paid to a third party to assess the value of the property being purchased.

Prepayment penalties

In addition, some loans may include prepayment penalties, which are fees charged if you pay your loan off early. It's crucial to understand all the fees and interest associated with your loan so you can accurately calculate the total cost of borrowing and ensure it aligns with your business's budget and financial plan.

Comparing costs

As you evaluate your best loan options, here are four popular pricing metrics that will help you break down the cost into manageable views:

• Annual percentage rate (APR) - Anyone who has purchased a home or vehicle is familiar with this metric, which represents the cost of your loan on an annual basis.
• Total cost of capital (TCC) - Sometimes it helps to get a macro view. With the TCC, you’ll see an overall cost that takes into account interest—fees on loans that don’t charge interest, plus ancillary fees.
• Average monthly payment - Because budgets are often viewed on a monthly level, this metric is helpful. Even if your loan were to have daily or weekly payments, you could still calculate those payments on a monthly scale.
• Cents on the dollar - The simplest of all the pricing metrics, cents on the dollar breaks down the amount you’ll pay in fees and interest for every dollar you borrow.

While these metrics will give you a clearer view of your loan costs, they’re far from your only resource. Commercial mortgage calculators are readily available and are a simple way to crunch the numbers and improve your understanding of various costs.

Where to get a commercial real estate loan.

There are multiple sources from which you can secure a commercial real estate loan. Each has its own benefits and drawbacks, thus your choice depends on your specific needs and circumstances. Here are some of your main options:

• Banks - Banks are traditional sources of commercial real estate loans. They typically offer competitive interest rates and longer terms. However, they also have stringent approval criteria and require extensive documentation, which can be a challenge for some small businesses.
• Non-bank lenders - These include online lenders, credit unions, and private lenders. Non-bank lenders generally have less stringent approval criteria, faster approval times, and more flexible terms than banks. However, their interest rates can be higher.
• Commercial mortgage-backed securities (CMBS) lenders - Also known as conduit lenders, they pool and sell commercial mortgages on the secondary market. These loans have fixed, low-interest rates and longer terms and are typically nonrecourse, meaning the lender can only claim the collateral in case of default.
• Hard money lenders - These are mostly private investors who offer short-term, high-rate loans. The advantage here is speed and a less rigorous approval process, making them suitable for short-term investment opportunities or when a faster closing time is paramount.
• Real estate investment trusts (REITs) - These are companies that own, operate, or finance income-generating real estate. They provide loans for commercial real estate but usually require a higher return on their investment.
• SBA 504 loan - The SBA 504 loan is offered by the U.S. Small Business Administration (SBA) for purchasing fixed assets, such as land and buildings. The advantage here is that you can access lower interest rates with a longer term with a 10% down payment.
• SBA 7(a) loan - The SBA also offers the SBA 7(a) loan for any kind of business expense including purchasing real estate. 

Repaying a commercial real estate loan.

Repaying a commercial real estate loan typically involves a combination of regular interest payments and a final balloon payment at the end of the loan term. The specific repayment schedule will depend on the terms set by your lender and the type of loan you have obtained.

• Regular interest payments - Most commercial real estate loans require monthly interest payments for the duration of the loan term. These payments are calculated based on the loan's interest rate and the remaining principal balance. Interest rates can be either fixed or variable, depending on the terms of the loan.
• Principal amortization - Some loans include a principal amortization schedule, in which a portion of each payment is applied towards reducing the principal balance of the loan. This means that over the term of the loan, you'll gradually reduce the principal until the loan is fully repaid. However, some commercial real estate loans have a shorter amortization schedule than the loan term, leading to a balloon payment at the end.
• Balloon payment - If your loan has a balloon payment, this means that the remaining balance of the loan is due at the end of the loan term. This could be a substantial amount, depending on the size of the loan and the amortization schedule. It's important to plan for this payment and ensure that you have a strategy for covering it. This could involve selling the property, refinancing the loan, or using other business assets.
• Prepayment - Some commercial real estate loans allow for prepayment, where you can pay off the loan before the end of the term without incurring a penalty. Others might impose a prepayment penalty to compensate for the interest the lender would lose. Check the terms of your loan agreement to understand the rules around prepayment.

Remember, the specifics of your repayment plan will depend on the terms of your loan agreement, so it's crucial to understand these details before you sign. Also, ensure that you manage your finances effectively to avoid defaulting on the loan, as this could lead to the loss of your property.

Conclusion

Getting a commercial real estate loan is a significant undertaking that requires careful consideration and preparation. However, with proper planning and research, you can find the right option.

