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The nation’s largest mortgage lender, UWM, has launched a new 90% LTV cash-out refi to drum up more business.

While it’s being sold to mortgage broker-partners as a way to “win more business,” it doubles as a worrisome trend of loosening underwriting guidelines.

Typically, homeowners are capped at 80% LTV when it comes to a cash out refinance, but UWM is taking things a little further.

This could be the symptom of low volume, which has plagued many mortgage lenders ever since mortgage rates jumped in mid-2022.

And it could be a sign that some American consumers are struggling to make ends meet as they grapple with surging inflation.

Conventional Cash-Out 90 Lets You Borrow More Than the Other Guys

  • Cash out refinance up to 89.99% LTV
  • Loan amount capped at the conforming loan limit
  • Must be a primary residence
  • Minimum FICO score of 680 required
  • No mortgage insurance required (might be built into rate)

First let’s talk about this new loan program, known as “Conventional Cash-Out 90,” then we’ll talk about whether it’s worrisome or not.

As noted, United Wholesale Mortgage (UWM) will now let you cash out up to 90% of your property value.

Technically, it’s capped at 89.99% LTV, but it’s still considered a conventional loan. Note that there’s a difference between conventional and conforming loans.

Both are non-government loans, but conforming loans must meet the guidelines of Fannie Mae or Freddie Mac.

And Fannie Mae and Freddie Mac have a maximum 80% loan-to-value ratio (LTV) limit for cash out refinances.

So it doesn’t meet their guidelines, which also means many competing lenders can’t offer such high limits.

In other words, UWM is offering something the other guys can’t, assuming you want a whole lot of cash.

On top of that, they aren’t charging private mortgage insurance (PMI). Though as I always say, if it’s not being charged separately, it’s usually baked into the mortgage rate.

However, the maximum loan amount on the program is at the conforming loan limit, currently $766,550 for 2024.

And the property must be your primary residence (the one you live in), and you need a minimum FICO score of 680 to qualify.

It’s unclear just how high the mortgage rates are, but I can’t imagine them being cheap when your typical vanilla purchase or rate and term refinance at 80% LTV or less is still around 6.5%.

We might be talking about rates in the mid-7% range or higher. But I’m just speculating here. You’ll need to speak to a UWM-approved mortgage broker for actual pricing.

Are We Bringing Too Much Risk Into the Housing Market?

Now let’s talk about risk. As noted, Fannie and Freddie have limited cash out refinances to 80% LTV. And they did this to minimize risk to both lenders and homeowners.

It’s generally not a good thing to be overleveraged as a homeowner, especially if the mortgage debt is pricey as it has become today. And even more so if home prices feel a tad frothy.

This means if your property is valued at $500,000, the largest loan amount you can qualify for when tapping equity is $400,000.

In the early 2000s, prior to the mortgage crisis, it wasn’t uncommon to see 100% LTV cash out refinances. Or even 125% LTV loans!

Of course, we all know how well that went. Homeowners had no equity left, and once home prices collapsed, they were the proud owners of underwater mortgages.

That led to one of the worst housing downturns in our lifetimes. The good news is it also led to stricter underwriting guidelines, including the 80% LTV cap on cash out loans.

So the fact that United Wholesale Mortgage (UWM) is pushing past this limit might feel a little troubling.

But it’s likely just the result of loan volume being so dismal today, and their desire to remain the top mortgage lender in the nation.

You also need homeowners to take the bait. Most have very low locked-in 30-year fixed mortgage rates in the 2-4% range with no desire to disturb them.

Chances are volume won’t be high on this new loan program, despite these more accommodating guidelines.

If and when a lender allows 100% cash out refis again, then I’ll really start to worry. Fortunately that seems unlikely at this juncture.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

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Security cameras are legal to purchase and use to protect your home or business, with some exceptions. U.S. states have specific laws about security cameras with slightly different standards for consent to recording and hidden cameras in private or public settings.

