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Part 1: Basic Types of Business Structures
A. Sole Proprietorship. A sole proprietorship is a business owned by one individual, and it is not incorporated. It is the easiest business structure to establish, but it provides the least amount of protection to the owner. All business liabilities become the owner’s personal liabilities. All income and expenses of the business are placed on the owner’s personal income tax return. As a sole proprietor, the owner may be liable for income taxes, self employment taxes, Social Security, and Medicare taxes (FICA).
Disadvantages:The owner is personally liable for all business’s debts, and liability is not limited to the value of the business. The owner is personally liable for any and all debt incurred.It is usually more difficult to borrow money or obtain outside investment with a sole proprietorship than with other types of business structures.If the owner becomes ill for any reason, the business is likely to fail.All management responsibility is with the owner.
Establishing a Sole Proprietorship:In order to establish a sole proprietorship, the owner should:Obtain local business licenses.Check on local zoning ordinances, regulations, and other land use restrictions.Determine if your particular business requires a state license to operate. Find out if any federal permits or licenses are required. File with your appropriate county official for the business name, then file an affidavit of publication. These guidelines apply to almost all states. Please check with your county clerk to make sure you are adhering to your states rules.Locate a good insurance agent to obtain fire, accident, liability, and theft insurance. You may operate your business out of your home and have no employees. Yet there is a possibility that a fire occurs, or some of your property is stolen. So when making the decision as to whether or not you need insurance and how much that you’re going to need take your time to think things through and take everything into account.Obtain an accountant. All profits and losses from the business are to be reported on your personal income tax.
When you file the paperwork with the county clerk to conduct business under any name other than your own, your business becomes known as, for example, John Smith d/b/a (doing business as) Acme Plumbing. You must file paperwork to obtain a d/b/a name if you wish to open a bank account under any name other than your own.
B. PartnershipA general partnership is similar to doing business as a sole proprietor except there are more than one owner has partners with whom to share the business’s losses and gains. The owners do not have the same liability protection as with a corporation or limited liability company, but a partnership is a fast way to get a business started.
Advantages:Partnerships are basically as easy to establish as sole proprietorships.The profits from the business flow directly through to the partners personal tax returns.You don’t have to register with your state and pay a fee, as you do to establish a corporation or limited liability company.
Disadvantages:Partnerships may have different business objectives and visions.Business debts and liabilities the partners are personally liable for.Each partner’s commitments to the business may not be equal.Personal quarrels may occur.
Establishing a Partnership:In order to establish a partnership, the owners should:Obtain local business licenses.Check on local zoning ordinances, regulations, and other land use restrictions.Determine if your particular business requires a state license to operate. Find out if any federal permits or licenses are required. File with your appropriate county official for the business name, then file an affidavit of publication. These guidelines apply to almost all states. Please check with your county clerk to make sure you are adhering to your states rules.Get an EIN Employee Identification Number from IRS using form SS-4.Draft written agreement between the partners determining a financial plan, management responsibilities, day to day activities, etc.Locate a good insurance agent to obtain fire, accident, liability, and theft insurance. You may operate your business out of your home and have no employees. Yet there is a possibility that a fire occurs, or some of your property is stolen. So when making the decision as to whether or not you need insurance and how much that you you’re your time to think things through and take everything into account.Obtain an accountant. All profits and losses from the business are to be reported on your personal income tax.
When you file the paperwork with the county clerk to conduct business under any name other than your own, your business becomes known as, for example, John Smith d/b/a (doing business as) Acme Plumbing. You must file paperwork to obtain a d/b/a name if you wish to open a bank account under any name other than your own.
C. S CorporationAn S Corp is a special type of corporation, of particular interest to sole proprietorships or partners. An entrepreneur who is interested in incorporating his or her business to limit personal liability assets may choose to do so through an S Corp. The S Corp allows the entrepreneur to protect his or her assets in the event of business failure. A simple sole proprietorship or partnership does not provide this protection.
Advantages:1. The S corporation has shareholders and is taxed like a sole proprietorship or partnership.2. The owner has the protection of limited liability without having to pay corporate taxes.3. The corporation is a separate legal entity. This means a corporation can open a bank account, own property, and do business under the corporation’s name, protecting the owner’s personal name.4. Earnings of an S Corporation—after paying a reasonable salary to the shareholders—can be passed through as distributions of profits, and are not subject to self-employment taxes.
Disadvantages:1. S Corps are not treated the same in every state. In some states an S Corp is treated like any other corporation regarding tax liability. It is important to seek professional advice before committing to set up an S corp. I placed this in the disadvantage area because S Corps in general are not the same size companies as C Corps which are publicly traded and revenue is much greater.2. There are restrictions on who can be owners (shareholders) of an S Corporation. An S Corporation can have no more than seventy-five shareholders, and none of the shareholders can be non-resident aliens. Also, shareholders cannot be other corporations or LLCs.