*The information in this blog is for informational purposes. It should not be used as legal, business, tax, or financial advice. The information contained in this page is Lendio’s opinion based on Lendio’s research, methodology, evaluation, and other factors. The information provided is accurate at the time of the initial publishing of the page (December 7, 2023). While Lendio strives to maintain this information to ensure that it is up to date, this information may be different than what you see in other contexts, including when visiting the financial information, a different service provider, or a specific product’s site. All information provided in this page is presented to you without warranty. When evaluating offers, please review the financial institution’s terms and conditions, relevant policies, contractual agreements and other applicable information. Please note that the ranges provided here are not pre-qualified offers and may be greater or less than the ranges provided based on information contained in your business financing application. Lendio may receive compensation from the financial institutions evaluated on this page in the event that you receive business financing through that financial institution.

Running a small business often requires making savvy decisions about acquiring necessary equipment without overspending. One popular strategy among small business owners is equipment leasing, which allows you to use high-quality equipment without the financial burden of buying it outright. 

This guide will demystify equipment leasing, explaining why it's an attractive option for your business and providing insights to navigate the process effectively.

What is equipment leasing?

Equipment leasing is a long-term rental agreement. A piece of equipment is purchased by a lender and rented to a business for a specific period. In return, the business pays the lender a monthly fee for the duration of the rental agreement (aka lease) and can use the equipment as if it were their own.

When the lease ends, the business has the option to renew the lease, purchase the equipment, or return the equipment to the lender. 

Lease payments usually remain consistent throughout the lease term.

Terms

While term lengths vary and will depend on your lender and unique situation, two-, five-, and 10-year terms are common.

The amount available will depend on the cost of the equipment you are leasing, but can range from $5,000 to $5 million.

Cancellation provisions.

An equipment lease agreement will likely have a cancellation provision that addresses whether and when a lease agreement can be canceled and if there are any fees associated with a cancellation.

Qualification criteria.

Lenders will look at a combination of your credit score, annual revenue, time in business, and the value of the equipment you are leasing. In general, you will need a minimum credit score of 520 and an annual revenue of $50,000. While some equipment lenders do work with day-one startups, they will have higher minimum credit score requirements starting at 650.

If you are leasing used equipment, the financier may also place restrictions on the age or mileage of the equipment.

Equipment leasing vs. equipment financing.

Your decision to lease equipment vs. finance equipment involves several considerations including the type of equipment you’re considering, how often you’ll use it, the cost of maintenance, the projected ROI, the resale value, and, of course, what you can afford (our equipment loan calculator can help with this). But these general rules will hold true across the board:

• Lease, if you’re considering a piece of equipment in danger of becoming obsolete.
• Finance, if the equipment is integral and a long-term part of your operation.
• Lease, if immediate cash flow is a concern, leasing may be more affordable.
• Finance, if investment, resale, and ROI are important to you.

Is it cheaper to lease or buy equipment?

The answer to this question depends on various factors, such as the cost of the equipment, the length of time it will be used, and the financial situation of your business. In general, leasing may be more affordable in the short term due to lower monthly payments, but buying can be more cost-effective in the long run, as you will own the equipment outright after making all payments. It's best to weigh the pros and cons of your specific situation before making a decision.

Capital lease vs. operating lease.

Think of a capital lease as something akin to ownership. When you enter into a capital lease, it's generally for the long haul, and the asset in question appears on your balance sheet. It's like taking out a loan to purchase the equipment outright, but you're making lease payments instead. This type of lease is usually for longer terms and by the end of it, you might even have the option to purchase the equipment for a nominal price.

An operating lease is more like a rental arrangement. You're essentially renting the equipment over a shorter period, and it doesn't show up on your balance sheet. Operating leases are typically for less than the full useful life of the equipment, and once the lease term is up, the equipment is returned to the lender. This type of lease can be a good fit if you're after the latest tech and want to regularly upgrade your equipment.

Types of equipment capital leases.

The following are examples of how a capital lease would be structured.

Equipment financing agreement - Fixed payments are made over a set term, after which you own the equipment in full. While similar to a loan, you pay a financing fee instead of interest. If you go this route, be prepared for slightly higher payments, but with no additional buyout cost at the end of the agreement. Note that tax benefits could help offset the cost of the monthly payments.

$1 buyout lease - A $1 buyout lease is a lot like an equipment loan. You make payments to rent the equipment and purchase it for $1 at the end of the lease.

10% purchase upon termination (PUT) lease - With a 10% PUT lease, you purchase the equipment for 10% of its original cost when the lease ends. This structure allows for lower monthly payments with a predetermined cost for the final purchase.

Types of equipment operating leases.

The following are examples of how an equipment operating lease would be structured.

Fair market value lease - With a fair market value lease, you make payments and use the equipment during the lease. At the end of the lease, you have the option to buy the equipment at fair market value, return it, or renew the lease. This type of lease is generally used for equipment that quickly loses its value such as computers or gym equipment.

10% option lease - The 10% option lease lets you make payments and purchase the equipment for 10% of its initial value or walk away once the lease comes to an end.

Terminal rental adjustment clause (TRAC) lease - Typically used for semi-trucks and other vehicles, a TRAC lease comes with the option to purchase the commercial vehicle for the agreed-upon residual amount, or the lender will sell the vehicle to a third party. If the vehicle is sold for less than the residual amount, the lessee will owe the difference.

