How Fixed Income Threshold Reduces Social Security Benefits

The income threshold that triggers federal income taxes on your Social Security benefits has not changed since 1984. But the national average wage index used by the Social Security Administration (SSA) to compute benefits has tripled since 1984, and the consumer price index has risen nearly two-and-a-half times.

As a result, more and more individuals and families are paying taxes on their Social Security benefits every year, not because their real incomes have risen significantly but mainly because of rising wage and price levels. The government’s use of a fixed income threshold not adjusted for either inflation or rising wages amounts to both an ongoing tax increase and a means test on Social Security beneficiaries, since taxing benefits based on your income effectively reduces them.

Social Security Benefits Not Always Taxed

On January 31, 1940, Ida May Fuller, a legal secretary from Ludlow, Vermont, became the first person in the United States to receive an old-age monthly benefit check under the then-new Social Security law, enacted in 1935. She was 65 years old. The check was for $22.54. Her total contribution to Social Security, made between 1937 and 1939 during her years of participation in the program, was $24.75. Ida lived to be 100, and collected a total of $22,888.92 in Social Security benefits. Ida never paid a dime of income taxes on her benefits.

For 44 years, Social Security benefits were exempt from federal income tax. Starting in 1984, however, beneficiaries whose income exceeded certain thresholds were taxed on up to 50% of their Social Security benefits. In 1993, the law was further amended to tax up to 85% of Social Security benefits after slightly higher income thresholds are reached.

How to Determine If Your Social Security Benefits Will Be Taxed

How much, if any, of your Social Security benefits are taxable depends on whether your total income exceeds the “base amount” for your income tax filing status. For this purpose, the IRS broadly defines your total income as one-half of your Social Security benefits plus “[a]ll your other income, including tax-exempt interest.” (For related reading, see: Social Security Benefits and Taxes: The Lowdown.)

Total income also includes exclusions and adjustments you’re permitted to take in arriving at your adjusted gross income (AGI). These include interest from qualified U.S. savings bonds, foreign earned income and housing, and the deduction for student loan interest. For a married couple filing a joint income tax return, up to 50% of their Social Security benefits are taxable if their total income exceeds $32,000. If their total income exceeds $44,000, up to 85% of benefits may be taxed. For single people and most other taxpayers, the thresholds are $25,000 and $34,000, respectively.

How the Tax Increase and Means Test Happen

Under our progressive income tax system, tax rates increase as your taxable income increases. To keep people from automatically being pushed into higher tax brackets simply because of inflation, indexing of the income tax brackets for inflation was enacted under President Reagan in 1981 and took effect in 1985. When Congress made Social Security benefits taxable in 1984, however, the income threshold of $32,000 for married couples ($25,000 for most others) was not indexed to inflation in either wages or prices.

In 1984, when the law went into effect, less than 10% of families had to pay income tax on their Social Security benefits. In 2015, 31 years later, a Social Security Administration Issue Paper projected 52% of Social Security beneficiaries would pay income tax on their benefits that year. Among those 52%, the median share of benefits owed as tax was estimated at 11%. In other words, those Social Security beneficiaries who paid taxes on their benefits had their benefits effectively reduced, half of them by more than 11%. A reduction in benefits based on your income, no matter what it’s called, is a means test.

To put this in perspective, if we adjusted the 1984 income threshold at which benefits become taxable to reflect average wage growth, using the SSA’s average wage index table (which SSA uses to make past earnings comparable with current earnings), the $32,000 threshold for married taxpayers today would triple to more than $96,000. The $25,000 threshold for single taxpayers and most others would exceed $75,000 before benefits were taxed. Because the income thresholds that trigger taxation of Social Security benefits are fixed, a family today making about the same inflation-adjusted income as a 1984 family pays tax on up to 85% of their Social Security benefits. The 1984 family paid no tax on their benefits. That amounts to a whopping tax increase.