In general, don’t place a camera anywhere someone would have a “reasonable expectation of privacy,” including bedrooms, bathrooms and guest rooms — even cameras pointing into a neighbor’s private spaces

.

If your cameras have audio capabilities and can pick up a conversation, remember that some states have “all-party consent” laws that require everyone talking to consent to the conversation being recorded.

Camera laws to know about

Expectation of privacy

The concept of reasonable expectation of privacy is a part of the Fourth Amendment of the U.S. Constitution

. It originally referred to government intrusion into private spaces but is also used to assess home security scenarios. For example, an overnight guest has a reasonable expectation of privacy in a home.

As security technology evolves, there may be new interpretations of this right on a case-by-case basis, but in general, it’s best to keep cameras out of places where people can reasonably expect not to be recorded. For example, a landlord might be able to place a security camera in a common area, such as a lobby, but might not be able to place a security camera inside a rented apartment.

One-party consent

Some federal consent laws for recording primarily concern audio, not video. For example, 18 U.S. Code §2511 pertains to the recording of conversations — over the phone or in person through a security camera — if at least one person involved has consented

. Some states require everyone involved in a conversation to consent to being recorded.

Camera laws by state

State laws concerning video and audio recording can have slightly different wording, but in general they maintain the same principle as federal laws: keep cameras out of places where people have a reasonable expectation of privacy. Here are some examples.

Recording

  • With consent. Arkansas and Hawaii, for example, require consent to record anyone in a private space

    . In Georgia, you’ll need consent unless you’re recording on your own property for security purposes, as long as you don’t invade anyone’s reasonable expectation of privacy.

  • No confidential information. In California, it’s illegal to record “confidential” communications

    .

  • No trespassing. In Minnesota, it’s illegal to enter someone’s private property to install a camera or to record through the window of someone else’s home

    .

Hidden cameras

  • In many states, such as Alabama, Arkansas, Delaware, Kansas, Maine, Michigan, New Hampshire, South Dakota, Tennessee and Utah, you need someone’s consent to record them with a hidden camera (in some states, it’s worded as using hidden cameras in places with a reasonable expectation of privacy).

What happens if I record someone without their consent?

Invasion of privacy can be a misdemeanor or a felony, depending on the state laws and what was recorded. If someone is recorded without their consent, they may be able to sue the party responsible

.

How do I prevent my security cameras from violating privacy laws?

Keep security cameras out of private spaces, such as bedrooms and bathrooms. If a camera can see into a neighbor’s property, change the angle or take advantage of privacy features from home security providers, many of which allow you to tailor a “privacy zone” that blocks out part of a camera’s view field.

Most security cameras we’ve tested have a “privacy shutter” that keeps the view field blocked most of the time, only opening when motion is detected and the system is armed.

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Source: nerdwallet.com

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Northwestern Mutual Announces “My Time to Plan” Content Series to Initiate Better Conversations About Money Series highlights the often surprising and deeply personal world of money and finances among professional athletes, with the first two episodes featuring Brice Turang and Sal Frelick of the Milwaukee Brewers™ Series launches during Financial Planning month to shine a light … [Read more…]

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Cleveland is a city full of opportunities and challenges. Known for its culture, strong sports professional teams, and affordable cost of living, Cleveland has a lot to offer new residents and lifetime locals alike. 

That said, every city has its fair share of downsides, and Cleveland is no exception. In this article, we’ll explore seven of the most impactful pros and cons of living in Cleveland, providing a detailed look at what you can expect if you decide to call this city home.

Cleveland at a glance

Walk Score: 57| Bike Score: 52 | Transit Score: 44
Median Sale Price: $125,000 | Average Rent for 1-Bedroom Apartment: $1,536
Cleveland neighborhoods | Houses for rent in Cleveland | Apartments for rent in Cleveland | Homes for sale in Cleveland

1. Pro: Affordable cost of living 

Cleveland’s cost of living is significantly lower than the national average, making it an attractive option for budget-conscious residents. Housing prices are affordable, well below the national median of $432,849. Apartments in Cleveland follow a similar trend, going for around $1,589 on average. 

