Please also see the Corporate Financial Statement Analysis Page to determine how financial institutions analyze companies. Please also see the Guide To Corporate Taxation Page to determine the tax treatment of business operations.
A business does not apply directly to the SBA. Rather, it has to apply at the offices of an approved third party lender or program participant. The relationship is always between the SBA and the Lender, not between the SBA and the Borrower. The SBA guarantee is not extended for the benefit of the Borrower, the guarantee is extended to induce the Lender to make a loan to a business that it otherwise would not consider providing.
|SBA Loan Programs|
The Small Business Act specifies that the SBA shall not make or guarantee loans for borrowers who are able to obtain credit elsewhere. The statute defines credit elsewhere as “the availability of credit from non-Federal sources on reasonable terms and conditions taking into consideration the prevailing rates and terms in the community in or near where the concern transacts business, or the homeowner resides, for similar purposes and periods of time.”
Thus, the SBA will guarantee loans only for applicants for whom the desired credit is not otherwise available on reasonable terms from a nonfederal source. As a result, the SBA requires lenders to explain in a borrower’s loan file why the borrower could not obtain credit elsewhere on reasonable terms.
The business must be domiciled within the United States and pay taxes in the United States.
The business must be an ongoing, for-profit operation.
The business must indicate how the receipt of the guaranteed financing will also benefit the local community (the guarantee is by a U.S. federal government agency that is funded by taxpayer money and the purpose of the program is that if the business thrives then the community thrives through jobs and the product or service). If the business is not going to create additional jobs, retain jobs or assist in community redevelopment then it is less likely to receive an SBA approval.
SBA Small Business Size Standards
SBA 7(a) Loan Guaranty Program
The SBA has informed lenders that the SBA portion of a real estate financing / refinancing may no longer be in a second lien position.
There are 2 Standard 7a Loan Guaranty Processing Centers (LGPC):
6501 Sylvan Road 262 Black Gold Blvd
Citrus Heights , CA 95610 Hazard, KY 41701
Phone: (916) 735-1515 ext. 4368 Phone: (606)436-0801
Fax: (916) 735-1554 or Fax: (606)435-2400
Fax: (916) 735-1680
The Applicant Must be a "small business" as defined by the SBA and meet owner occupancy requirements. Under the 504 Program, the business qualifies as small if it does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years.
SBA Small Business Size Standards
The SBA 504 loan program can also be utilized as a financing option for franchisees (acquisition).
Franchise Registry www.franchiseregistry.com/
Loans cannot be made to businesses engaged in speculation or investment in rental real estate.
Generally, the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.
The business must indicate how the receipt of the guaranteed financing will also benefit the local community (the guarantee is by a U.S. federal government agency that is funded by taxpayer money and the purpose of the program is that if the business thrives then the community thrives through jobs and the product or service). If the business is not going to create additional jobs, retain jobs or assist in community redevelopment then it is less likely to receive an SBA approval. The SBA indicates that with regard to CDC / 504 loans the generally, "a business must create or retain one job for every $50,000 provided by the SBA except for "Small Manufacturers" which have a $100,000 job creation or retention goal."
CDC / 504 Loan Guaranty Program
Certified Development Company (CDC) is a development company usually set up by a local municipal government in partnership with local business groups and financial institutions. With regard to purely economic issues a CDC will assist with the revitalization of commercial districts and also assist with long-term planning (non-commercial programs include housing for low-to-moderate income families, operate child-care programs, provide literacy training, etc.). CDCs are usually funded through grants and state funding and many operate with federal 501(c)(3) tax-exempt status. The SBA 504 loan program is also sometimes referred to as the Certified Development Company Economic Development Loan Program.
The CDC will participate up to 40% of the loan to a maximum amount of $1,500,000 (the maximum SBA debenture). The SBA 504 portion can be amortized over 10 or 20 years terms with a fixed below-market rate. SBA 504 real estate financing is 20-year, fully amortized financing. Please note: CDCs can go as high as $2,000,000 of SBA 504 financing for public policy or community development projects and up to $4,000,000 for eligible manufacturing projects.
National Association of Development Companies (NADCO) www.nadco.org/
The lender must have an SBAExpress Supplemental Loan Guaranty Agreement between lender and SBA in place.
For loans with a maturity of more than 12 months, the lender must pay a guaranty fee of 2.00% of the amount guaranteed for loans of $150,000 or less, and 3.00% for loans of more than $150,000 to the Small Business Administration, Denver, CO 80259-0001, within 90 days of the date of an SBA Authorization. For loans with a maturity of 12 months or less, the lender must pay a guaranty fee of 0.25% of the amount guaranteed to the same address within 10 days after the SBA issued the SBA Loan Number.