A Marginal Tax Rate Example

If your total income is near the thresholds at which either 50% or 85% of Social Security benefits become taxable, one dollar of additional income can trigger a significant jump in your marginal tax rate.

For example: Nick and Nora are in the 12% federal income tax bracket. Every dollar of extra income they earn costs them 12 cents in taxes. But if that same extra dollar of income also causes 50% of a Social Security benefit dollar to become taxable, Nick and Nora must now pay tax at 12% on that 50 cents of taxable Social Security benefits, or 6 cents more (50 cents x 12%). Thus, one extra dollar of income now costs 18 cents in taxes (12 cents + 6 cents), and Nick and Nora’s marginal tax rate has now increased from 12% to 18%, a 50% increase!

Tax Planning Opportunities Limited, But Still Available

Unfortunately, because the IRS' definition of total income is so broad, opportunities for avoiding or reducing the tax on your benefits are limited. Most often, your only recourse is to pursue traditional tax-planning strategies to postpone income while accelerating or maximizing certain deductions taken in arriving at AGI (so-called above-the-line deductions).

These include:

Deferring the receipt of income — If you have the ability to postpone the receipt of income until the following year, you may be able to reduce both your overall taxes and the taxable amount of your Social Security benefits this year. Examples of items that might be deferrable into next year include taxable IRA or 401(k) distributions (other than required minimum distributions), business income or year-end bonuses.

Harvesting capital losses — Capital losses exceeding capital gains can offset up to $3,000 of ordinary income. Thus, harvesting capital losses could potentially make less of your benefits taxable by reducing your total income. (For related reading, see: How Tax-Loss Harvesting Can Save You Money.)

Maximizing allowable deductions and adjustments to income — Some above-the-line deductions are still allowed when arriving at your total income for benefits taxation purposes. These include IRA and health savings account (HSA) contributions, educator expenses and various deductions available to self-employed people, such as the deductible part of self-employment taxes and the deductions for health insurance and retirement plans.

A combination of these planning techniques could be highly beneficial not only in reducing your overall taxes but also in avoiding the punitive jump in marginal tax rates that results when additional Social Security benefits become taxable.

Putting It All in Perspective

Congress’s goal in making Social Security benefits taxable was to make their tax treatment comparable to that of private pension income, which is generally taxable to the extent that payments exceed worker contributions. The Social Security Administration has estimated the average worker directly contributed in taxes only about 15% of the benefits he or she receives. That is why only up to 85% (100 – 15) of benefits are taxable. This avoids double taxation on the portion of benefit income representing previous contributions. Whether that calculation remains the same for the future, as changes to Social Security are contemplated, remains to be seen.

Later retirement ages, higher limits (or no limits) on the earnings to which Social Security taxes apply, increased FICA tax rates, or lower benefits may argue for reducing the portion of taxable benefits. It’s also important to remember, for individuals and families with total income below the thresholds, all Social Security benefits continue to be tax-free at the federal level. Moreover, 37 states do not currently tax Social Security benefits. The income taxes you pay on your Social Security benefits are credited to the Social Security and Medicare trust funds, which in turn helps continue to fund those programs. Finally, the next time you hear someone saying Social Security benefits should be means-tested, realize that, to a certain degree, they already are.

(For more from this author, see: The Case for Collecting Social Security Early.)

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Control What You Can for Financial Success

When I played with the Ottawa Senators, my coach often told us to stay focused on what we could control. In hockey, a lot can go wrong—the team could suffer through a string of bad luck with injuries, we could be bothered by the ice condition, etc..

Many people get frustrated and angry when such situations arise. But with experience, we came to understand our success depends on powering through adversity by preparing for the worst and planning for the best. Here are three ways you can apply this advice to your financial planning so you are prepared for those factors beyond your control:

1. Live Within Your Means

Many people complain that they can’t seem to save. They often point their finger at the fact they haven’t received a raise in a while. It can be frustrating to dedicate a lot of time to an employer who doesn’t seem to appreciate the value you bring to the table, but that’s for another discussion. When it comes to creating a budget and having enough money to save for future goals, focus less on the income you are making and pay attention to your expenses instead.