Establishing an S Corp:To form an S Corp you must file articles of incorporation with the Secretary of State. An S Corp is formed by filing incorporation documents with your state’s department of state, department of corporations, or other appropriate department. Once the business has incorporated, the owners may decide to file taxes as an S Corporation.
D. Limited Liability Company (LLC)An LLC is a type of company, authorized to exist only in certain states, whose owners and managers receive the limited liability and (usually) tax benefits of an S Corporation without having to conform to the S Corporation restrictions.
Advantages:1. The LLC allows for multiple owners or members. Additionally, there is a managing member who also enjoys the rewards of limited liability, and is typically the person responsible for managing the business.2. The profits or losses of the business pass directly through to the owner’s personal income tax return on Form 1040. The LLC files a Form 1065, and then lists each member’s taxable profit on Form K-1. In other words, the LLC does not file taxes.3. An LLC offers greater flexibility in ownership and ease of operation. The owners of an LLC can distribute profits in any manner they see fit. For example, you and a partner are owners of an LLC. Your partner contributed forty thousand dollars for capital. You only contributed ten thousand dollars, but you perform 90 percent of the work. The two of you decide that, in the interest of fairness, you will split the profits evenly, meaning you will get 50 percent and your partner will receive 50 percent. This is possible to do with an LLC, whereas other business structures do not allow such flexibility.
Disadvantages:Earnings of most members are generally subject to self-employment tax. There are other disadvantages that should be researched. LLC is the newest of all the business structures, so you will need an experienced tax professional to explain all its details.There is not one guideline which governs how Limited Liability Companies operate within all states. So if an LLC conducts business within many states there is a possibility it may not receive the same treatment.Conversion of an existing business to LLC company status could result in tax recognition on appreciated assets.Not all businesses can be formed as an LLC. Businesses in trust and insurance and banking are in most instances prohibited from forming an LLC.In California, accountants, architects, lawyers, doctors and other licensed healthcare professionals are restricted from forming their business as a LLC.
Establishing an LLC:Choose an available business name.File articles of organization and pay filing fee which can range anywhere from $100 to $800.Obtain any licenses and permits your business needs. The licenses all depend on the type of business you’re starting.Publish your notice of intent to form an LLC (this is only required within a few states). Check with your accountant, attorney or the business organization that you’re seeking to assist you with forming your LLC.
There are several business savvy websites like legalzoom.com, and limitedliabilitycompanycenter.com, sba.gov, nolo.com, irs.gov, incorporate.com and bizfiling.com so get on your pc and get going. There is a saying which is so true, “A man who fails plan plans to fail”.
Part 2: Writing a Business Plan
A business plan is a carefully thought out document detailing the steps you will take to develop a financially successful business. Preparing your business plan will help you think through every aspect of your business. If your proposed business needs investors or a loan, the first thing lenders want to see is a business plan.A business plan will serve as an assessment tool. As you work through the points in your plan, you can fix or reevaluate your ideas. Once your business is up and running, your business plan will help you keep on track and move forward to the goals you established when first thinking about the business.Your business plan should consist of four to six sections: introduction or executive summary, marketing analyses, financial management, operations or strategy and implementation, mission statement and concluding statement. Below are short descriptions of each part of a business plan. Again there is no written rule in stone as to what titles you need to give each section, but it is a must that you cover everything from what you and your company are about to how it operates or will operate, financial history if any or future projections, marketing and how you plan to grow the company. I have also included the business plan I wrote for establishing a bookstore/kiosk division of Third Eye Publishing, Inc.
Introduction: Provide a detailed description of the business and its goals. Discuss the legal structure and ownership. Explain your experience and skills, and list the advantages your business and you have over the competition.
Marketing: Explain the products and services being offered. Identify the demographics of the customer base, i.e., its race, age, gender, etc. Explain the marketing and publicity you plan to use. Give an outline of your pricing strategy.
Financial Management: Include personal financial statements and income statement projections for the first three years of your business.
Business Operations: Provide an outline and schedule of all business activities with a description of hours and days of operation, equipment and supplies that are needed, as well as how inventory will be maintained.
Concluding Statement: In your concluding statement you will briefly summarize all the information in each section of your business plan to give an overall analysis of why you feel your business venture will be successful.
Sample Business PlanThird Eye Books & Things(Bookstore and vending division of Third Eye Publishing, Inc.)