Equipment leasing rates

The cost of an equipment lease is determined primarily by the depreciation rate of the equipment, plus fees and taxes.

The fee the company charges is called a money factor instead of an interest rate. It is multiplied by the financed amount plus the residual value of the equipment to create the monthly rent charge. That rent charge is then added to monthly depreciation to come up with your final lease payment. 

Depending on the structure of the lease, you will also either pay taxes up front, or they will be incorporated into your monthly payment.

What is depreciation?

Depreciation refers to the gradual loss of value of an asset, such as a piece of equipment, over time due to usage, wear and tear, obsolescence, or age. 

Additional costs

• Down payment - Many lease agreements offer 100% financing with no down payment. However, they may require your first and last monthly payment upfront.
• Documentation/processing fee - Some will require this fee, which is paid to the lender for processing your loan or lease application.
• Appraisal/site inspection fees - There may be a fee to appraise the equipment being purchased or to inspect a work site.
• Insurance - Equipment breakdown insurance is typically the responsibility of the lessee. You'll likely have to provide proof of insurance before you can take possession of the equipment.
• Maintenance costs - Depending on the structure of the lease, you may be responsible for any maintenance costs.
• Transportation/assembly costs - If the equipment needs to be transported to your place of business or assembled, you may have to cover that cost as well, which can be included in your total lease amount.

Benefits of equipment leasing.

There are numerous benefits that equipment leasing offers to small businesses, making it a compelling option for many. Let's delve into some of these advantages.

Manages obsolescence.

Some pieces of equipment risk becoming outdated. If you are considering using a piece of equipment that is in danger of being obsolete in the future, an equipment lease may be a better option than a loan. 

Cash flow benefits.

Equipment leasing often has a lower impact on cash flow. Leasing spreads payments out over the duration of the lease, allowing your business’ cash to be used for other opportunities like paying expenses or funding your growth. 

Tax benefits.

Lease payments are considered a tax-deductible expense. For a capital lease, businesses can also deduct the depreciation of the equipment. For operational leases, businesses can deduct depreciation if they purchase the equipment at the end of the lease.

100% financing.

Unlike an equipment loan, which requires a down payment, many equipment leases offer 100% financing with no down payment.

No debt on the balance sheet.

If a company opts for an operational lease, it doesn’t appear on the debt or balance sheet, opening up more opportunities to secure other types of business financing at the same time.

Steps to get an equipment lease.

Getting an equipment lease involves a systematic process. Here are the suggested steps to follow:

1. Identify your needs - Determine what type of equipment you need for your business. Whether it's machinery, vehicles, or office equipment, knowing what you need is the first step.

2. Research leasing companies - There are numerous equipment leasing companies out there. Take your time to research and find the ones that cater to businesses like yours.

3. Acquire quotes - Once you've identified suitable leasing companies, reach out to them for quotes. This will give you an idea of what the lease will cost you.

4. Review the terms of the lease - Read the terms of the lease agreements you receive. Make sure you understand all the terms and conditions, including the lease duration, monthly payments, and what happens at the end of the lease period.

5. Apply for the lease - After you've decided which leasing company and lease terms work best for you, fill out an application. You'll likely need to provide information about your business and financial situation.

6. Approval and signing - If your application is approved, review the terms one last time, sign the lease agreement, and make any required down payment.

7. Start using the equipment - Once everything is signed and sealed, the equipment is yours to use for the duration of the lease.

Remember, always consult with a financial advisor or legal counsel before signing any lease agreements to ensure you're making the best decision for your business.

In conclusion, equipment leasing and loans are powerful tools that can help you acquire the necessary equipment for your business' operation without breaking the bank. The right choice will largely depend on your business' unique needs and financial situation.  

At Lendio, we're here to make the process of acquiring business equipment as straightforward and cost-effective as possible. Visit our equipment financing page to learn more about how we can help your business grow.

Suppose for a moment that you wanted to install a fence in your backyard. As you obtain project bids from various businesses in your area, you begin to realize that the cost for the fence would exceed your budget. Then you have a brilliant idea—you call five of your neighbors and ask if they’d also be interested in getting fences in their yards. Two of your neighbors say they are interested.

When you call your favorite fence company and explain that there will be three neighboring homes getting fences, they lower the cost substantially for each of you. After all, they will already have all their equipment and installers on site, and they’ll get a discounted price on the vinyl fence pieces because they’ll be buying it in bulk for this project.

If you’ve ever experienced a scenario like the one described above, you have successfully leveraged group buying power and secured a better price for yourself and others. A group purchasing organization (GPO) uses the same approach to empower doctor’s offices, hospitals, and other healthcare facilities to work together to get better prices for the products they need.

What is a GPO?