Many financially successful people are able to accumulate a nice nest egg with lower salaries. You can’t really control the income you make, but you can control the way you spend it. (For more from this author, see: To Save More, Focus on Your Needs, Not Your Wants.)

2. Spend One Hour of Your Day Learning

Getting a promotion often comes with a raise, which is great. However, there are a lot of factors affecting your chances of getting a promotion. Most of these factors are beyond your control, so you shouldn’t worry about them. Stay focused on what you can control, which is your dedication to the quality of your work and your education. Take an hour a day to continue learning about your craft and become an expert in your field. If you are able to accomplish that, the work opportunities and raises will come.

3. Invest in a Strategy That Makes Sense to You and Stick With It

Many people stress about the markets. They watch financial news and check their accounts every day. However, the biggest investment mistake comes when investors change their asset allocation at the wrong time, taking more risk at the top of the market and reducing risk after a large sell-off. Focus on what you can control. It is nearly impossible to know what the markets are going to do, however if you invest in a strategy that makes sense to you and stick with it, you will be able to avoid the biggest investor mistakes.

Control What You Can for Financial Success

A lot of things can affect our financial success. However, many of these factors are well beyond our control. The key is to put your time and effort into the things that will make you successful in your career, your finances and your life.

(For more from this author, see: How to Build Your Financial Foundation.)

Disclosure: MoneyCoach LLC and/or Patrick Traverse offer Investment advisory and financial planning services through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe), an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe Asset Management offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC and Belpointe Specialty Insurance, LLC. MoneyCoach LLC is not affiliated with Belpointe Asset Management, LLC. Additional information about Belpointe Asset Management is available on the SEC’s website at www.adviserinfo.sec.gov

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Business Owners: What to Do After Disaster Strikes

Now that you've learned what to do prior to a natural disaster or other emergency in my previous article, it is time to prepare for what you would do during an actual emergency. The first step you will want to take is to keep track of any natural disaster by following weather reports and receiving live, updated information.

Monitoring Impending Weather Events

Keep track of any approaching storms or natural disasters. You can use a variety of apps to do this from the NOAA weather alerts and local station (NBC/other) apps to Google’s live tracking.

You will want to move your family, loved ones and business team away from the area as best as possible. This is the time that you will rely upon the supplies you have saved and possibly use backup generators. Run through any emergency drills ahead of time with your team so you are ready to go before a hurricane, earthquake, storm or other event occurs. You can also take proactive measures to close your business early and operate from another location and check in with your team ahead of time.

After the natural disaster has passed through your area and it is safe to go outside, these are the next steps to take. (For related reading, see: The Financial Effects of a Natural Disaster.)

After a Natural Disaster

1. Take photos of your home and business - After you experience a major disaster, it is advisable to take photos and video of the damage as soon as it is possible to go home. Do not move anything and do not start repairs yet. Be sure to file an insurance claim, get a claim number and reach an agreement with your insurance company before you start repairs. Make sure your insurance company considers the regional cost for repairs as it varies from state to state so you do not have to pay more out of pocket. Only cash your insurance check after you have agreed on the amount due. Document any loss or damage you see. You may need to take some temporary steps like boarding up walls, covering roofs with tarps or other short-term measures to prevent further damage, but first be sure to take photos and videos and speak to your insurance company.
2. Check in with your employees - Find out how your employees are doing. Some of them may have additional issues to deal with. Be considerate and patient.
3. Restore critical business functions - As soon as you can, restore critical functions. The planning you did ahead of time will help you now.
4. Call your creditors - Many companies ranging from banks to mortgage lenders and credit card companies will offer a longer grace period for payments after a natural disaster.
5. Check disaster status - You may be eligible for help through the government’s disaster relief efforts at https://www.disasterassistance.gov. FEMA typically offers help to individuals and not businesses and is usually just for essential survival needs.
6. Request an SBA disaster loan - You may be eligible for up to $2 million in disaster loans through the SBA at favorable terms that you can use to repair physical property or meet financial obligations that you could not because of the natural disaster. This loan can be used to cover losses that were not included in your insurance coverage.
7. Get extended tax filing date - When your business lies within an area that is declared a disaster by the federal government, you can receive more time to file and pay your taxes as well as other tax provisions for up to five years.