Business Plan1.0 Executive SummaryRationale:More young African Americans are reading now than ever before in the history of the United States. With the rebirth of urban literature and stories that take place within urban settings, this genre has become one of the fastest growing markets in the book industry. In suburban areas most of the bookstores are large chain retail stores like Borders and Barnes & Noble that carry a very small selection of African American books. As an author I’ve toured most of the urban cities within the northeastern states and I’ve asked many of the store clerks who represents most of their customer base. I was surprised to find out that most of them told me African American women. I found this to be even the case for libraries in urban areas where I asked and would receive the same response from clerks.Third Eye Publishing, Inc. currently has two titles published, another releasing on November 20, 2007, and one more releasing December 15, 2007. Third Eye Books & Things will serve as a distribution center for Third Eye Publishing, Inc. (www.thirdeyepublishing.org and www.myspace.com/theroneshellman)
Objective:Third Eye Books & Things will be the bookstore/kiosk and vending division of Third Eye Publishing, Inc. It will carry Third Eye Publishing book titles and other African American titles, as well as children books, financial health literature, natural health and beauty products like soaps, face cream, Shea butter, lotions, and other paraphernalia such as posters and buttons.Its store market emphasis will be to exist as a satellite store (a booth or kiosk approximately ten feet by twelve feet) within a local flea market/mall location where there is a large customer base and the store overhead will be much lower than a store front in the mall. This location will serve as the headquarters for Third Eye Publishing, Inc.’s distribution operations.
1.1 MissionThird Eye Books & Things will develop into the premier location for local Long Island residents to buy African American books and natural healthcare products. Currently most Long Island customers cater to the street vendor market in such areas as Jamaica Avenue (Queens, New York, 125th Street in Harlem, New York). These areas are twenty-five to thirty-five miles away from Long Island. Since Third Eye Books & Things will be a booth that mimics the same model of the street vendor market, Long Island customers will be familiar with the setup, and be able to purchase book titles at discount off-retail prices much closer to home.
1.2 GoalsMake Third Eye Books & Things the premier location for Long Island residents to purchase African American books and natural healthcare products.Achieve a profitable return on investment within two years. Increase sales for Third Eye Publishing titles outside of the mainstream bookstores and street vendor market. Use the profits from Third Eye Books &Things to invest in printing machinery to create a Third Eye Publishing printing division so titles can be produced on demand. Within two years create a replica satellite Third Eye Books & Things at another flea market/mall location.
2.0 Company SummaryThird Eye Books & Things will be a Long Island retailer and distributor of Third Eye Publishing books, other African American titles, financial literacy material, and natural healthcare products and paraphernalia. The company will be formed as a division of Third Eye Publishing, Inc.
2.1 Company OwnershipThird Eye Publishing, Inc. has one principle owner—Therone Shellman. Third Eye Books & Things will have the same principle owner.
2.2 Projected Start-up Financial Plan Start-up Requirements: Store furniture (bookshelves, product stands, tables, counter) $2,500Wireless credit card machine $1,000Equipment-Computer, cash register, fax machine, copier-scanner-phone $2,000Inventory: books and products $6,000Computer software-inventory $600Marketing (business cards, postcards, local newspaper ads, newsletter) $1,000Rent (one month/plus one month security) $2,000-$4,000Total Start-up Expenses $15,100-$17,100
Start-up Assets: Start-up Inventory: Three Third Eye Publishing titles $3,000Total Start-up Assets $3,000
Immediate Liabilities: Not applicable. Kiosks within flea market locations are covered under the flea market’s insurance.
Total Start-up Expenses (from above)$15,100-$17,100Total Assets (from above): $3,000Total Loan Amount Needed: $12,100-$14,100
2.3 Company Location and FacilitiesThird Eye Books & Things will be located within a busy mall in Suffolk County or Nassau County, Long Island (New York). The mall is open seven days a week. People from all over Long Island and the county of Queens come to shop at this location since it houses the most jewelry centers within Long Island, as well as affordable clothing. The booth/kiosk will be the only one in the mall that sells books and natural soaps, oils, and skin care products.
3.0 Market Analysis SummaryAccording to online reports of book sales African American books represent one of the largest segment of growth within the book market. According to publishing industry experts, the trend is expected to continue, and reach, if not surpass, the financial success in the hip-hop industry, which is in the trillions of dollars. Health is always a main concern for people, which makes the healthcare product industry a profitable industry in which to get involved. By combining the two markets of books and healthcare products at an outlet where people can feed their minds and take care of their skin and hair, Third Eye Books & Things will cater to a broad customer base that will extend beyond the African American market.
3.1 Target Market Segment StrategyThe target market profile is Long Island residents who represent many class and educational tiers. Most of the customer base travel considerable distances to purchase books and natural skin and healthcare products. These customers tend to be loyal to merchants who service all their needs at one location. This information I acquired by asking customers who purchased my own personal book titles at book signings. I used my book signings as a platform to do the research for my business plan and a guideline to what I need to do to create businesses which would service customers in the best way as possible.