2. Con: Harsh winters 

While not one of the coldest cities in the U.S., one of the biggest drawbacks of living in Cleveland is its long, cold, and snowy winters. Thanks to its location near Lake Erie, Cleveland experiences heavy snowfall due to lake-effect snowstorms. Temperatures can drop well below freezing, and the city’s infrastructure often struggles to manage the snow and ice that accumulate throughout the season. For those who are not fond of winter weather, this could be a major drawback, as Cleveland winters often last from November until March.

3. Pro: Strong healthcare industry 

Cleveland is home to some of the best healthcare facilities in the country, with the Cleveland Clinic and University Hospitals leading the charge. These institutions not only provide top-notch medical care but also offer ample employment opportunities for those in the healthcare field. Whether you’re seeking treatment from world-class doctors or looking for a job in a thriving medical community, Cleveland’s healthcare industry is a draw for many.

4. Con: Declining public transportation 

While Cleveland’s public transportation system used to be stellar, it has seen a decline in recent years. The Greater Cleveland Regional Transit Authority (RTA) still offers bus and train services, but the routes are often limited, and many neighborhoods are underserved. Residents who rely on public transit may find it inconvenient, particularly if they live outside the city’s core. While driving is a common solution, it does add to commuting times and traffic, especially during rush hours and winter storms.

5. Pro: Elite entertainment options 

Cleveland’s culture sets the standard for large Ohio cities. The city is home to the renowned Cleveland Museum of Art, Playhouse Square (one of the largest theater districts in the country), and the Rock and Roll Hall of Fame. Cleveland’s sports teams, including the Cleveland Browns (NFL), Cleveland Cavaliers (NBA), and Cleveland Guardians (MLB), have passionate fan bases, providing year-round entertainment for sports fans. Needless to say, there’s always something to do in Cleveland.

6. Con: Aging infrastructure 

Like many older cities, Cleveland faces challenges with its aging infrastructure. Roads, bridges, and public buildings often require repair, leading to large-scale construction projects and delays. While the city is working to improve its infrastructure, these efforts can feel slow, and the ongoing construction can be a nuisance for locals, particularly drivers who may face detours or pothole-filled roads.

7. Pro: Thriving food scene 

Cleveland’s food scene has exploded in recent years, with a variety of restaurants offering everything from fine dining to casual eats. The city is known for its ethnic diversity, with neighborhoods like Little Italy, Tremont, and Ohio City offering authentic global cuisine. From Polish pierogies to Hungarian pastries, there’s no shortage of unique dining experiences. Cleveland also has a growing craft beer scene, with local breweries, like Bookhouse Brewery, becoming popular spots for residents to kick back and stay connected.

A native of the northern suburbs of Chicago, Carson made his way to the South to attend Wofford College where he received his BA in English. After working as a copywriter for a couple of boutique marketing agencies in South Carolina, he made the move to Atlanta and quickly joined the Rent. team as a content marketing coordinator. When he’s off the clock, you can find Carson reading in a park, hunting down a great cup of coffee or hanging out with his dogs.

Source: rent.com

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Whether you’re looking for an apartment in Seattle or an apartment in Charlotte, you may be wondering what apartment floor plan is right for you. It can be tricky to imagine yourself living in a space without seeing all your stuff in it.

Luckily there are some key floor plan design elements you can consider before moving in that will help you determine if an apartment has enough space for your needs.

1. Evaluating floor plan space

Your primary consideration when evaluating floor plans should be space. The team with property management software, TenantCloud says, “Think about the overall layout and how it will work with your daily routine and needs.” You need to know if an apartment design includes enough space for you, your family, and all of your things.

Just looking at the amount of square footage on a blueprint floor plan isn’t really a good indicator of how usable the space will be. Interior designers recommend classifying the rooms into three categories: private areas, service areas, and public areas; Richard Soto with VIP Realty in Texas, suggests considering “the number of bedrooms and bathrooms based on your needs and about the flow of foot traffic.”