Creating an emergency plan is similar to having an estate plan in place that helps the family and loved ones after a person has passed away. It gives you a roadmap of what to do immediately and helps you think ahead.

Depending upon where you live, you may face different natural disasters. Whether your business survives and thrives after a natural disaster depends upon the planning that you do ahead of a disaster and what you do after a disaster strikes. With good planning, you can keep your home, loved ones and business safe and out of harm’s way.

(For more from this author, see: The Importance of Creating a Will.)

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What Makes Financial Markets Work?

410 days. That’s all it took to create one of the seven wonders of the modern world. Over 3,000 masons, architects, steelworkers and skilled laborers worked together on the Empire State Building. For nearly 40 years it stood as the tallest building on earth, an undeniable example of efficiency, produced through the collective use of knowledge. It’s a simple concept that can be applied to just about any industry and it underpins the basic idea of why markets work.

The functionality of financial markets, like any market, is based on open and ongoing participation in an environment where decisions are made based on an opinion of value. Market efficiency isn’t a new idea. The concept of exchange for equal or greater value is enshrined in our DNA. For every buyer, there must be a seller and vice versa. In order to execute a trade, each side has to at least initially feel like they’re getting a good deal. So what makes markets efficient? (For more, see: What Is Market Efficiency?)

Decision Making: Groups vs. Individuals

At any given moment, a single person acting independently is capable of making an uninformed decision. Individuals are at a distinct disadvantage in the decision-making process because they often draw conclusions from their own limited set of data. Groups on the other hand, while still capable of exhibiting poor judgment, are less likely to make mistakes due to the benefits of collective brain power. You’ve probably heard the old adage a thousand times, “two heads are better than one.”

Financial markets operate on the same premise, acting at the will of millions of participants who make judgments through the active buying and selling of companies based upon massive quantities of information. In a sense, they’re voting with their dollars. The act of buying or selling effectively moves stock prices in one direction or another until it reaches an equilibrium. Therefore, the current price that a stock trades at should represent a good estimate of what that company is worth because it captures the sentiments of millions of buyers and sellers. 

The Judgment of the Masses is Hard to Beat

Markets don’t trade on yesterday’s information or even today’s. Alternately, they look toward the future, and trade based on the collective masses' interpretation of tomorrow’s value. So, if two heads are better than one, millions of heads are most assuredly better than two. This is the main reason why stock mispricings are so hard to identify. A speculator would have to believe that they know something that everyone else doesn’t already know about a company because the current stock price is a reflection of all voting participants, i.e buyers and sellers.

In a world where news travels at the speed of light, what are the chances of that? Even if they did know something - and for argument’s sake, let’s say a speculator was in possession of information that wasn’t already reflected in prices - what are the chances they can act on this information fast enough to benefit from any price change? In a 24-hour news cycle, it’s hard to keep much of anything a secret. As word spreads, the value of information is depleted by the second.