A group purchasing organization (GPO) is a collective of like-minded businesses that come together to leverage their combined purchasing power. This collective approach allows these businesses to negotiate from suppliers better prices, terms, and conditions than they would be able to individually. 

In the healthcare sector, GPOs are primarily composed of hospitals, clinics, and doctor's offices. They band together to purchase necessary supplies, from medical equipment and pharmaceuticals to office supplies and services. By doing so, they save not only on costs but also streamline their procurement processes, allowing them to focus more on their primary goal: providing quality healthcare.

How do GPOs work?

A group purchasing organization operates on the simple yet powerful principle of collective bargaining. When businesses unite and pool their purchasing power, they become a significant customer for suppliers, thereby gaining the ability to negotiate lower prices and better terms. Here's the breakdown of how it works:

1. Membership - A healthcare provider (Ex: a hospital or clinic) joins a GPO. There might be a membership fee, or sometimes the GPO operates on a cost-sharing model.
2. Catalog access - Once a member, the healthcare provider gets access to the GPO's catalog of products and services, which includes everything from medical supplies and pharmaceuticals to office essentials.
3. Ordering - Members place orders through the GPO, specifying their needs. The GPO then communicates these orders to the suppliers.
4. Delivery and billing - Suppliers deliver the orders directly to the members. However, billing is often handled through the GPO, simplifying the process for members.
5. Cost savings - The discounted prices negotiated by the GPO translate into substantial cost savings for the members. These savings can then be redirected to enhance patient care and services.

Remember, the strength of a GPO lies in its numbers—the more members it has, the greater its negotiating power. So, the next time you're looking to make a significant purchase for your healthcare facility, consider the potential benefits a GPO could bring.

Types of group purchasing organizations.

There are primarily two types of GPOs—horizontal and vertical—and they differ in their structure and the benefits they offer.

1. Horizontal GPOs - These are organizations where members are from the same industry or sector, such as healthcare. Within the healthcare industry, for example, a horizontal GPO might include a group of hospitals, clinics, or nursing homes. Members of horizontal GPOs usually purchase the same types of products and services, allowing for greater purchasing power and more significant cost savings.
2. Vertical GPOs - In contrast, vertical GPOs comprise members from various industries. While this might mean a more diverse product and service catalog, the cost savings may not be as substantial as in a horizontal GPO, given the varying needs and purchase volumes of different industry members.

However, be it horizontal or vertical, the core objective of a GPO remains the same—to leverage collective purchasing power to secure better prices, terms, and services for its members. Therefore, choosing the right type of GPO depends largely on your specific business needs and purchasing requirements.

Reasons to join a GPO.

Joining a group purchasing organization (GPO) can bring manifold benefits for your healthcare business.

Cost savings.

One of the most compelling reasons to join a GPO is the substantial cost savings it can provide. GPOs leverage the collective purchasing power of their members to negotiate better deals, discounts, and terms with suppliers. This negotiating power can secure lower prices than individual healthcare providers could obtain on their own. 

These cost savings can be significant, especially for healthcare providers who need to make frequent and substantial purchases. According to research from the Healthcare Supply Chain Association (HSCA), a trade association for purchasing organizations, the strength-in-numbers effect of GPOs helps save the healthcare system about $55 billion a year.

Efficient procurement.

Another significant advantage of joining a GPO is the efficiency it brings to procurement processes. Healthcare providers, particularly those running on tight schedules, may not have the luxury of time to negotiate with multiple suppliers or sift through countless product catalogs. A GPO eliminates this hassle by providing a consolidated platform for accessing a wide variety of medical supplies, pharmaceuticals, and services from trusted suppliers. 

This streamlined process frees up valuable time and resources, allowing healthcare providers to focus more on their primary mission—patient care. The standardization of products across various providers through GPOs can lead to better consistency in service delivery and patient outcomes. It's like having a dedicated procurement team to handle your purchasing needs, without the overhead costs associated with managing such a team internally. 

In a field where efficiency can greatly impact life-saving services, this advantage of GPOs cannot be overstated.

Access to a broad range of products and services.

A GPO offers an extensive portfolio of products and services, adding another layer of benefit to its members. Healthcare providers need a vast array of supplies, from basic office equipment to specialized medical tools and pharmaceuticals. With a GPO, members gain access to diverse catalogs compiled from various trusted suppliers. This vast array simplifies the procurement process as healthcare providers can find most, if not all, of their supply needs met in one place.

Moreover, due to the extensive network of suppliers, GPOs often have the capacity to provide newer, innovative products in the healthcare field. This allows healthcare providers to stay up-to-date with the latest technology and industry standards, thereby enhancing their service quality and patient care. Hence, partnering with a GPO not only streamlines the procurement process, but also equips healthcare facilities with the tools necessary to provide top-tier care.

Leveraging collective bargaining power.

The advantage of collective bargaining power is one of the central benefits of a GPO. By aggregating the demands of numerous healthcare providers, a GPO can negotiate with suppliers on a scale that individual members cannot. This collective force means that suppliers are more likely to offer favorable terms and prices, due to the volume of business they receive from the GPO's membership.