Living rooms are an example of public areas. They are the social spaces where you entertain, relax and live most of your day-to-day life. These should be multi-purpose spaces where you could participate in a variety of activities from hosting a party to reading a book.

Service areas include the kitchen and laundry room — highly functional spaces with defined purposes. When you evaluate these spaces, look for logical layouts that make your life easy.

Private areas include the spaces where you want to be alone: your bedroom, your office, and your bathroom. When you’re thinking about areas such as the bathroom, the TenantCloud team suggests considering how many you may need “to accommodate morning and evening routines” for those residing in the space. In many apartment floor plans, these private areas will be separated from busy public areas by physical barriers.

Thinking about separating floor plan space into these three areas should give you a better idea of whether or not an apartment has enough usable space. If you’re still not sure what to look out for, California real estate agent, Logan Winn suggests “watching @DearModern on YouTube for insightful videos about feng shui and modern design principles to help guide your apartment floor plan selection.”

2. Storage considerations

Don’t underestimate the importance of storage space in your new apartment. Everybody needs a place to put food, clothing, and important valuables.

When it comes to thinking about your storage options, the team with Turnkey Locating says, “Ensure you have ample space for your belongings” and design experts recommend looking for an apartment that is 10-15 percent storage space. In other words, built-ins like closets, cabinets, and pantries make up almost 15 percent of a floor plan with adequate storage. Look for an apartment design that incorporates these storage features throughout the unit and makes them easily accessible.

If an apartment doesn’t have as much built-in storage space as you’d like, don’t write it off just yet. The floor plan may still work if it’s spacious enough to hold a lot of non-built-in storage furniture, like dressers, shelves, or trunks. Turnkey Locating adds, “Ultimately, the perfect floor plan aligns with both your functional needs and personal comfort.”

3. Furniture placements

For those who are relocating with existing furniture, you’ll want to be sure that there is ample space and that the layout can accommodate your belongings.

Marcoantonio Anaya, with The Apartment Source states, “Renters need to determine if they are starting from scratch or bringing furniture from a previous apartment.” He adds, “When relocating with existing furniture, think about which pieces are non-negotiable and measure them before apartment hunting to rule out options that won’t work.”

Additionally, for items such as a sectional sofa, think about which side the “arm” is on and whether that is right facing or left. What works in one space, may not be suitable for another.

4. Foot traffic

Traffic patterns are another important floor plan consideration. A floor plan’s traffic pattern refers to the way a person has to walk through the apartment to get from room to room. The best apartment designs are arranged so that you can move easily from space to space, as well as enter and exit easily.

Foot traffic should also be considered when it comes to entertaining. Ross Quade, lead locator for Second Chance Apartment says, “Make sure it’s easy to move around the kitchen when you’re cooking and hosting guests–and be sure that everyone has a place to sit when you have friends or family over.”

5. Location

Another factor to consider is the location of your apartment unit and whether or not you want to live on the top floor or closer to the bottom of an apartment complex. Dallas, Texas apartment locator, Lisa Parrish with Spirit Real Estate Group shares, “Top floors may have more sunlight and cross ventilation, while lower floors may be cooler and have access to outdoor spaces.”

Questions to ask about floor plan design:

When you’re evaluating an apartment floor plan, ask yourself these questions to get a grip on whether or not a space will work with your lifestyle:

  • Will each person in your apartment have enough space for their own?
  • Are private bedroom areas far enough away from public living areas?
  • Is there room for entertaining as well as everyday living?
  • Does the apartment design include a logical foot traffic pattern?
  • Are entrances and exits conveniently located?
  • Is there enough storage space?

The key to finding the right apartment floor plan is to consider what works for your specific needs. Think about how you need your space to function, and you’ll make the right choice. As you’re going through the process Apartmentlocating.net shares how you may want to consider working with an apartment locator for “access to exclusive listings and insider information.” They add that “These services can help you quickly find an apartment that suits your lifestyle.”