Selling in Bulk Volume:Much of this business needs to be cultivated through opportunistic networking, and diligent follow-ups of in-store inquiries and leads.
Interstate-shipments:Interstate shipments will be contingent on expansion following the successful implementation of this business plan in the first year or two of operations. This business would develop through direct-mail catalog marketing (newsletter), and an Internet sales operation.
3.2 Market NeedsLittle attention is paid to the opportunities that exist in Long Island concerning African American literature and natural health, skin, and hair products. Brooklyn, New York is the only borough larger than Long Island, so there is a strong market for these products. I’ve lived in Long Island most of my life. Suffolk County to be exact and I have never seen a book store which carried a multitude of African American literature. Even as I did my research and visited beauty supply stores I rarely came across stores which carried a large selection of natural skincare products such as soaps, lotions, body butters, etc. Here you will find hair care products which are made for African Americans.
3.3 Competition and Buying PatternsCompetition in the book and healthcare products combination market is to a large degree non-existent. Third Eye Books & Things will carry Third Eye Publishing’s titles as well as other publishers’ titles, ranging from children’s books to financial wealth and spiritual literature. Titles will mainly be by African American authors. The healthcare products that will be sold include:The first two Third Eye Publishing, Inc. titles have sold about 3,500 copies within the Long Island market to date. President and author, Therone Shellman, is very well known by readers and book purchasers in the Long Island area, most of whom will become store customers of Third Eye Books & Things.
4.0 Strategy and ImplementationLocation is critical to attract the traffic and customer profile required to generate planned sales volumes. The malls represent the best retail opportunities because of their high volume of customer traffic. Three target areas were identified throughout Long Island.Therone Shellman, President of Third Eye Publishing, is a seasoned executive management professional, having previously worked as a production supervisor for Nature’s Bounty, Inc. He also authored Third Eye Publishing, Inc.’s first two titles. The first title, Love Don’t Live Here, released in August 2006, became a best selling title On Booking Matters Magazine which conducts sales of African American titles within a select number of African American stores. The second title, No Love Lost, was an award winner in the African American Fiction category at the Indie Excellence Book Awards in 2007. This title was also a finalist in the African American Fiction Category for USABookNews.com. Shellman is also the co-author of Love.com, which released on December 15, 2007. From his various business experiences and endeavors, Shellman is knowledgeable in general business, sales, and book buyer habits.
4.1 Revenue PotentialRegarding Third Eye Publishing’s titles, Third Eye Books & Things is forecasting average sales of eight hundred to one thousand books (ten dollars per book) for each title during the first year, four thousand to six thousand book sales (eight to fifteen dollars per book) from other publishers during the first year, and urban magazine sales of three hundred to six hundred copies (prices vary). Natural products—soaps, lotions, Shea butter, Muslim oils, and incense—will make up the bulk of the stores sales.
Sales Forecast:Sales FY2008 FY2009 FY2010Third Eye Publishing titles$20,000 $35,000 $45,000Other companies’ titles$40,000 $50,000 $60,000Soaps, lotions, Shea butter, oils$45,000 $50,000 $65,000Posters, buttons, etc $8,000 $12,000 $15,000
4.2 Sales ProgramThird Eye Publishing, Inc. has an established Web site (www.thirdeyepublishing.org) and myspace accounts:www.myspace.com/theroneshellmanwww.my...
A proprietary Web site will be created for Third Eye Books & Things to enhance customer service, supplier commerce, and direct sales. Peripheral sales and marketing collaterals (such as pens, refrigerator magnets, and buttons) will be used to expand product lines and customer awareness of the store.Therone Shellman is an author with three published titles who has done signings at many bookstores. He knows how to present his merchandise in a professional and eye-catching manner. The booth layout for Third Eye Books & Things will be personally overseen by Shellman.
4.3 Strategic Alliance/Concluding StatementTherone Shellman belongs to many writer and publisher organizations. Third Eye Books & Things will seek out opportunities to establish viable strategic alliances with authors, publishing companies, and community organizations. Third Eye Books & Things will enable Third Eye Publishing, Inc. to expand as a recognizable brand. Third Eye Publishing will then enable Third Eye Books & Things to flourish since the Third Eye Publishing’s titles will provide a ready-made customer base for Third Eye Books & Things.
Part 3: Finding Capital for Your Business
There are many options to consider when looking for start-up capital for your business. It’s a good idea to think things through and evaluate all your options before making any decisions.