This collaboration not only helps to reduce costs but also creates a dominant market presence that suppliers cannot afford to ignore. Consequently, the GPO members, even smaller healthcare providers, have a strong voice and influence in their dealings with suppliers. The power of collective bargaining garners the best deals, terms, and conditions for the members, ultimately leading to better financial control, and freeing up resources that can be used to enhance patient care and services.

On a broader scale, the collective bargaining power of GPOs can even influence industry trends and drive innovation, as suppliers strive to meet the demands of a critical mass of customers. Thus, GPOs not only facilitate cost savings, but also foster an environment that pushes for growth, innovation, and improved patient care in the healthcare industry.

Community and support.

Yet another considerable advantage of joining a GPO is the community and support it offers to its members. The healthcare industry can be complex and challenging, with constant advancements, regulatory changes, and the need for effective patient care practices. Being a part of a GPO community allows healthcare providers to navigate these challenges more effectively.

The GPO community is akin to an extensive network of peers facing similar operational and procurement challenges. This network can provide valuable insight, advice, and innovative solutions to common problems. Members can learn from each other's experiences, share best practices, and collaborate to overcome shared obstacles.

In addition, many GPOs offer educational resources, training, and assistance to their members, helping them stay updated on the latest industry advancements, regulatory changes, and procurement strategies. This supportive environment empowers healthcare providers to improve their operations, enhance patient care, and ultimately succeed in their mission.

The support does not stop at learning and collaboration. GPOs often advocate for their members, representing their interests in discussions with suppliers and helping to resolve any issues that arise. The backing of a strong and sizable organization can provide peace of mind, knowing there is a dedicated team ready to assist when needed. In sum, the community and support provided by GPOs can be just as valuable as the cost savings they deliver, contributing significantly to the success of healthcare providers.  

In a nutshell, being part of a GPO can lead to substantial cost savings, greater efficiency, access to a wider range of products and services, and a supportive community of like-minded businesses.

Is a GPO right for my business?

So is a GPO right for your healthcare facility? Probably. There is an undeniable benefit from buying in bulk. Otherwise, why would any of us have Costco memberships? (Obviously not for the beautiful ambiance in those cavernous warehouses.)

How to find the right GPO for your healthcare facility.

Just know that not all GPOs operate on the same level. The experts from Healthcare Finance recommend that you re-evaluate your GPO relationship about once every five years. This practice allows you to confirm that the supply chain spend is still relevant and the GPO is connecting you with the right products. The most effective way to get a bead on your savings is with a “market basket.”

“In healthcare, a market basket measures the pure price change of inputs used by a provider in supplying healthcare services by using price data from the Bureau of Labor Statistics,” explains Healthcare Finance. “If the market basket tops 50% of an organization’s spend, it’s helpful to look through each item to see if the GPO is effectively covering those items under contract. If it isn’t, a healthcare organization may want to look at other GPOs that potentially offer better deals.”

Perhaps your analysis will reveal essential values that you’re not currently receiving from your GPO. Truth is, the best fit for your facility might not be a large GPO. Smaller facilities sometimes find that they get more bang for their buck by working with a channel partner, which is a smaller company that belongs to a nationwide GPO.

When a hospital matches up with the right GPO or channel partner, they will likely see 8% to 10% savings for their supply chain. The potential to save this much money certainly makes it imperative that your healthcare facility considers the GPO model and carefully reviews its options before signing up with any given organization.

On the flip side, some experts in the healthcare industry have concerns with the GPO model. Research shared by Modern Healthcare reveals that GPOs can contribute to:

• Higher prices
• Drug shortages
• Stifled innovation in medicine

At the heart of these issues is the fact that GPOs generally receive kickbacks and incentives from manufacturers. Just as there’s no such thing as a free lunch, there’s no such thing as a free product placement in a GPO catalog. With manufacturers paying fees to the GPO, the costs of supplies can go up. Ultimately, hospitals could end footing that bill.

Also, the contracting practices used by GPO exclude some suppliers from participating. This practice can limit the supplies available and keep some excellent products from reaching hospitals. This situation is especially true if GPOs make a manufacturer the sole supplier, essentially shutting the door on innovation and quality from other companies.

Despite these concerns, the GPO model still has a lot to offer the healthcare industry. You’ll just need to exercise caution before signing on the dotted line and make sure you understand how the GPO operates and what their supply chain looks like.

Even after you’ve joined an organization, remember to reassess your membership every five years. This clear-eyed approach will prevent you from getting stuck in a relationship that mainly benefits the other party.

The bottom line.

Group purchasing organizations play a substantial role in the healthcare industry. They present a cost-effective, efficient, and community-driven approach to procurement, which can be a boon for healthcare providers striving to balance financial constraints with the need for high-quality patient care.