Source: apartmentguide.com

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Google “paycheck to paycheck” and you’ll be flooded with statistics that seem a bit suspect to an economist’s eye. Diving deeper into the spending habits of people who say they’re living with every dollar spoken for, it’s clear we’re not all defining paycheck to paycheck quite the same way. And it’s clear that some who assign themselves to this group could just be very efficient budgeters.

More than half of Americans (57%) say they’re currently living paycheck to paycheck, according to a nationally representative NerdWallet survey conducted online in July by The Harris Poll. In our survey, we didn’t define the phrase, as we wanted to measure the share of folks who identify with “living paycheck to paycheck” regardless of their finances. Then, we asked for some budget specifics.

Of those who said they’re living paycheck to paycheck, many regularly contribute to savings accounts (31%), retirement accounts (22%), or emergency savings funds (22%), all of which are important, but none of which are obligatory. And others include house cleaning services (15%) and subscription boxes (19%) among their regular monthly [expenses.

In fact, 42% of Americans with household incomes of $100,000 or more say they live paycheck to paycheck.

So, what does living paycheck to paycheck mean?

By not defining the phrase in our survey, we hoped to understand how people feel about their financial condition more than whether they fit a tidy definition. Generally, living paycheck to paycheck implies all or most of your money from one paycheck is gone before or right in time to receive the next. And for many people, it implies some level of financial hardship.

But, it turns out depleting one paycheck just in time for the other’s arrival doesn’t have to mean financial dire straits. In fact, our survey found many people who place themselves in this category manage to spend on some monthly luxuries as well as have emergency savings and retirement accounts.

Addressing the feeling of financial constraint

When someone says they’re living paycheck to paycheck, it could be that they’re tightly budgeted. Emergency funds and retirement accounts, for example, are generally features of more financially secure households.

Some popular approaches to budgeting involve allocating your income toward various categories — 50% for needs, 30% for wants and 20% for savings and debt payments, in the case of the 50-30-20 budget, for example. And if 100% of what you bring in is earmarked for various purchases or accounts, you could consider yourself paycheck to paycheck, yet still doing quite well.

If you’re feeling like the well is dry when your next paycheck arrives, take a closer look at how you’re allocating your monthly income. You may find yourself on-track to long-term financial goals and able to afford some of the extras each month that enrich your life, even if your spending account dwindles toward the end of the pay period. If this is the case, and the tightly allocated budgeting feels fine, pat yourself on the back for being an astute financial manager. But if the dwindling feels bad, consider budgeting a buffer into that primary spending account or loosening the limits on your variable “wants” expenses each month. In this way, your “fun money” comes from one place, it rarely runs completely dry and you enjoy a bit of flexibility.

When living paycheck to paycheck means serious hardship

For some, however, living paycheck to paycheck happens because the money coming into the home just isn’t enough to cover the needs of the household. In this case, clever budgeting can only get you so far. According to the Federal Reserve, 63% of adult Americans in 2023 could manage an unexpected expense of $400 using cash, savings or a credit card they paid off right away. There’s a good chance the remaining 37% would describe themselves as living paycheck to paycheck.

Building a $400 emergency fund can be a tall order when you truly have nothing leftover at the end of the month. But every bit that gets you closer can be helpful. While you incrementally build a small safety net, have a financial hardship plan in place should things take a turn for the worse.

  • Prioritize crucial expenses like housing, utilities, food and medical care.

  • Contact your creditors and other bill collectors to explain your situation and ask about any hardship programs they offer.

  • Identify local charities and organizations that can help in times of need and reach out to your state or county social services if you think you might qualify for government assistance.

METHODOLOGY

This July survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from July 16-18, 2024, among 2,076 U.S. adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For these studies, the sample data is accurate to within +/- 2.5 percentage points using a 95% confidence level. For complete survey methodologies, including weighting variables and subgroup sample sizes, please contact [email protected].