A. Personal Savings Most new businesses are financed primarily by the business owner’s personal savings. Most owners will use their personal credit cards. Although your personal savings may be the easiest route to take, remember that most businesses fail because of a lack of resources. In most cases, a lack of knowledge and capital cause businesses to close within the first year.
B. Friends and Relatives Your friends and relatives may lend you start-up money, and do so interest free or at a low interest rate, which can be a bonus. Every dollar saved when getting started is a big plus.
C. Banks and Credit Unions If your business proposal is solid and thorough, then there is a very good chance for you to obtain a business loan. I will talk more about the different types of business loans below.
D. Venture Capital Firms These firms do provide funding to some start-ups, but in most cases they help expanding companies grow in exchange for interest on the loan or partial ownership of the company.
Business Loans
Most people assume that it is very difficult to obtain a small business loan, but this is not always the case. If you have a felony on your record, then you may have some difficulty obtaining a loan. In that case, you may want to search for SBA programs where the qualifications are less strict. But other than that issue, a sound business loan proposal along with a good credit rating should get you in the door.Requesting a loan when you do not have everything together is one of the main reasons why loan proposals are turned down. It means you’re not prepared, and if you’re not prepared, you’re not going to be successful in business. Banks lend money to make money, not lose it. The better prepared and organized you are, the more successful you will be in obtaining a loan. You must know exactly how much capital you will request, how it will be used, and how it will be paid back.
Types of Business Loans There are two basic types of loans: short-term and long-term. In most cases, a short-term loan has a life of up to twelve months. These loans are usually working capital loans, accounts-receivable loans, and lines of credit.Long-term loans generally have a life span greater than one year and up to seven. Equipment and real estate loans have a life span of up to twenty-five years. Long-term loans are acquired for major business expenses such as purchasing facilities, furniture, and vehicles.
How Your Loan Proposal Will Be AnalyzedThe first question a bank considers when a loan request is reviewed is how the borrower intends to pay back the loan. Lenders also want to know whether you are intending to invest some of your own capital to fund the business. In most cases lenders will not finance 100 percent of the business. Lenders also analyze your credit report, work history, and letters of recommendation to determine whether you are a sound candidate to pay back the loan. Some other questions lenders consider are the following:
Do you have enough work experience and knowledge to run a business successfully?Does your loan proposal and business plan demonstrate your understanding of the business?Can the business make monthly payments based upon its cash flow demonstrated within the business plan?
Make sure you also consider each of these questions before approaching your lender for a loan. If you have positive answers to these questions, then you are more likely to get approved for your loan.
Small Business Association Financial Assistance ProgramsThe largest source of business financing in the U.S. is the Small Business Administration (SBA). The best way to determine if you qualify for one of the SBA’s programs is to contact your local bank. The bank must be a qualified SBA lender. Or you can contact the SBA directly and speak to a loan officer. He or she can direct you to a lending institution which can assist you according to your business loan needs. If you have the time stop by your bank and ask to speak to their loan officer. You may need to set up an appointment because most banks have a loan officer which may handle either a few or several branches. Once you get a chance to speak to them find out what SBA loans they participate in and what are the criteria of each. From there you’re on your way.Below are various loan programs offered by the SBA.
7(a) Loan Guaranty ProgramThe 7(a) Loan Guaranty Program is the SBA’s primary loan program. Under this program the SBA reduces risk to lenders by guaranteeing a major portion of loans made to small businesses. This helps lenders provide loans to small businesses when funding in other cases is unavailable. This loan program should be a last resort option for owners trying to obtain funds. The eligibility requirements and credit criteria for the program are very broad, so they allow for many considerations in small business financing needs. To qualify for an SBA 7(a) loan, a small business must meet the 7(a) criteria, and the lender must assert that it cannot provide the financing on reasonable terms except with assistance from the SBA. In most cases the maximum guarantee is seven hundred fifty thousand dollars. The SBA can guarantee as much as 80 percent on loans of up to one hundred thousand dollars, and 75 percent on loans of more than one hundred thousand dollars. There are other loan programs where the SBA guarantees more. Some of these programs are DELTA, 504 loan programs, and the International Trade program.
How It HappensA small business applies to a lending institution for a loan; the lender reviews the application and decides if the business has all the necessary requirements to obtain financing on its own, or if it requires additional support in the form of an SBA guarantee. The lender then requires that the SBA back the loan. Under this program, the SBA guarantees the lender that in the event the borrower does not pay back the loan, the government will.If the lender approves the loan based on an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds. You then make monthly loan payments directly to the lender. Repayment plans may be specially tailored to each business. There are no balloon payments, prepayment penalties, or application fees.
Financing UsesPermitted uses for a 7(a) loan are very broad and include expanding or renovating facilities, purchasing machinery, equipment, and fixtures, improving the leasehold, financing receivables, keeping on-hand working capital, and refinancing existing debt.