While there are concerns regarding pricing and stifled innovation, these can be mitigated by adopting a vigilant approach towards GPO participation. Regular re-evaluation of your GPO relationship ensures your organization continues to gain value from the partnership. Ultimately, the decision to join a GPO should be a strategic one, based on a comprehensive understanding of your organization's unique needs and the offerings of the GPO.

Thinking about solutions to manage your medical practice’s finances? Check out medical practice loan options and find the one that suits your needs best.

Did your small business keep employees on your payroll through the pandemic? Congratulations! You may be eligible for a tax credit from the Internal Revenue Service.

The Employee Retention Credit, referred to as the ERTC or the ERC, was first launched in the early days of the COVID-19 pandemic as part of the CARES Act relief package. It was intended as an extra incentive for smaller businesses to retain their employees, although the Payment Protection Program widely overshadowed it.

The ERC is still available retroactively for both 2020 and 2021, but 2024 deadlines are quickly approaching.

Key Points:

• The ERC is a pandemic relief tax credit that gives qualifying businesses up to $26,000 per W-2 employee.
• Even though it is termed a tax credit, you can get paid in excess of what you’ve paid in taxes.
• Businesses that received PPP loans are eligiblefor the ERC too.
• Businesses have until April 2024 to amend their 2020 tax filing and until April 2025 to amend their 2021 filing to apply for the ERC.
• Given the time it takes to gather the necessary documentation and process a claim, businesses looking to meet the April 2024 deadline should start the application process in Q1 of 2024.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit intended to encourage businesses to continue to pay employees throughout government shutdowns during the COVID-19 pandemic.

CARES Act - 2020

The Employee Retention Credit was first introduced as part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) in 2020. The act permitted qualifying businesses to claim 50% of qualifying wages up to $10,000 per employee paid from March 13 through Dec. 31.

Consolidated Appropriations Act - 2021

The Employee Retention Credit was updated in 2021 to allow qualifying employers to claim 70% of qualifying wages up to $10,000 per quarter in 2021.

American Rescue Plan Act - 2021

This act added recovery startup businesses who started their business on or after Feb. 15, 2020, as eligible businesses if their annual gross receipts didn’t exceed $1 million in 2020 or 2021 and they had more than one or more W-2 employees excluding family members.

Infrastructure Investment And Jobs Act - 2021

This act terminated the ERC credit for the 4th quarter of 2021 except for recovery startup businesses.

How the ERC works.

The Employee Retention Credit is a refundable tax credit for qualifying employee wages. The credit is based on payroll taxes rather than income taxes, so you can still receive the credit even if you paid no income taxes in 2020 or 2021.

The best part is because it is refundable, it’s possible to receive money back beyond what you originally paid in payroll taxes. So if you qualify for $50,000 under the ERC, but only paid $10,000 in payroll taxes, you would still receive the full $50,000 refund from the IRS. Bear in mind there is a small non-refundable portion of the ERC that is limited to the amount you actually paid in employee Social Security and Medicare taxes.

How much money will my small business get from the ERC?

For tax year 2020, eligible small businesses can claim 50% of the first $10,000 in wages per employee through the Employee Retention Credit. This adds up to a maximum of $5,000 per worker, and you can apply for this credit now in 2023.

For the first 3 quarters of 2021, eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee. This amounts to $21,000 per employee.

In total, a small business could potentially receive $26,000 in credits per employee kept employed through 2020 and 2021. Keep in mind that the IRS defines certain health care expenses as part of an employee’s wages.

Is my small business eligible for the ERC?

While businesses of all sizes can benefit from ERC, the program favors small businesses over larger employers.

Number of full-time employees

For tax year 2020, a small business is defined as a business that averaged 100 or fewer full-time monthly employees in 2019. For tax year 2021, the definition is expanded to include businesses that averaged 500 or fewer full-time monthly employees in 2019.

Larger employers can claim the ERC but only for wages and some healthcare costs paid to employees who did not work.

For small businesses, you can claim the credit for all employees whether they worked or not.  

Government-mandated full or partial suspension

Now, to be eligible for the ERC, your business must have been impacted by either a government-mandated lockdown or a decrease in revenue.  

If your business was impacted by a full or partial suspension of operations because of a government COVID-19 order during any quarter, you can qualify. This includes restrictions on hours or capacity. This area of eligibility criteria is complex, so work with a vendor who is familiar with government orders, their impact, and the timeframe they were enacted.

A few examples of a qualifying business include:

• A business that was ordered to fully suspend operations
• An essential business that remained open but had government-mandated limited hours or capacity, such as a restaurant that could use fewer tables.
• A business whose suppliers experienced shutdowns and were unable to make deliveries
• A business that had to shut down a portion of the business due to government mandates

Significant decline in gross receipts

Your business can also qualify if it experienced a “significant decline” in gross receipts as defined by the IRS. For tax year 2020, a significant decline means gross receipts for a quarter are less than 50% compared to the same period in 2019. For the first 3 quarters in 2021, it means quarterly gross receipts are less than 80% compared to the same period in 2019.