The lender must comply with current SBA Form 750.
The borrower must complete the SBAExpress Borrower Information Form 1919 http://archive.sba.gov/idc/groups/public/documents/sba_homepage/tools_sbf_finasst1919.pdf
The Patriot Express loan (which is part of the 7a Loan Guaranty Program) can be used for most business purposes, including start-up, expansion, equipment purchases, working capital, inventory or business-occupied real-estate purchases.
Maximum loan size of $500,000 (the SBA has limited the number of loans above $350,000 to 2,000, through the year 2010, in order to focus the loan program toward smaller loans).
Patriot Express maximum interest rates will range from Prime Rate + 225 bp to Prime Rate + 475 bp depending upon the size and maturity of the loan. Interest rate structure may be either Fixed interest rate or Variable interest rate .
This is a 75% - 85% loan guaranty program: loans of $150,000 or less may receive a maximum guaranty of 85% and loans in excess of $150,000 (up to $500,000) may receive a maximum guaranty of 75%.
SBA Patriot Express Loan Guaranty Program
The Community Express Pilot Loan program (which is part of the 7a Loan Guaranty Program) was originally designed for minority-, women- and veteran-owned small businesses located in low- and moderate-income areas identified under the SBA’s Historically Underutilized Business Zones (HUBZones) and those communities identified as distressed through the Community Reinvestment Act (CRA). In addition, to encourage small businesses start-ups, SBA also makes eligible loans of $25,000 or less for Community Express, regardless of where small businesses are located.
Community Express loans must meet the basic 7(a) loan criteria.
Maximum loan size of $250,000. Revolving lines of credit may have a maturity of up to 7 years.
Lenders are not required to take collateral for loans up to $25,000. Lenders may use their existing collateral policy for loans from $25,000 to $250,000.
Lender must provide and ensure that the borrower receives appropriate technical assistance (T/A) but may use SBA’s Small Business Training Network (SBTN) and/or other SBA T/A resources to fulfill T/A requirements. Lender must document provision of T/A in loan file.
Community Express is a pilot program, under law its loan volume is capped: all SBA Pilot Programs are Limited to 10% of the Number of 7(a) Loans. There have been some concerns by the SBA with regard to predatory lending practices. In addition, loans originated through Community Express program have a 7% default rate, the highest of all SBA loan programs, while the 7(a) loan program has an overall default rate under 3%.
SBA Community Express Loan Guaranty Program
SBA Microloan Program
The relationship and guarantee that the SBA provides is between the SBA and the Lender and not between the SBA and the applicant / borrower. The Lender must utilize generally accepted credit analysis standards and guidelines to qualify the loan. The fact that there is going to be an explicit guarantee does not in of itself qualify the loan nor should it influence the Lender to extend the loan. Rather, the business must clearly demonstrate the ability to service and repay the loan.
The first analysis of the application is to determine if the applicant would qualify for a non-SBA guaranteed loan.
The SBA does not deny approval for a SBA Guaranty Loan solely due to lack of collateral.
All owners of twenty percent (20%) or more of the business are required to personally guarantee SBA loans.
A business / individual that has recently been charged with having committed a felony or defaulted on any previous government debt is ineligible for SBA financing.
Within the 7(a) program, there are several delivery methods—including regular 7(a), the preferred lender program (PLP), and SBAExpress. Under the regular (nondelegated) 7(a) program, SBA makes the loan approval decision, including the credit determination. Under PLP and SBAExpress, SBA delegates to the lender the authority to make loan approval decisions, including credit determinations, without prior review by SBA. The maximum loan amount under the SBAExpress program is $350,000 (as opposed to $2 million for other 7(a) loans). The program allows lenders to utilize, to the maximum extent possible, their respective loan analyses, procedures, and documentation. In return for the expanded authority and autonomy provided by the program, SBAExpress lenders agree to accept a maximum SBA guarantee of 50 percent.
Lenders are permitted to sell the guaranteed portion of 7(a) loans on the secondary market pursuant to 13 C.F.R. Part 120, Subpart F.
The secondary market for small business loans declined substantially after the development of the credit crisis in the thrid quarter 2008, On March 16, 2009, the U.S. federal government indicated that as part of the American Recovery and Reinvestment Act economic stimulus plan the Treasury Department would purchase securities backed by the guaranteed portions of 7(a) loans packaged since July 2008 through December 31, 2009.
