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Training Series Part 2: Show Me The Money

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Training #2 – show me the money

What to know (and do) about finance and your business

If you want to open a business, you will have to understand how the financial sector works and how to manage your money effectively. You will also have to know what that may look like here in Columbia/Boone County, Missouri. 

Remember that how the financial world works in the U.S. may be very different from the way that things are done in your country of origin. It may look confusing to foreign-born entrepreneurs, but you cannot be an entrepreneur in the U.S. without a solid understanding of the way the financial and banking world work.

In this training REDI will help you understand what the financial sector is, how it works and how that may affect you as an entrepreneur; how banks work in the U.S. and what they offer you as a new business creator; how credit works and how you can use it for your business; and how to get financial help for your business if you need it. This training will also answer some foundational personal finance questions and address some concerns foreign-born residents may face in the U.S.

We at REDI know that this will be a lot of information, and that it is complex and confusing for most people, not just for refugees and immigrants. We are here to answer your questions and to direct you to the proper experts if we can’t find the answer. 

The Global Entrepreneurs and the whole staff at REDI are dedicated to helping you succeed in your business journey. When you win, we all win.

[There is a glossary of terms at the end of this document to help you get familiarized with the most common American business terms as they pertain to how the financial sector works.]

1/ What is the financial sector and how does it affect you as an entrepreneur?

2/ How do banks work and why is it important?

3/ What are loans and grants and how do you get them?

4/ What is “credit history” and why should you take it seriously?

1/ What is the financial sector and how does it affect you as an entrepreneur?

Key things to understand:

  1. The financial sector is a section of the U.S. economy made up of companies and institutions that provide financial services. This sector encompasses a broad range of industries including banks, investment companies, insurance companies, and real estate firms.
  2. Wall Street (see Glossary,) or the money exchange markets, is (in)famous but only one part of the financial sector. 
  3. The financial sector makes most of its money by giving out loans and mortgages to people like you, as well as to commercial customers.

How does the financial industry affect you as an entrepreneur? 

The financial sector gives loans to businesses, mortgages to home owners, and insurance policies to businesses and people. It also employs millions of people. Chances are when you get ready to create your business, you are going to need money to get started. From a food truck to a small taxi company, from a lawn care business to an import-export company, all these businesses will need cash to open, to give you just a few examples. The financial sector is where you turn for that essential step.

In the following section, we will look closely at banks. Whether you are a newly arrived immigrant or someone who grew up in the United States, you need banks for conducting your business.

2/ How do banks work and why is it important?

Banks are the corner stone of the financial industry, as we’ve seen in the previous section. In this section, we will look at how banks are organized in the U.S., and how you can use them for your business (and your personal finances.)

Key things to understand:

  1. Banks are one of the financial sector’s biggest industry.
  2. The U.S. financial sector includes some of the most famous banks in the world, including J.P Morgan, Wells Fargo and Bank of America, but also lots of smaller banks. 
  3. Banks that provide services to individual consumers are called retail or personal banks. They are where most people deposit their money, get access to credit, and manage their money.
  4. Services offered at retail banks include checking and savings accounts, debit or credit cards, certificates of deposit, mortgages, and personal or business loans.

Let’s focus on what will matter the most to you, both as an entrepreneur and as an individual: retail banks. Most startup entrepreneurs only work with retail banks, at least at the beginning of their business journey. We’ll call them simply “banks” from now on in this training.

There are different kinds of retail banks, from the large retail wings of commercial banks like Bank of America, to smaller local banks called community banks and member-owned credit unions. How are they different?

  • Big banks have branches all over the world and that is convenient. On the other hand, they may not offer you much interests on your savings. 
  • Community banks or small banks and credit unions have to compete to attract customers so they offer better savings rates. However, with community banks you may not have the convenience of finding a branch almost anywhere in the U.S. or the world, and you may have to pay ATM fees (see glossary) when you need to access your account in another location. 
  • In Columbia and Boone County you can find all these different types of banks. 

Here are the different sorts of services offered by retail bank:

  • Checking accounts
  • Savings accounts
  • Loans and mortgages
  • Credit cards (most banks, although not all)

Let’s look into the first three services. They matter to you as an entrepreneur because they are the most basic and also most important tools for your business. 

  1. A checking account is the building block of your financial home: it allows you to have money safely kept in a bank and easily accessed when you need it. Most checking accounts have bank fees (see glossary), unless your balance (see glossary) stays above a certain amount. That amount is different with each bank so you may want to do some shopping around, as they say in the U.S., to get the best deal for your money.
  2. A savings account gives you payments on the money you deposit, in the form of interests. A savings account will usually give you interests that offset inflation (the rise in prices for products and services) and allow you to save, but again, it is always a good idea to shop around to get the best interest rates for your money.
  3. Loans and mortgages services are here to offer large sums of money to customers when they need them (and most entrepreneurs at some point will need them.) We will talk more about loans in the next section.

Banks are the building blocks of business, and thanks to online banking, they are really at the foundation of living and working in the U.S. today. If you haven’t opened a bank account yet, do so now. At some point in your business’ lifetime, you will need a loan. 

3/ What are loans and grants and how do you get them?

Banks offer many financial tools (see previous section) and loans are one of the most common. Loans are also the financial products that you will most likely need as an entrepreneur. Grants are also a source of money for your business, but they work differently. We will look at loans first, then grants.