For the first 3 quarters of 2021, if your business did not see a 20% decline in gross receipts compared to 2019, businesses can also elect to use the immediately preceding quarter for comparison. This means that if a business’s Q2 of 2021 isn’t eligible compared to Q2 of 2019, it can instead use Q1 of 2021 and compare it to Q1 of 2019 to meet eligibility.

Recovery startup business

If you have a newer business, the ERC was amended in 2021 by The American Rescue Plan to even let you gain access. So-called “recovery startup businesses” can apply for the credit for Q3 and Q4 of 2021. Recovery startup businesses are defined as ones that opened after February 15, 2020, and have annual gross receipts under $1 million for 2018, 2019 and 2020. As long as you meet these two criteria and have one or more W2 employees, you don’t have to meet the other eligibility requirements. The maximum a recovery startup business can receive is $50,000 in ERC per quarter.  

How to apply for the Employee Retention Credit.

First, before filling out any forms, consult your accountant or tax professional. They will help guide your business through this process. Because eligibility might be tricky to sus out, especially if you applied for PPP loan forgiveness, a tax professional who specializes in ERC will be well worth the cost.     

Since you will need to claim the ERC retroactively, you can file Form 941-X to amend your previous return.

What is considered qualified wages?

Qualified wages vary based on the year and size of your business.

In the following situations, all wages qualify regardless of whether employees worked or not:

• In 2020: 100 or fewer full-time employees
• In 2021: Fewer than 500 full-time employees

If you had more than 100 full-time employees in 2020 or more than 500 full-time employees in 2021, qualifying wages are wages paid to an employee while they were unable to work due to suspended operations or a substantial decline in revenue.

A full-time employee is defined as any employee who worked more than 30 hours/week on average. In general, the wages of the owner or family members of the company owner do not qualify.

Cash tips greater than $20/month would be included as qualified wages.

Can I still apply for the ERC during the moratorium?

Quick Answer: Yes, small businesses can still apply for the ERC during the moratorium announced by the IRS.

On September 14, 2023, the IRS announced a pause on processing new Employee Retention Credit claims. The moratorium will last at least through the end of 2023.

What this means

• Applications received prior to the moratorium will continue to be processed.
• Processing times will be longer — potentially expanding from a 90-day turnaround to 180 days or more.
• Payouts for previously filed claims will continue through the moratorium.
• The IRS will begin a more scrutinous compliance review period to protect businesses from bad claims.
• New claims can still be filed, but they will not be reviewed until after January 1, 2024.

Note: The IRS has also announced an ERC withdrawal process for those who are concerned about the accuracy of their claim and have not yet received a refund. Businesses also have the option to amend their ERC claim. Learn more about ERC scams to avoid here.

Small Business Administration (SBA) loans are a popular financing option for small businesses. These loans offer affordable interest rates and flexible terms, making them an attractive choice for entrepreneurs looking to start or expand their business. However, like any loan, there are limits on how much money you can borrow through the SBA program. 

Let's dive into the details of maximum SBA loan amounts and what they mean for small business owners.

Understanding maximum SBA loan amounts.

The maximum SBA loan amount refers to the highest loan limit set by the SBA. These limits are in place to ensure that the loans are being used for their intended purpose—to help small businesses grow and succeed. The SBA sets different maximum loan amounts for various types of loans, which we'll explore in more detail below.

Maximum SBA loan amount for purchasing a business.

If you are looking to buy an existing business, the maximum SBA loan amount is $5 million. This includes both the purchase price of the business and any working capital needed to operate the business. However, keep in mind that this is the maximum amount and not all businesses will qualify for such a large loan. The SBA also requires a down payment of at least 10% to 20% for purchasing a business.

Maximum SBA loan amount for commercial real estate and commercial property.

For small businesses looking to purchase or refinance commercial real estate or commercial property, the maximum SBA loan amount is $5 million. This includes both the cost of purchasing the property and any renovations or improvements needed for business operations. Again, like with purchasing a business, not all businesses will qualify for the full $5-million loan amount.

Maximum SBA 7(a) loan amount.

The most popular SBA loan program is the 7(a) loan program, which provides working capital for small businesses. The maximum SBA 7(a) loan amount is $5 million, and this can be used for a variety of business purposes, such as purchasing inventory, refinancing debt, or expanding operations. However, the SBA typically guarantees only up to 85% of the total loan amount, meaning the lender is still responsible for a portion of the loan.

When it comes to the SBA 7(a) loan, business owners should be prepared to make a down payment. While the exact amount can vary, it's typically around 10% of the total loan amount. It's important to note that this down payment requirement can be higher if you're using the loan for certain purposes, such as purchasing real estate or an existing business.

Maximum SBA 504 loan amount.