With instant access to breaking news in the palm of our hand, information has never been so readily available as it is today. Collectively, the way we interpret information empowers us to freely evaluate the value of things, including companies we choose to invest in. In most every instance investors should operate under the assumption that prices are fair and accurate. Markets work because they are a global reflection of what we think works. (For related reading, see: Financial Markets: Random, Cyclical Or Both?)

cr. https://www.investopedia.com/advisor-network/articles/what-makes-financial-markets-work/

5 Year-End Tax Strategies You Don’t Want to Miss

The end of the year can be a hectic time. With the holiday season in full effect, we find ourselves cooking, shopping, and entertaining friends and family. But one thing many people forget about is taxes. While there is plenty of time after the holidays to prepare your taxes, some of the best tax strategies you should be considering must be implemented before the last day of the year. Here are five things you may want to consider before year-end to help reduce your tax liabilities now or in the future:

1. Set Donations Aside With a Charitable Remainder Trust (CRT) 

There are great tax incentives for charitable donations. However, many people don’t take advantage of this tax benefit because they believe the money must be given away immediately. With a charitable remainder trust, you can maintain control of the asset and take income from it while you are still alive. At the same time, you will enjoy a tax deduction in the year you transfer the asset to the trust even though the charity doesn’t receive the funds until you pass away. And, as an added bonus, you can transfer highly appreciated assets (like real estate or stocks) and sell them within the charitable trust without realizing an immediate capital gain. This means you can use this strategy to sell investments with a lot of unrealized growth and spread the capital gains taxes owed (potentially reducing the total taxes paid on those gains).     

2. Offset Capital Gains Taxes With Tax-Loss Harvesting

This strategy involves realizing gains or losses (or both) in your investment portfolio for tax purposes. If this is done properly, the investor can minimize the taxes paid on capital gains and maximize the tax benefits of capital losses. This can also help reduce future tax liabilities, which is a concern for people who think their capital gains taxes may be higher down the road. But be careful; there are a number of rules you must pay attention to when it comes to tax harvesting (like the “wash sale” rules). (For related reading, see: Pros and Cons of Annual Tax-Loss Harvesting.)

3. Contribute to a Health Savings Account

You must be part of a qualified high-deductible health plan (HDHP) to receive the tax benefits of a health savings account (HSA) contribution. But if you do qualify, this is one of the best tax advantages available. The tax deduction is an above-the-line deduction similar to an IRA contribution. However, unlike an IRA, the funds can be taken out tax-free if they are used for qualified medical expenses. This means you receive the tax deduction upfront, the money grows tax-deferred, and it comes out tax-free for qualified medical expenses. 

4. Convert Retirement Account to a Roth IRA

It is never easy paying more taxes than you need to. But for people in lower tax brackets who believe their tax rates may be higher in the future, Roth conversions can make a lot of sense. Partial conversions are allowed, meaning the entire sum of the retirement account does not need to be converted. This means you can calculate the exact amount that should be converted each year to minimize the taxes due. Also, the taxes owed on the conversion can be offset using some of the strategies discussed above. Remember, all the growth in a Roth will be tax-free if the rules are followed properly. This can be very powerful if/when taxes are higher in the future.  

5. Take Advantage of Tax Forecasting

Everyone has a unique tax situation. By working with a professional who can offer tax forecasting software and services, you can clearly see the net effect of implementing some or all of these strategies. A tax forecast is an extremely valuable tool that should be used near the end of the year to help you make educated decisions on your tax plan.

December can be a busy time of year and it is always easy to procrastinate, especially when the subject is taxes. But for some people these strategies could mean thousands of dollars in tax savings. And after all the holiday spending, that extra money in the beginning of the year can be even more important. So, don’t wait any longer—all of the strategies discussed here need to be implemented by the end of the year.   

(For more from this author, see: How to Manage Risk With Bonds in Your Portfolio.)

Disclosure: Kinetic Financial & Insurance Solutions, Inc. and Kinetic Investment Management, Inc. are two separate entities. Insurance products and services are offered and sold through individually licensed and appointed agents in all appropriate jurisdictions under Kinetic Financial & Insurance Solutions, Inc. Investment Advisory Services are offered through Kinetic Investment Management, Inc., a registered investment adviser.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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Ways to Give Gifts That Keep Giving Financially

It’s the season of gifts again. What if you chose some gifts that would literally keep giving, and keep that Santa Claus warm fuzzy feeling going for a long time?