Interest Rates, Fees, and TermsThe repayment length of time depends on how the proceeds are intended to be used, and the ability of the business to repay. Payment terms in most cases are five to ten years for working capital, and up to twenty-five years for fixed assets such as major renovation of real estate, or the purchase thereof. The purchase of equipment can also fall under fixed assets.Both fixed and variable interest rates are available. For loans under fifty thousand dollars, rates may be slightly higher than 2.75 percent. But for loans with maturities under seven years, rates are somewhere around 2.25 percent. The SBA charges the lending institution a fee to provide the guaranty, and in most cases the lender passes this charge on to the borrower.
CollateralPersonal guarantees are required from all the principal owners of the business. Liens on personal assets of the owners may be required. In most cases a loan will not be declined where sufficient collateral is the only criteria not met. This is so because the SBA depending on the loan amount can guarantee up to 80 percent of the loan.
EligibilityTo be eligible for a 7(a) loan, the business must be operated for profit and fall within the size standards set by the SBA. A business is deemed a small business based on the average number of employees during a twelve-month period, or on sales averaged over three years. A manufacturing business can have from 500-1,500 employees, and a wholesaling business can have 1-100 employees.
What You Need for The Lender’s ReviewDocumentation requirements may vary, so contact your lender for the specific information you must supply. Below is a list of some of the documentation and information you must provide.1. Purpose of loan.2. History of the business.3. Amount of investment in business by owners.4. Signed personal financial statements.5. Personal resumes.6. Financial statements for three years (existing businesses)
There are a number of specialized programs under 7(a) that address specific needs of new and established businesses. These specialized programs are all usually governed by the same rules, so make sure you speak to your lender or an SBA loan officer about your available options.
Low Documentation Loan (LowDoc)One of the SBA’s most popular loan programs is the LowDoc program. If you meet the requirements of your lender, LowDoc only requires a simple one-page SBA application form. The LowDoc is a way to get rapid approval for loans up to one hundred thousand dollars. For loans over fifty thousand dollars, you must also provide a copy of U.S. Income Tax Schedule C, or the front page of the corporate or partnership returns for the past three years. The SBA guarantees up to 80 percent of the loan amount. Applications are usually processed within two to three business days. The funds cannot be used to repay most existing debt.
FastrakThis program allows lenders to provide capital to businesses seeking loans up to one hundred thousand dollars without SBA approval. Lenders use their existing documents and procedures to make and service loans. The SBA guarantees up to 50 percent of a Fastrak loan. Maturities are usually five to seven years. Be aware that not all lenders participate in the Fastrak program.
CAPLinesUnder this program there are five short term loans and revolving lines of credit for the working capital needs of businesses. CAPLines may be used to finance direct costs for construction needs, service supply contracts, finance direct costs associated with commercial and residential construction, and finance working capital by obtaining advances against inventory and accounts receivables.
International Trade LoanThis program is designed for businesses engaged in international trade, or those preparing to engage in international trade. This loan is for short-term and long-term financing. The SBA can guarantee up to $1.25 million for a combination of fixed asset financing and permanent working capital.
The Export Working Capital Program (EWCP)The EWCP uses a one-page application form, and turnaround time is usually within ten days. This program was designed specifically for exporters seeking short-term working capital. The SBA guarantees up to 90 percent of the principal, and interest up to seven hundred fifty thousand dollars. You can also apply for a letter of prequalification from the SBA. A EWCP loan can combine with an international trade loan as long as the SBA’s exposure is not above $1.25 million.
504 Certified Development CompaniesThese non-profit organizations are sponsored by private interests or by state and local governments. The SBA can cover as much as 40 percent of a 504 project up to $1 million. Proceeds from 504 loans must be used for fixed-asset projects such as purchasing land, construction of new facilities, renovation of existing facilities, or purchasing machinery and equipment. The 504 program cannot be used for working capital or inventory, or for repaying debt.
The 7(m) Microloan ProgramThis program provides small loans up to twenty-five thousand dollars. The average loan is ten thousand dollars. This is a pilot program available at a limited number of lenders. With this loan the SBA makes funds available to intermediary non-profit organizations, and in turn these organizations make loans to small businesses.
The Small Business Investment Company (SBIC)SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans. SBICs are for-profit firms whose purpose is to share in the success of a small business. The SBIC program is regulated by the SBA, and is designed for new or established businesses.
Women’s Pre-Qualification Loan ProgramSelected non-profit intermediaries work with applicants to develop a viable business plan and loan application. A loan request is then presented to the SBA, and in most cases a decision is made within three business days. Upon approval, the SBA provides a letter of prequalification. The applicant can then take this letter to a lending institution and apply for an SBA guaranteed loan of up to two hundred fifty thousand dollars. Contact your local SBA office to check for other requirements regarding approval.