The SBA 504 loan program is specifically designed to support small businesses in acquiring major fixed assets, such as real estate or equipment. Unlike the 7(a) program, the 504 loan does not have a maximum limit. Instead, it is structured as a partnership, where the borrower contributes at least 10% of the total project costs, a certified development company (usually a non-profit) provides up to 40%, and a lender covers the remaining 50%.

The SBA's contribution (through the CDC) can range anywhere from $25,000 to $5.5 million, depending on the nature of the project and the business' eligibility. However, keep in mind that the total project costs (including all three contributors) can significantly exceed the maximum SBA 7(a) loan amount. The SBA 504 loans are an excellent option for businesses looking to make large investments in long-term assets, while benefiting from low down payments and fixed interest rates.

For the SBA 504 loan, the borrower typically has to make a down payment of around 10% of the total project costs. However, this can increase to 15% for newer businesses (less than two years-old) or when the project involves a limited or single-purpose building.

Maximum SBA microloan amount.

The SBA offers a microloan program designed specifically to aid small businesses and non-profit childcare centers in need of small-scale financing. This program caters to businesses that require smaller amounts of funding than offered under the larger SBA loan programs. The maximum SBA microloan amount is $50,000, but the average loan awarded tends to be around $13,000. 

Microloans can be used for various business expenses, such as purchasing inventory, furniture, machinery, or equipment. However, it's important to note that they cannot be used for buying real estate or paying off existing debts. The repayment term for these microloans can go up to six years, providing an accessible and manageable financing option for small businesses.

For the SBA microloan program, the down payment requirements can vary heavily depending on the lender's policies and the borrower's creditworthiness. While some lenders may not require a down payment, others might ask for an upfront contribution. It's crucial that prospective borrowers discuss their specific situation with their lender or a financial advisor to understand the exact requirements and plan accordingly.

Understanding the nuances of financial transactions can be intimidating, with credit card factoring being a prime example. Despite its appealing facade of quick money, it's a practice that often lands businesses in hot water. 

In this article, we'll dissect the concept of credit card factoring, delve into why it's illegal, explore common examples, and examine the potential consequences of engaging in such activities. Awareness is the first line of defense against scams, so we will also share some cautionary tales to keep you vigilant. Let's dive in and unravel the complexities of credit card factoring.

What is credit card factoring?

Credit card factoring is a practice where a business uses a merchant account of another business to process credit card transactions.

This could include the following scenarios:

1. A business owner uses a friend's merchant account to process their transactions. Despite appearing to be a practical solution for businesses struggling with cash flow, this method is considered illegal due to its close resemblance to money laundering.
2. A fraudster with stolen credit card information asks a legitimate business to process credit card transactions for them in exchange for a portion of the proceeds. The business processes the credit card charge and sends the proceeds to the fraudulent company. When the credit card owner identifies the credit card charges as fraudulent, the legitimate business is on the hook for paying the credit card owner back.

Consequences of credit card factoring.

Engaging in credit card factoring can have far-reaching consequences for businesses, both legally and financially. On the legal front, credit card factoring is considered illegal due to its resemblance to money laundering. Businesses found guilty of this practice may face hefty fines and legal ramifications. In severe cases, business owners may even face criminal charges such as fraud, which can lead to imprisonment.

From a financial perspective, if a business falls victim to a scammer, it could be on the hook for thousands of dollars of chargebacks.

To make matters worse, your processor could place you on the Terminated Math File. After this, you would find it almost impossible to acquire a merchant account.

Merchant cash advances vs. credit card factoring.

Credit card factoring is sometimes confused with merchant cash advances, but they are two different things.

A merchant cash advance (MCA) is a legal type of business financing where a company sells a portion of its future credit card sales in exchange for a lump sum of cash up front. This is typically a quick and easy way for businesses—especially those with poor credit or those unable to secure traditional loans—to access needed capital. However, MCAs often come with high factor rates and fees, making them a costly solution over time.

On the other hand, credit card factoring, as previously discussed, is a practice where a business uses another business' merchant account to process credit card transactions. This is often seen as a workaround for businesses unable to secure their own merchant accounts, but it's a risky and illegal practice closely resembling money laundering.

Merchant cash advance vs. invoice factoring.

In invoice factoring, you sell your business’ invoices to a third party called a factor. It is then up to the factor to collect the payment from the customer. The factor typically advances 80% to 90% of the value and then provides the rest (minus processing fees) upon receiving payment from the customer.Merchant cash advances, on the other hand, are cash advances secured by your business’ future credit card sales. To do this, a merchant cash advance company gives you upfront cash and then deducts a percentage of your credit card sales each day until the amount is fully paid.

Benefits of a merchant cash advance.

The greatest benefit of a merchant cash advance is the speed and ease with which you can get financed. Many companies can fund your advance in as little as 24 hours and will work with business owners with a credit score of 500 or higher.To learn what works best for your business, you can weigh your cash advance options with other business loan options through Lendio’s free loan match tool.