Disclaimer

NerdWallet disclaims, expressly and impliedly, all warranties of any kind, including those of merchantability and fitness for a particular purpose or whether the article’s information is accurate, reliable or free of errors. Use or reliance on this information is at your own risk, and its completeness and accuracy are not guaranteed. The contents in this article should not be relied upon or associated with the future performance of NerdWallet or any of its affiliates or subsidiaries. Statements that are not historical facts are forward-looking statements that involve risks and uncertainties as indicated by words such as “believes,” “expects,” “estimates,” “may,” “will,” “should” or “anticipates” or similar expressions. These forward-looking statements may materially differ from NerdWallet’s presentation of information to analysts and its actual operational and financial results.

Source: nerdwallet.com

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Visionary architectural designer Jean-Michel Gathy is recognized as the creative force behind some of the world’s most iconic luxury hotels and resorts.

The man who, alongside the late Ed Tuttle and Kerry Hill, established the DNA blueprint of Aman Resorts, has worked on some of the most recognizable luxury hospitality projects in the world — including the Marina Bay Sands infinity pool in Singapore, the famed Aman New York, and the recently launched Jumeirah Bali.

He also designed Amanyara, a luxury Aman Resorts retreat in the Turks and Caicos Islands, set on the shores of an 18,000-acre nature reserve. Here, one of the 20 private villas Gathy envisioned is being offered for sale, newly listed for $13,900,000 with Muffy Ward and Sean O’Neill of The Agency Turks and Caicos.

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Part of Amanyara, a luxe Aman Resort in Turks and Caicos

Photo credit: Kaieri Photo and Video / The Agency

Amanyara Villa 16 is part of the larger Amanyara resort designed by the renowned architect Jean-Michel Gathy on the shores of Northwest Point Marine National Park in Providenciales, Turks and Caicos.

Adjacent to protected parkland and overlooking a marine reserve, the luxury beachfront resort is known for its signature pavilions and villas, and luxe amenities, which include world-class restaurants, the tranquil Aman Spa, and various wellness and fitness facilities.

By the numbers: What $13.9M buys you in Turks & Caicos

Photo credit: Kaieri Photo and Video / The Agency

While harder to quantify than your ordinary mainland listing, Villa 16 offers a total of 5 bedrooms, 5 full baths, and 1 half bath, spread across a generous 11,954 square feet of living space.

Baked into the price is access to Aman Resorts amenities, which range from watersports to yoga and wellness facilities.

Villa 16 consists of 5 spacious guest pavilions

Photo credit: Kaieri Photo and Video / The Agency

Tucked away in a secluded, lush setting, Amanyara’s Villa 16 boasts 5 spacious guest pavilions, each thoughtfully designed to offer tranquility and comfort and boasting an indoor-outdoor living design. At the center of it all sits the expansive Great Pavilion, designed for both relaxation and entertainment.

The pavilions are arranged around a central pool

Photo credit: Kaieri Photo and Video / The Agency

Adding to the sense of seclusion, the pavilions have been built around a central body of water, with a few other pools and an oversized reflecting pond doubling down on the water features.

Future owners get to enjoy upscale Aman Resorts amenities

Photo credit: Kaieri Photo and Video / The Agency

Villa owners get to enjoy the luxurious amenities at Amanyara, including the Nature Discovery Centre, beach amenities, paddleboards, kayaks, four clay Har-tru tennis courts, a fitness center, and a Clubhouse with shuffleboard, billiards, wide-screen televisions, ping-pong, and a world-class soccer pitch.

Particularly the wellness features it’s renowned for

Photo credit: Kaieri Photo and Video / The Agency

Chief among the amenities are the wellness-oriented facilities Aman Resorts is known for; in the case of Amanyara, these include a luxurious spa with 4 treatment rooms, a relaxation pavilion, an outdoor yoga sala and pool, as well as a fully equipped pilates studio and boxing studio.