In the United States there is a private on-line exchange that allows business owners, lenders (who may have originated a commercial loan but are not going to fund it), business brokers, loan packagers and franchisors to present loans to lenders for potential SBA financing (primarily 7a loans).
|Small Business Operations|
Some municipalities also have zoning regulations against the operation / location of a business within a residential area. If your business operates in violation of them, you could be fined or shut down. (Consult an attorney)
Some states also have restrictions against certain products being manufactured / fabricated in in or at a residential property. Most states restrict the home production of fireworks, drugs, poisons, explosives, sanitary or medical products and toys. Some states also prohibit home-based businesses from making food, drink or clothing. (Consult an attorney)
Federal Employer Identification Numbers (EIN) are required by all businesses with employees, including sole proprietorships, or if you operate as a corporation or a partnership.
Employer ID Numbers (EINs), Internal Revenue Service
How to Apply for an EIN, Internal Revenue Service
In order to open a bank account, a corporation and/or LLC must ususally provide their bank with a copy of the entity's articles of organization (also known as a certificate of formation in some states), and the acknowledgement / approval of incorporation from the Department of State of the respective state in which the business is domiciled. Some banks may also require that the entity have an official seal.
If you are manufacturing / fabricating a product that you originally designed then it worth the effort, time and expense to have the design patented and then engage a service that monitors the patent. You must also make sure that there are no unauthorized distributors of your product, especially if those that are selling the product at the retail or wholesale level at prices lower than your authorized distributors.
E-Verify is an Internet based system operated by the Department of Homeland Security (DHS) in partnership with the Social Security Administration (SSA). The service is free and voluntary and allows participating employers to electronically verify and confirm the employment eligibility (legal working status) and the the validity of the Social Security Number of their newly hired employees.
Another challenge is getting customers to pay your invoice in a timely manner and that their payment is good. When bounced check payments are too small for Small Claims Court or for a collection agency then one may have to contact the local District Attorney's office. One may also sign on with (for a fee) a private check service program that will approve and guarantee payments by check.
Contrary to popular belief, the U.S. Department of Labor indicates that there is no federal law that requires a coffee break or a lunch break. However, it is really good operating policy to provide one but each company is free to regulate the time provided for such breaks.
Self-mployed persons and their employees may have a Health Savings Account (HSA) as long as they are enrolled in a qualified high deductable health plan (HDHP) with a minimum deductable of $1,100 for individuals and $2,200 for families, and are not covered under another health plan (including Medicare). An employee's contributions are tax deductable and the unused balance in the HSA at the end of the year may be rolled over into the next calendar year. There is no requirement that an employer match an employee's contribution into their HSA.
Select specific markets (market segmentation) to serve, which is the same as asking who are your target customers? The product or service may be applicable to several different types of businesses and this requires very good research. Do you also need to go outside of your immediate geographical area? Can you discern any type of change in attitudes or developing trends (for instance, people trying to eat healthier food) that you can serve?
To connect with a customer figure out how to satisfy their needs. That means taking a good, long look at them and determine what their competitive advantage(s) are and how does your product or service assist them to meet their objectives. Essentially: how are you going to help tham make money or solve a problem? Again, are there change in attitudes or developing trends that you can assist them address? Do you need to tailor your company's product offerings or service, prices, or distribution to accommodate the customer? Admittedly, it is very difficult to determine needs which currently are not being met in the market place but that is the key to success.
The purchase of mailing lists from list brokers, magazines, or other companies can be fairly expensive, especially after factoring in the cost to contact the persons / companies on the list.
Physical location is very important: high traffic and visibility are critical for certain types of services and products. However, location is less of a concern for products or services that customers are willing to go out of their way to locate or the business sells on-line. Secondly, there is an issue of cost: the greater the traffic and visibility (for instance, a shopping mall) the higher the rental expense.
Good customer service is essential to retaining customers. Once you have a customer make sure that you are available by telephone, listen carefully to what they are saying and provide a rapid response to questions or requests.
It is very important to know who your competitors are and what are their strategies. What does it appear that they are doing correctly or incorrectly and what can you learn from that? How do / can you serve customers better than the competition?
Do not confuse a Business Plan with a Financing Proposal. The Business Plan is the outline of how the business will be organized, what the goals are, what activities will engaged in and carried out in order to achieve those goals, and how the business wil be managed and operated. The Financing Proposal is prepared for a potential lender and it includes the Business Plan and then indicates the amount of financing that is being sought, how it will be utilized and how it will be repaid. The Business Plan is written before the business starts or is entering a new market or product line. The Financing Proposal is always written after the Business Plan.
There are some general guidelines but a Business Plan always has to customized for the specific business functions and specific business objectives. Please note with regard to the writing style of the plan: leave out the superlatives and most adjectives.