Accounts for Children and Teens

For children or teens, don’t forget the college savings accounts that you as a parent or grandparent can set up. Consider the tax and financial aid treatment of each type of account before settling in on strategy for contributing on a one time or continuing basis. While a 529 account can be tax free if the holder withdraws for qualified education purposes, other accounts can be considered as financial assets available to the child for covering educational fees and tuition fees once accepted to college. (For related reading, see: Choosing the Right 529 Education Savings Plan.)

Delaying a custodial account’s inheritance until age 21 from the usual 18 years of age may help but many young adults may still be in college at that age. Custodial accounts, however, can hold a variety of assets and are not limited to mutual funds as a college 529 account is. 

Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts can serve as a poor man’s trust, and hold title to assets in the name of a child until the age of majority. The UTMA account differs from the UGMA account in that it can hold title to non-bank assets as well, such as real estate. This may be a consideration as minors cannot inherit directly. A trust or UTMA account can hold assets on the child’s behalf that are managed by the named custodian or guardian until the child matures. Families with assets should think about how these can be protected for children if the parents pass away before the children attain the age of majority.

Termination age may vary from one state to another but generally, for the UGMA trust, the termination age is 18 years, while for the UTMA trust the termination age is 21. Depending on the state, assets in UTMA accounts can be held for up to 25 years, allowing parent more control over the timing for turning over the assets to their child. Unlike a college 529 account, a UTMA or UGMA account is not transferable to another child.

Custodial accounts can be established at a bank, mutual fund company or brokerage services company, as well as directly with a trust company serving the shareholders of a specific corporation. Direct investment programs allow incremental month by month purchase of blocks of stock using checking account withdrawals and allow the giver to literally give monthly to accumulate shares in a variety of dividend-paying companies. The dividends are reinvested to accumulate even more shares during the holding period and fees are usually quite low. The one downside is that concentration in a single company stock can be subject to wider swings than the general stock market.  (For more, see: A Closer Look at Custodial Accounts.)

If you decide to investigate direct investment one idea may be to choose companies that your children or grandchildren understand, such as major consumer brands which the child has experience with. In this way, children learn early on about investing, assets and the possibilities for dividends and growth. The account becomes theirs at the designated age of majority.

Check with your tax advisor about taxation of the account and the dividend income and the effect on your returns. There is a deduction available to the child for the first $2,100 or so of unearned income. The amount received thereafter can be taxed at the child’s rate or the adult’s rate, depending on the age of the child. For more information on taxes visit this page of the IRS' web site.

Charitable Giving

When thinking about gifts to charities many people like the idea that their gifts continue to give over time. For instance, a gift to Heifer International can buy goats, cows, chickens, ducks, honeybees and many other animals that procreate. Heifer donates these animals to farm families in underdeveloped countries who in turn can manage their animals to create income for their families.

Donor advised funds are another way of giving and you decide the frequency of distributions. Your local community foundation, a 501(c)(3) nonprofit organization, is a resource. These foundations support a variety of local nonprofits and create pools of donor funds for quarterly or annual distributions. Better yet, you may get a gift back in the form of a tax deduction for amounts you initially gift to the community organization. It’s worth a conversation and you may like to involve your children or grandchildren in the process to learn about the importance of giving during one’s lifetime. The community foundation can also advise you about the tax benefits of donating appreciated stock to support the donor fund or other charitable goals.

End of the year tax planning is paramount. Many changes to the tax code are before our current seated Congressional delegations. Many of these changes could take effect in the new year. Luckily charitable deductions don’t yet seem to be on the chopping block. They can be useful in managing your overall tax liability for this year when filing in 2018. (For more from this author, see: Putting Your Money to Work for the Greater Good.)

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How Small Business Owners Can Create Cash Flow

After all the planning and preparation that has gone into your business, you think you’re in the clear once you turn a profit. While business owners traditionally evaluate a company’s financial performance based on net income, your continued efforts to generate new sales and trim costs might not be enough to save you from financial disaster. Profits are important, but cash flow is key in determining your company’s viability.