A place for peace and relaxation

Photo credit: Kaieri Photo and Video / The Agency

Amanyara draws its name from the Sanskrit word for peace, evoking a sense of calm and belonging, and the Arawak Indian word for place, which combined give it a moniker that translates into “peaceful place” — an apt name for the serene resort.

More stories

Dominica’s idyllic Secret Bay Resort now has clifftop tree-house villas you can buy

A Japanese-inspired home in the British Virgin Islands is its own slice of paradise

10 Celebs who made the Caribbean their home away from home

Source: fancypantshomes.com

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Accounts payable are bills and other short-term debts that a business needs to pay. It includes all of a company’s current liabilities (due within one year), making it a key component of small business accounting.

Understanding accounts payable and having a dependable accounts payable system is essential to running a successful small business. Here’s what you need to know.

Key Points

•   Accounts payable (AP) represent a company’s short-term obligations to suppliers for goods or services received but not yet paid for.

•   AP appears under current liabilities on the balance sheet.

•   Examples of accounts payable could include licensing costs, leasing costs, subscription services, and installment payment plans.

•   The four steps of the accounts payable process include capturing the invoice, approving the invoice, payment authorization, and payment execution.

•   Investors and lenders may look at accounts payable when deciding whether to invest in your company or approve you for a small business loan.

What Is Accounts Payable (AP)?

When a business buys goods or services from a vendor or supplier on credit that needs to be paid back in the near term, the accounting entry is known as “accounts payable.” On a balance sheet, accounts payable appears under current liabilities.

Accounts payable differs from a loan payable in that accounts payable does not charge interest (unless payment is late) and is typically based on goods or services acquired. Loan payables, such as balances on various kinds of small business loans, generally charge interest and are based on the prior receipt of a sum of cash from a lender.

In a company, the term “accounts payable” is also used as the name of the department responsible for handling vendor invoices and bills — from recording them in the general ledger to making payments to suppliers and other third parties.

Recommended: Guide to Vendor Financing

Is Accounts Payable an Asset or Liability?

In small business accounting, accounts payable is a liability since it is money owed to vendors and creditors. The account grows larger when more money is owed to vendors. When accounts payable increases, a business will typically have more cash on hand because of the delay in paying amounts owed. This typically results in a temporary increase in liquidity.

The short-term debt in accounts payable can help keep cash on hand to pay for other items, but eventually creditors will require payment.

Accounts payable differs from business expenses in that accounts payable is shown on a business’s balance sheet, whereas business expenses are shown on the income statement.

Recommended: Small Business Balance Sheets with Examples

How Accounts Payable Works

When a business purchases goods or services from a supplier on credit, also known as trade credit, payment isn’t made immediately. Typically, it will be due within 30 or 60 days, sometimes longer.

Here’s how it works:

A business will send the supplier a purchase order. The supplier will then provide the goods or services the business purchased, along with an invoice requesting payment by a certain date. The person or department responsible for accounts payable will verify the invoice against the purchase order and ensure the goods or services were received before issuing payment to their vendors.

If amounts owed to suppliers and other third parties are not paid within the agreed terms, late payments or defaults can result.

The sum of all outstanding payments owed by a business to third parties is recorded as the balance of accounts payable on the company’s balance sheet. Any increase or decrease in accounts payable from one accounting period to another will appear on the cash flow statement.

Recommended: How to Calculate Cash Flow

4 Steps of the Accounts Payable Process

Managing business finances is one of the most important aspects of running a small business. The accounts payable process has four key steps. Going through this defined process helps avoid errors and missing a payment deadline to a vendor.

1. Invoice Capture

The accounts payable process generally begins when a supplier or third party submits an invoice to the accounts payable department. After receiving the invoice, the accounts payable clerk will verify the invoice is valid and not a duplicate, code the invoice to the general ledger, and, depending on the company’s process, conduct a two-way match (in which invoices are matched to purchase orders) or a three-way match (in which invoices are matched to purchase orders and receiving information).