The Minority Pre-Qualification Pilot Loan ProgramThis program utilizes local, private sector organizations as intermediaries to assist in the loan process. A prospective borrower works with the intermediary to develop a solid loan application. The application is then sent immediately to the SBA for consideration of a loan pre-qualification. Generally the loan application is for loans of two hundred fifty thousand dollars or less. Businesses that are 51% owned and managed by a racial or ethnic minority person(s), or not engaged in rental real estate are eligible.
Before you go into business, do your research. Contact your local branch of the Service Core of Retired Executives (SCORE). SCORE provides counseling and assistance on how to put together a business plan, and it will link you with someone who has previous work experience, or ownership of the type of business you would like to open. You may also contact the SBA for information on counseling and lending programs.
Part 1: Basic Types of Business Structures
A. Sole Proprietorship. A sole proprietorship is a business owned by one individual, and it is not incorporated. It is the easiest business structure to establish, but it provides the least amount of protection to the owner. All business liabilities become the owner’s personal liabilities. All income and expenses of the business are placed on the owner’s personal income tax return. As a sole proprietor, the owner may be liable for income taxes, self employment taxes, Social Security, and Medicare taxes (FICA).
Disadvantages:The owner is personally liable for all business’s debts, and liability is not limited to the value of the business. The owner is personally liable for any and all debt incurred.It is usually more difficult to borrow money or obtain outside investment with a sole proprietorship than with other types of business structures.If the owner becomes ill for any reason, the business is likely to fail.All management responsibility is with the owner.
Establishing a Sole Proprietorship:In order to establish a sole proprietorship, the owner should:Obtain local business licenses.Check on local zoning ordinances, regulations, and other land use restrictions.Determine if your particular business requires a state license to operate. Find out if any federal permits or licenses are required. File with your appropriate county official for the business name, then file an affidavit of publication. These guidelines apply to almost all states. Please check with your county clerk to make sure you are adhering to your states rules.Locate a good insurance agent to obtain fire, accident, liability, and theft insurance. You may operate your business out of your home and have no employees. Yet there is a possibility that a fire occurs, or some of your property is stolen. So when making the decision as to whether or not you need insurance and how much that you’re going to need take your time to think things through and take everything into account.Obtain an accountant. All profits and losses from the business are to be reported on your personal income tax.
When you file the paperwork with the county clerk to conduct business under any name other than your own, your business becomes known as, for example, John Smith d/b/a (doing business as) Acme Plumbing. You must file paperwork to obtain a d/b/a name if you wish to open a bank account under any name other than your own.
B. PartnershipA general partnership is similar to doing business as a sole proprietor except there are more than one owner has partners with whom to share the business’s losses and gains. The owners do not have the same liability protection as with a corporation or limited liability company, but a partnership is a fast way to get a business started.
Advantages:Partnerships are basically as easy to establish as sole proprietorships.The profits from the business flow directly through to the partners personal tax returns.You don’t have to register with your state and pay a fee, as you do to establish a corporation or limited liability company.
Disadvantages:Partnerships may have different business objectives and visions.Business debts and liabilities the partners are personally liable for.Each partner’s commitments to the business may not be equal.Personal quarrels may occur.
Establishing a Partnership:In order to establish a partnership, the owners should:Obtain local business licenses.Check on local zoning ordinances, regulations, and other land use restrictions.Determine if your particular business requires a state license to operate. Find out if any federal permits or licenses are required. File with your appropriate county official for the business name, then file an affidavit of publication. These guidelines apply to almost all states. Please check with your county clerk to make sure you are adhering to your states rules.Get an EIN Employee Identification Number from IRS using form SS-4.Draft written agreement between the partners determining a financial plan, management responsibilities, day to day activities, etc.Locate a good insurance agent to obtain fire, accident, liability, and theft insurance. You may operate your business out of your home and have no employees. Yet there is a possibility that a fire occurs, or some of your property is stolen. So when making the decision as to whether or not you need insurance and how much that you you’re your time to think things through and take everything into account.Obtain an accountant. All profits and losses from the business are to be reported on your personal income tax.
When you file the paperwork with the county clerk to conduct business under any name other than your own, your business becomes known as, for example, John Smith d/b/a (doing business as) Acme Plumbing. You must file paperwork to obtain a d/b/a name if you wish to open a bank account under any name other than your own.