As indicated above, a Financing Proposal would include a section titled Financing Request, which would be inserted perhaps just after the Executive Summary. The proposal would cover the amount requested, an accurate estimate of the rate and terms, collateral (if any), how the loan will be utilized, how the loan would be repaid, and the owner's equity contribution to the company (to demonstrate that the principal is also willing to risk their own funds / assets). A loan applicant's chance of approval increases substantially with the submittal of a concise plan rather than just assembling documentation and then placing the financial institution in the position that they have to figure everything out on their own
Merchant account cash advance services provide financing to small businesses and obtain repayment from from the merchant's monthly credit card (Visa, MasterCard, American Express and/or Discover) dollar sales amount. The cash advance company usually enters into an arrangement with the credit card processing service to have the amount collected directly. Typically, there is no fixed payment schedule. Rather, the monthly payment includes a premium, which equates to an interest cost of money. The cash advance company usually advances a percentage of the monthly credit card processing average balance (there is usually a minimum monthly average requirement). The advance term is usually six months to one year, and can be extended again as long as the first advance was paid as agreed. The advantage to the business owner is that the application requirements are low: no tax returns, no financial statements, no application fees, just copies of the monthly report from the credit card transaction processors. The advantage to the cash advance company is that the premium charged with the monthly payment is substantial, usually in excess of commercial credit card rates and certainly higher than traditional loans from a financial institution. The largest company in the industry is AdvanceMe (a wholly owned subsidiary of Capital Access Network), and the industry as a whole advances just under $1 billion per annum to U.S. businesses.
A local or regional chamber of commerce can assist all size and type of businesses with locating customers and suppliers, services directory, licensing and tax issues, local promotions, partnerships, advice and support, and available resources.
Directory of U.S. State, Regional, County and City Chambers of Commerce
Alaska Division of Corporations, Business, and Professional Licensing www.commerce.state.ak.us/occ/home.htm
Alaska Office of Economic Development: Small Business Development www.commerce.state.ak.us/oed/smallbus/home.cfm
American Association of Franchisees and Dealers www.aafd.org/
Arizona Small Business Association (ASBA) www.asba.com/
Arkansas Small Business and Technology Development Center asbdc.ualr.edu/
Florida Small Business Development Center www.floridasbdc.com/
Florida State Business Portal www.myflorida.com/taxonomy/business/
FRANdata Franchise Registry www.franchiseregistry.com/
Hawaii Department of Business, Economic Development & Tourism hawaii.gov/dbedt
Illinois Department of Business Services www.sos.state.il.us/departments/business_services/home.html
Internal Revenue Service, Small Business and Self-Employed One-Stop Resource www.irs.gov/businesses/small/index.html
Iowa Business & Economic Development www.iowa.gov/state/main/business.html
Iowa Small Business Development Center www.iowasbdc.org/
Kansas Business www.state.ks.us/business/
Missouri Merchants & Manufacturers Association (MMMA) www.mmma.org/
Missouri Small Business Advocacy Center www.sos.mo.gov/business/sbac/
National Association of Development Companies (NADCO) www.nadco.org/
National Business Association (NBA) www.nationalbusiness.org/
Nevada Department of Business & Industry dbi.state.nv.us/
Nevada Small Business Development Center www.nsbdc.org/
New Jersey Business Portal www.nj.gov/njbusiness/
Occupational Safety & Health Administration (OSHA), U.S. Department of Labor www.osha.gov/
Social Security Department, Employer W-2 Filing Instructions & Information www.socialsecurity.gov/employer/
SBA Financial Assistance Forms www.sba.gov/tools/Forms/smallbusinessforms/fsforms/index.html
SBA Forms www.sba.gov/aboutsba/sbaprograms/elending/lgpc/forms/index.html
Alternative SBA Forms www.sba.gov/tools/Forms/SBApartnerforms/lenderforms/index.html
SBA Franchising Strategy www.sba.gov/content/franchising-strategy
SBA Local Resources www.sba.gov/localresources/index.html (locate a district office)
SBA Small Business Planner www.sba.gov/smallbusinessplanner/index.html
Small Business Association of Michigan (SBAM) www.sbam.org/
Smaller Business Association of New England (SBANE) www.sbane.org/
Small Business California www.smallbusinesscalifornia.org/
Texas Business and Consumer Services www.state.tx.us/category.jsp?language=eng&categoryId=2
United States Patent and Trademark Office (USPTO) www.uspto.gov/
Virginia Department of Business Assistance www.dba.virginia.gov/
Washington State Department of Licensing www.dol.wa.gov/business/