2. Invoice Approval

Once all the data is entered, an invoice must be approved. This involves an individual from the accounts payable department routing the invoice to the appropriate person (or people) in the company to get the necessary approval(s).

3. Payment Authorization

After an invoice is approved, the accounts payable clerk may need to get authorization to make a payment. The authorization will typically include the payment amount, method of payment, and date the payment will be made.

4. Payment Execution

Once payment is authorized, the invoice can be paid. Payment should be processed before or on the bill’s due date and may be done by check, electronic bank-to-bank payment, or credit card. Once the invoice is paid, it can be closed out in the accounting system.

Recommended: Debt-to-EBITDA Ratio Explained

Internal Controls and Audits

Internal controls are standardized operating procedures used by companies in their accounts payable process to reduce the risk that a business will pay a fraudulent or inaccurate invoice, pay a vendor invoice twice, and/or fail to pay an invoice on time.

These controls often include:

•  Purchase order approval

•  Invoice approval

•  Two-way matching (in which invoices are matched to purchase orders) or three-way matching (in which invoices are matched to purchase orders and receiving information)

•  Auditing for duplicates (which involves checking files manually or with an accounts payable automation platform to make sure duplicate payments aren’t made)

Accounts Payable Examples

Generally, any items bought on short-term credit fall under the accounts payable umbrella. This includes:

•  Licensing costs

•  Leasing costs

•  Subcontractor bills

•  Amounts owed for raw materials and fuel

•  Products and equipment received but not paid for

•  Subscription services

•  Installment payment plans

Accounts Payable vs Accounts Receivable

Accounts receivable is basically the opposite of accounts payable. While accounts payable is the money a company owes to suppliers and vendors, accounts receivable is the money that is owed to the company, generally by its customers. If two companies make a transaction on credit, one records it to accounts payable, while the other records it to accounts receivable.

Here’s a side-by-side comparison of accounts payable vs accounts receivable:

Accounts Payable Accounts Receivable
Money you owe to a vendor or other third party Money owed to you from customers
Recorded as a current liability on the balance sheet Recorded as a current asset on the balance sheet

When a business owner needs an influx of cash, accounts receivable financing is a type of financing that enables them to receive early payment on outstanding invoices. The owner must then repay the money (plus a fee) to the financing company when they receive payment from their customers.

Recommended: GAAP Explained

Trade Payables and Accounts Payables

Though they sound similar, trade payables are actually slightly different from accounts payables.

Trade payables are amounts a company owes its vendors for inventory-related goods, such as business supplies or materials that are part of the company’s inventory. Accounts payables, on the other hand, includes trade payables, as well as all other short-term debts.

The Takeaway

Accounts payable is a current liability on a company’s balance sheet. It includes all of the short-term credits extended to a business by vendors and creditors for goods or services rendered but not yet paid for. Accounts payable also refers to the department or person in a firm that records and handles purchases and payments.

Lenders and potential investors will often look at a company’s accounts payable, as well as their accounts receivable, to gauge the financial health of a business. Mismanagement on either side of the equation can have a negative impact on your business’s ability to get credit or get approved for a small business loan, and could also put your business at risk.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

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FAQ

What are examples of accounts payables?

Any good or service that is purchased by the company on short-term credit should be listed as accounts payable on the balance sheet. Some examples include:

•  Leased vehicles

•  Subcontractor services

•  Equipment

•  Materials

•  Business supplies

•  Subscription services

What is the purpose of accounts payable?

The purpose of accounts payable is to accurately track what’s owed to vendors and suppliers and to ensure that payments are properly approved and processed. Having accurate accounts payable information is essential to producing an accurate balance sheet.

What is accounts payable reconciliation?

Accounts payable reconciliation is a process in which the accounts payable department verifies that the detailed total of all accounts payable outstanding matches the payables account balance stated in the general ledger. This is done to ensure that the amount of accounts payable reported in the balance sheet is accurate.

Photo credit: iStock/Panuwat Dangsungnoen

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Source: sofi.com