Profitability and cash flow are not the same and poor cash management is the top reason most businesses fail. Without proper cash flow, you won’t have the resources to pay your bills or your employees - the fast track to going out of business. Think your business is safe? While there’s no guarantee, keeping these factors in mind will help to manage your cash flow and sustain your business when times are lean. (For more, see: Asset Protection for the Business Owner.)

Self Financing Cash Flow

As a business owner, you put everything on the line to grow your business. Self-financing your startup can seem like the formula for immediate success. After all, you won’t have to deal with banks or investors. Plus, when your own money is on the line, you’ll look at your business differently than if you had borrowed it.

The truth is, while half of all businesses survive five years, most won’t make it to the 10-year mark. When cash flow stalls, it’s tempting to dip into funds earmarked for personal goals. This is especially true if you self financed your startup because you won’t have the necessary outside financial resources to lean on for your business. But doing so increases personal debt and your risk of bankruptcy.

For long-term success, avoid using your personal savings account or personal credit cards and lines of credit to supplement your cash availability. Mixing your personal finances may seem straightforward now, but you’ll pay the price later. Keeping separate bank and credit accounts for your business gives you a more accurate picture of the financial health of your business, and it also helps shield your credit score if your business takes an unfortunate downturn.

Financing Cash Flow

When cash flow becomes a problem for your business, it’s best to look at outside funding options. Whether it’s for growth opportunities like opening a new location, increasing inventory in anticipation of a busy season, or for supplementary cash flow, an estimated 99.95% of small business owners seek debt financing.

Traditional banks offer larger loans at a lower APR, but the application process can take months. Unsecured loans will get you money faster, though lenders will limit the amount you can borrow and your APR will likely be very high. That’s why, when it comes to financing cash flow, a cash flow loan is a good balance between the application process time and the cost of APR. (For more, see: Six Steps to a Better Business Budget.)

Here’s a look at the five most common types for your business:

Business Credit Cards

Using a business credit card is a popular option because of the relatively easy access to securing funding. Higher APR and lower borrowing limits make it an impractical option to cover large cash flow gaps. But if you’re a new business, need short-term purchasing power, and can pay it back in full within a month or two, this could be a good option.

Lines of Credit

Though similar to a credit card, lines of credit require a more formal agreement between borrower and lender. A line of credit is great for small business owners because it gives rolling access to cover seasonal cash flow gaps and can help to cover large cash payments to suppliers, vendors and contractors that don’t accept payments by credit card.

Term Loans

Similar in structure to a mortgage or car loan, a term loan for business lets you borrow a lump sum upfront and pay it back according to a fixed payment schedule. Most term loans require a business to have operated two years or more, a personal credit score of at least 640, and a minimum $200,000 in annual sales, making term loans a good choice for established small businesses.

Invoice Financing

Invoice financing lets you borrow money by managing your accounts receivable to cover gaps in cash flow. This is especially useful if you land a larger contract and need help coming up with cash up front to meet the large order. If you have a long history of credit sales and can collect within 60 to 90 days the majority of accounts receivable, this might be a good option.

Merchant Cash Advance

While not a loan, a merchant cash advance offers advance payment using your business’ future income as collateral. Terms can range from 90 days to 18 months and are repaid automatically using a percentage of your daily credit card receipts. This option is ideal for small businesses that lack a strong business credit score, though you must readily demonstrate a steady cash inflow stream to qualify.

Selecting the best way to finance cash flow is a complicated decision. You’ll need to understand your business’ finances in-depth to know if using a credit card, line of credit, merchant cash advance, or another method is right for you. While no one knows your business better than you do, a fee-based financial planner can help determine what financing options may make the most sense for your business. (For more from this author, see: Exit Strategies for Business Owners.)

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cr. https://www.investopedia.com/advisor-network/articles/how-small-business-owners-can-create-cash-flow/