Watch the plan fees and expenses.

No matter which plan or plan administrator you choose, the administrator has operating expenses. These expenses are passed on to the account holder. Expenses and associated fees vary considerably, just as they do with mutual funds. Moreover, just as with mutual funds, the expense burden has a tremendous impact on returns. When considering which QTP to use, consider the fees. Watch for hidden fees as well. While all plans charge a management fee typically ranging from 0.25 to 0.95 percent a year, some also will sock you with an enrollment charge, an annual maintenance fee, and annual expenses charged by the underlying mutual funds in your portfolio.

QTP plan funds may affect qualification for financial aid.

Need for financial aid is based in part on assets owned by the applicant and his or her family. In fact, 35 percent of an aid applicant’s assets are considered in calculating the portion of education expenses that must be paid by the applicant and his or her family, and 5.6 percent of an applicant’s parents’ assets are considered. As such, monies in QTP accounts that designate a parent as the account owner will count for less on the aid application (which improves chances that aid will be granted) than if the applicant/student is named as the account owner. This is because it is the account owner, not the designated beneficiary, who is considered the “owner” of the QTP account assets. ESA accounts are different as the beneficiary is considered the “owner” of ESA account assets.

Check for state tax breaks.

Most states have piggybacked the federal tax code and shelter QTP plan income from state taxes. But be sure to check your state’s tax laws. Some states have limited the tax benefits, while others have expanded them. Some states also allow contributions to their state QTP plan to be deducted from state income taxes. Check out the various plans at www.savingforcollege.com.

Example #1: If the company redeems or buys back part of a shareholder’s stock, the full amount paid (not just the profit) to the stockholder may be taxed as a dividend at ordinary income tax rates up to 38.6 percent, rather than at the capital gain rate of 20 percent.

Example #2: If you sell all of your stock back to the company – for example, if you wish to retire – you also must completely sever your relationship with the company for the next 10 years. Otherwise, the full proceeds may be taxed to you at ordinary income rates. That means you can’t be an officer, director, consultant or employee. It’s okay, though, to be a supplier or rent property to the company on an arm’s-length basis. You may also be able to be a creditor, under certain circumstances.

Again, be sure to consult your tax advisor before you make plans to buy back the stock of any shareholder. The rules are complex and the IRS filing requirements are detailed. More information can also be found in the Internal Revenue Code, Sections 302 and 303.

Have a line of credit that is never fully paid off? Consider taking out a term loan and using the proceeds to pay off the portion that doesn’t “revolve.” You may want to consider doing the same with credit card debt.^*

Interest rates remain at historic lows. Residential mortgage rates recently dipped to 5 percent. Interest burden is low today, but the reprieve won’t last. Rates will soon rise and before you know it, you’ll be paying 8, 9, even 10 percent on variable-rate debt. Don’t think it will happen? Look at the accompanying chart of historical rates — prime and residential mortgage. Yes, the future will reflect the past.

Weighted average rate of initial mortgage interest rates paid by home buyers on conventional fixed and adjustable rate mortgages.

Source: Mortgage-x.com

If you want more evidence that rates are poised to rise, listen to the comments of Ben Bernanke, U.S. Federal Reserve chairman. The Federal Reserve sets interest rates and Bernanke says they are going to hold rates at their current low levels until the economy is clearly out of the recession. He has said this for a couple of years now, and economic data show the economy is out of the recession. Gross domestic product (GDP) is growing again — a robust 3 percent (annualized) in the most recently reported quarter.

During periods of GDP growth, interest rates rise. During periods of low or negative GDP growth, interest rates decline. We’ve been through low, even negative, growth for a few years now. We’re now shifting to a period of interest rate increases.

Convert Variable Rate Debt to Fixed

If you currently have debt you pay a rate on that changes as the prime rate changes, talk to your lender about locking in a fixed rate. You might pay a slightly higher rate today, but you’ll be protected from rate increases and also know exactly what you’ll owe in interest and principal going forward, which helps for budgeting.

Credit card debt carried as variable-rate debt is at punishingly high rates. If you carry a balance on credit cards, talk to your banker about a loan to pay off your credit card(s) with a term loan (which has a fixed rate of interest).

Refinance Fixed-Rate Debt

If you have fixed-rate debt at a rate above 7 percent, talk to the bankers you know today about refinancing. The table on page 11 shows how the change in interest rates can affect annual interest expenses paid on a loan. Over the life of a loan, the interest rate impact is even more significant. For example, a 2-percentage-point interest savings on a $1 million, 25-year note is $390,000 over the life of the mortgage.

Again, if you don’t think we’ll ever see rates at 10 percent or greater, think again. History tends to repeat itself. Also, one way to deal with our federal debt problem is inflation.