Loans

Key things to understand:

  1. Loans give you the cash you need for your startup or to grow your existing business. 
  2. There are personal loans and business loans, each with their own rates, terms and eligibility requirements (see glossary.)
  3. Personal loans are for you as an individual to use as you like. They are usually approved fast. They also have lower maximum amounts (meaning you cannot borrow more than a certain sum,) shorter repayment term (meaning you have less time to pay back the money to the bank,) and higher interest rates than business loans. 
  4. Business loans in turn are made entirely for your business and given to your company, not you. They have longer repayment terms (especially if they are made through the Small Business Administration, a federal agency,) higher maximum amounts you can borrow, and lower interest rates, but they are also harder to qualify for (the eligibility requirements are higher; see glossary.) 

One of those requirements is a strong credit history for your business. We will look at what that means in the next section.

To explore loans further: https://www.investopedia.com/business-loan-personal-loan-difference-7485839, https://www.sba.gov/ and https://www.centralbank.net/small-business/loans/

Grants

Key things to understand:

  1. Grants are a monetary and one-time gift awarded to a nonprofit organization or a company by another company, organization or by the government (local, state or federal.) 
  2. The goal in giving a grant is to support the idea or goal behind the nonprofit or business. 
  3. You do not have to pay a grant back, however there may be rules and parameters that you have to follow in using the money that was granted to you.

Here at REDI, we award the Minority Business Enterprise grant (MBE) in collaboration with the Missouri Women’s Business Center (MOWBC.) This annual grant of $5,000 is open to minority (Black, brown and Native American) and women entrepreneurs in Columbia and Boone County. There are several other local, state and federal grants available to help you start or grow your business. 

Learn more about grants from the state of Missouri here: https://sbdc.missouri.edu/ and from the federal government here: https://www.sba.gov/funding-programs/grants

4/ What is “credit history” and why should you take it seriously?

The term “credit history” is specific to the U.S. and can be confusing to anybody who didn’t grow up here. We’ll look into it in this last section of the Show Me the Money training module. 

Credit history is the history of how you manage your finances. More specifically, it is the history of how you pay back your debts. The purpose of credit history is to paint a picture of how trustworthy somebody is when it comes to paying back money they owe. In other words, your credit history demonstrates to lenders (see glossary) how responsible you are and whether they can trust that you will repay the money they gave you. 

How do you build up your credit history? By paying back your credit accounts debts on time, among other factors. That means paying your credit card expenses on time each month (this will also prevent you from incurring costly fines.) Other factors are how long your credit accounts have been open (how long you have had your credit cards), the amount of credit you have at your disposal (how much you can borrow on these credit cards), and the amounts you owe. 

The different factors that weigh in on your credit history are calculated by credit bureaus (see glossary.) Credit bureaus calculate your credit score (see glossary,) and issue your credit report (see glossary.)

 You can get a free credit report each year from those credit bureaus. Learn more about your credit report here: https://www.usa.gov/credit-reports

A good credit score shows lenders that you are a lower-risk borrower, meaning there is not a large amount of risk that you will default on your loan (not repay it.) A good credit score will help you get approved for a loan, whether it is a personal or a business loan. It will also get you approved faster and with potentially lower interest rates. This is why credit history is so important to an entrepreneur. In four words: no history, no money!

You have made it through the second Global Entrepreneurs Training Module, Show me the Money. In the next and last module of REDI Global Entrepreneurs’ training modules, we will discuss how to create a business plan, the framework for your business’ success.

Glossary of financial sector terms:

Broker: a broker is an individual or a firm that acts as an intermediary between the stock exchange and an investor.

ATM fees: ATM is an acronym for Automated Teller Machine. If the ATM you visit belongs to a bank that is not yours it may charge fees to take cash out. This is an ATM fee.

Balance: how much money available you have in your checking or saving account in a bank.

Bank fees: cost of bank services. You pay fees to banks in return for their financial services. Bank fees are usually paid monthly and automatically deducted from your accounts.

Certificate of deposit (CD): a type of saving tool that earns you interests at a higher rate than a savings account and for a fixed amount of time, provided you do not touch the money.

Credit bureaus: credit reporting agencies (Equifax, Experian, and TransUnion) that calculate credit reports and scores. 

Credit report: a report of your finances that includes your bill payments history, loans, current debt, bankruptcy history and lawsuit records, that is calculated by credit bureaus.

Credit score: the number calculated by credit bureaus that creditors use to determine whether you are likely to pay back loans.

Credit union: a small, cooperative bank owned and operated by its members, who are also the clients of the bank.

Eligibility requirements: specific rules and parameters each bank uses to verify whether customers qualify for a loan, grant, or other financial tool. Think of eligibility requirements as a hurdle that a person has to jump over in order to qualify for certain financial products.

Lender: a financial entity, usually a bank, that lends money in the form of loans.

Mortgage: a type of loan used to buy a home or other type of real estate and secured by the property itself.

Wall Street: an umbrella term used to describe the U.S. financial markets and the companies that trade publicly around the U.S. Wall Street is also a street in Manhattan, New York City, that many financial institutions called home, and where the New York Stock Exchange (NYSE,) one of the largest exchange in the world, is located.

Some Columbia/Boone County/Missouri community banks: Central Bank of Boone County, Hawthorn Bank, Simmons Bank

Second in a series of REDI Global Entrepreneurs training modules:

  • Follow the Rules (Business licenses and permits)
  • Show Me the Money (Financial Literacy)
  • What’s the Plan? (Making a Business plan)
Training Available as PDF Download
 (English Version)
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