Pay Attention to Terms

In evaluating loan options, there’s more to consider than the interest rate. Up-front expenses such as “points,” closing costs and even legal fees must be evaluated. The best method for comparing loans with varying terms is net present value (NPV). Review this article online to download a calculator (in Excel). It makes the job easy. The loan with the lowest NPV (all loans have a negative NPV) is the least expensive and therefore most attractive.

Effective Interest Rate

Another way to compare loans with varying terms is to calculate effective interest rates (EIR). It entails amortizing up-front costs over the life of the loan, i.e., adding the cost to the interest expense and recalculating the rate. Although this method is simple, it is not as desirable as NPV because it doesn’t take into account the time value of money. One thing that makes up-front costs so expensive is they’re due up front. Given a choice, you would rather pay in installments over the life of the loan. That’s what the effective interest rate calculation assumes, but not how it is in real life. So the EIR method understates the true cost of up-front fees. The NPV method does not. Still, EIR calculations are one way of viewing the cost of points and up-front fees.

The two tables display the effective rate calculations for various points paid on loans with 5-year and 25-year amortizations. One point is simply 1 percent of the loan value. So, for a $100,000 loan, two points is $2,000.

Comparing the two effective interest rate tables, you can see that up-front expenses have a far more substantial impact on short-term loans compared to long-term loans. When points are required to “buy down” an interest rate, doing so is far more attractive when the loan term is long.

Prepayment Penalties

Many loan terms include prepayment penalties. Calculating their effect can be tricky because they come into play only if you need to pay off the loan before its natural expiration date. This most often comes into play when interest rates fall and you wish to refinance. The chances of this happening to you on a loan you close today are slight, but you should consider this feature nonetheless. Comparing options to refinance involving a prepayment penalty, simply calculate the NPV of the existing note, using the calculator we provide online. Then calculate the NPV of the refinance option by entering the data for the new loan and include any prepayment penalty on the old note as an up-front expense on the new. Whichever option offers the lowest NPV is the most attractive (financially). Again, when using the Excel calculator, the loan with the lowest negative number is the least expensive.

^*Term loans require collateral and are therefore secured debt. Credit card debt is unsecured, of course, so you should take this into consideration before refinancing credit card debt with term debt.

Interestingly, one of the companies we looked into was Whole Foods Market. Its employees were given a choice of health care benefits or 401(k). They chose health care insurance.

Health Care Reform Hindering Retirement Benefits Programs?

U.S. legislators are floating proposals to require employers to provide health care benefits to employees or pay a penalty. One proposal in the U.S. House of Representatives would penalize employers if they do not provide employee health insurance. Companies with payrolls of more than $400,000 would be forced to pay a penalty of 8 percent of their total annual payroll. Employers with payrolls ranging from $250,000 to $400,000 would pay a lesser penalty, and firms with payrolls under $250,000 would be exempt.

Where’s the money going to come from? You have to wonder if companies might just kill other benefit programs — such as the 401(k) match — to pay for any new health care mandates.

To be sure, many companies are struggling just to keep their doors open.

Contingent Matching in Our Future?

Maybe Starbucks and Pep Boys are on the forefront of what’s to come — retirement plan matching programs contingent on company profitability. A type of incentive compensation?

Maybe it’d entice employees to work harder and smarter — to think more like owners — while giving businesses a built-in cost reduction mechanism during downturns.

Uncertain Future

It’s impossible to know what the future holds. Employers have little choice but to be very conservative. Cash is the lifeblood of the business, and managers must conserve cash at every turn. Thank goodness that employers have the ability to cut expensive programs when they feel they must. But what if the government mandates health insurance? Will they also mandate retirement programs? Could these mandates hinder a company’s ability to survive tough times?

Nancy Hwa, spokeswoman for the Pension Rights Center, says the companies have the discretion to cut these programs. “Unfortunately, we’ve seen this trend over the past 20 years, where companies are increasingly getting out of contributing to their employees’ long-term well-being plan, whether it’s a pension or retirement income or health benefits,” said Hwa.

The Rich Get Richer

U.S. employees are immensely mobile. They can change employers at will, and they do. They choose where to work based on important things such as pay and benefits. When an organization cuts pay and benefits, it’s a given that some employees will depart for greener pastures.

Where are the greener pastures? Companies making money and able to pay full benefits such as a 401(k) matching program.

So, in a way, when a company cuts benefits, it may start to lose the war for top talent. Which begs the question, how is an already marginally profitable company going to make a comeback with employees who are not the cream of the crop? Does a cut in benefits spell the beginning of the end?

Only One Way Out

As the owner of a business during a downturn, you have tough calls to make. Run out of cash and it’s game over. Fail to retain top talent and it may also be game over.

This dilemma leaves us with only one real option — find ways to raise revenue and profit. And so, even if it means running some losses in the near term or raising additional equity from investors, we have to invest in improving our business.

Are you dealing with these issues? Have you? If so, what are you doing? What have you done? Let us and your peers know by writing to us at editor@thebusinessowner.com. We would like to share with others how you handled the situation.

Pretty shocking, given the punishingly high cost. And since respondents reported using their credit cards as sources of funding, we can safely assume they carry balances. Add to this the turmoil in the credit card market today and we have at hand a real challenge for small companies.

In the NSBA’s recent study, conducted between April 27 and May 5, some 79 percent of the companies that responded reported worse terms on their cards (i.e., higher interest rates and fees) compared to the prior year. To be sure, credit card companies are paring down their loan limits, raising interest rates and fees, and reducing their risk. They’re doing so to try stemming their losses. See the accompanying tables that show the spike in delinquent accounts and bankruptcies.

Capital Is Critical

The issue here – funds needed to operate your business – is deadly serious. Run out of money and it’s game over. So what’s a business owner to do?

Of course, the best option is to build a business that generates cash and allows you to fund its operations through cash flow. Many business owners do achieve this, and you can, too.

This publication gives many tips for building such a business. And, of course, doing so is a long-term project. Furthermore, even businesses that generate strong operating cash flow may choose to use debt to fund rapid growth, enhance return on equity, or smooth the hit to cash caused by periodic capital expenditures.

So, what are your options?

Traditional Bank Financing

Have you tried to obtain traditional bank financing? Despite what you read in the press, banks are lending. More than that, they’re lending at all-time low rates of interest. So if you already have a relationship with a banker, give him/her a call to discuss paying off or paying down your credit card debt. If you don’t have a lender, get a referral from one of your business owner peers.

Keep in mind that new SBA loan programs are incredibly attractive. Your lender will be able to help you evaluate the programs and assess the opportunities.

In summary, business owners must get the funds they need. Credit cards are a substantial source of funds for small businesses and, at times, one of the only sources available. Every business owner should endeavor to move beyond credit card dependence as a primary source of funds. It’s just too expensive. Credit cards should be used for emergencies only.

A short-term funding source of last resort.

To qualify for a regular business loan, all you need is to build a relatively stable business that is profitable, has organized books and records, pays its income taxes and maintains modest levels of leverage.

You can get there. The Business Owner can help.

Synonymous with “equity.” Calculated by subtracting the total value of all liabilities owed by the business from the total value of all assets owned by the business. A key question is how the assets and liabilities themselves are valued. One well-known method is “according to generally accepted accounting principles (GAAP).”

Tangible Net Worth

Net worth minus intangible assets.

Intangible Assets

Assets that have value but cannot be physically touched or easily valued, such as a brand, franchise, trademark or patent. Cash, receivables and payables are not difficult to value and therefore are considered tangible assets. Small and midsize private businesses may not have any intangible assets on their balance sheet, but if they do, it’s typically goodwill, which may have been derived from the purchase of another business, or capitalized expenses such as organization or research and development costs.

Book Net Worth

Simply the net worth of your business as shown on your financial statements. Also described as “unadjusted.”

Adjusted Net Worth

Derived by subtracting total liabilities from total assets after adjusting each to reflect its true value. For example, business assets almost always include accounts receivable. Let’s say that XYZ Company’s accounts receivable are shown on “the books” at $249,303, but the business owner knows that this amount includes $33,424 owed by PDQ Inc. that is past due and likely uncollectable. If the business owner were to prepare an adjusted balance sheet, he or she would amend the book value of receivables to reflect a more accurate estimate of value, including all assets and liabilities.

Do not risk having your life insurance unintentionally lapse for nonpayment. Notify the insurers on all policies that the cash value of the policies (or any earned dividends) is to be automatically used to pay for any missed premiums.

Do not arbitrarily cancel or cash in an annuity or life insurance policy; the move can result in substantial taxable income and, possibly, tax penalties. Get a letter from your agent and insurance company on the tax consequences before taking such an action.

Do not arbitrarily designate irrevocable beneficiaries or co-owners. If you do, you will need their approval to borrow from the policy, apply dividends to premium payments, change ownership, or effect other important policy amendments.

Do not buy insurance or annuities from questionable insurance companies. Check out their rating, investment performance and financial health before doing business with them.

The law governing so-called 529 plans allows an individual to make generous gifts to a college savings plan (529 plan) for the benefit of another individual without any gift or estate tax consequences. A couple can make gifts up to $120,000 in one year for the benefit of another individual.

IRS has discovered that some taxpayers abuse the rules by making $120,000 gifts to several different individuals, then quickly change the beneficiary on all the accounts to one person. The donors thus circumvent the gift tax limits on gifts to an individual that would otherwise apply. The IRS has promised a crackdown.