C. S CorporationAn S Corp is a special type of corporation, of particular interest to sole proprietorships or partners. An entrepreneur who is interested in incorporating his or her business to limit personal liability assets may choose to do so through an S Corp. The S Corp allows the entrepreneur to protect his or her assets in the event of business failure. A simple sole proprietorship or partnership does not provide this protection.
Advantages:1. The S corporation has shareholders and is taxed like a sole proprietorship or partnership.2. The owner has the protection of limited liability without having to pay corporate taxes.3. The corporation is a separate legal entity. This means a corporation can open a bank account, own property, and do business under the corporation’s name, protecting the owner’s personal name.4. Earnings of an S Corporation—after paying a reasonable salary to the shareholders—can be passed through as distributions of profits, and are not subject to self-employment taxes.
Disadvantages:1. S Corps are not treated the same in every state. In some states an S Corp is treated like any other corporation regarding tax liability. It is important to seek professional advice before committing to set up an S corp. I placed this in the disadvantage area because S Corps in general are not the same size companies as C Corps which are publicly traded and revenue is much greater.2. There are restrictions on who can be owners (shareholders) of an S Corporation. An S Corporation can have no more than seventy-five shareholders, and none of the shareholders can be non-resident aliens. Also, shareholders cannot be other corporations or LLCs.
Establishing an S Corp:To form an S Corp you must file articles of incorporation with the Secretary of State. An S Corp is formed by filing incorporation documents with your state’s department of state, department of corporations, or other appropriate department. Once the business has incorporated, the owners may decide to file taxes as an S Corporation.
D. Limited Liability Company (LLC)An LLC is a type of company, authorized to exist only in certain states, whose owners and managers receive the limited liability and (usually) tax benefits of an S Corporation without having to conform to the S Corporation restrictions.
Advantages:1. The LLC allows for multiple owners or members. Additionally, there is a managing member who also enjoys the rewards of limited liability, and is typically the person responsible for managing the business.2. The profits or losses of the business pass directly through to the owner’s personal income tax return on Form 1040. The LLC files a Form 1065, and then lists each member’s taxable profit on Form K-1. In other words, the LLC does not file taxes.3. An LLC offers greater flexibility in ownership and ease of operation. The owners of an LLC can distribute profits in any manner they see fit. For example, you and a partner are owners of an LLC. Your partner contributed forty thousand dollars for capital. You only contributed ten thousand dollars, but you perform 90 percent of the work. The two of you decide that, in the interest of fairness, you will split the profits evenly, meaning you will get 50 percent and your partner will receive 50 percent. This is possible to do with an LLC, whereas other business structures do not allow such flexibility.
Disadvantages:Earnings of most members are generally subject to self-employment tax. There are other disadvantages that should be researched. LLC is the newest of all the business structures, so you will need an experienced tax professional to explain all its details.There is not one guideline which governs how Limited Liability Companies operate within all states. So if an LLC conducts business within many states there is a possibility it may not receive the same treatment.Conversion of an existing business to LLC company status could result in tax recognition on appreciated assets.Not all businesses can be formed as an LLC. Businesses in trust and insurance and banking are in most instances prohibited from forming an LLC.In California, accountants, architects, lawyers, doctors and other licensed healthcare professionals are restricted from forming their business as a LLC.
Establishing an LLC:Choose an available business name.File articles of organization and pay filing fee which can range anywhere from $100 to $800.Obtain any licenses and permits your business needs. The licenses all depend on the type of business you’re starting.Publish your notice of intent to form an LLC (this is only required within a few states). Check with your accountant, attorney or the business organization that you’re seeking to assist you with forming your LLC.
There are several business savvy websites like legalzoom.com, and limitedliabilitycompanycenter.com, sba.gov, nolo.com, irs.gov, incorporate.com and bizfiling.com so get on your pc and get going. There is a saying which is so true, “A man who fails plan plans to fail”.
Part 2: Writing a Business Plan
A business plan is a carefully thought out document detailing the steps you will take to develop a financially successful business. Preparing your business plan will help you think through every aspect of your business. If your proposed business needs investors or a loan, the first thing lenders want to see is a business plan.A business plan will serve as an assessment tool. As you work through the points in your plan, you can fix or reevaluate your ideas. Once your business is up and running, your business plan will help you keep on track and move forward to the goals you established when first thinking about the business.Your business plan should consist of four to six sections: introduction or executive summary, marketing analyses, financial management, operations or strategy and implementation, mission statement and concluding statement. Below are short descriptions of each part of a business plan. Again there is no written rule in stone as to what titles you need to give each section, but it is a must that you cover everything from what you and your company are about to how it operates or will operate, financial history if any or future projections, marketing and how you plan to grow the company. I have also included the business plan I wrote for establishing a bookstore/kiosk division of Third Eye Publishing, Inc.
Introduction: Provide a detailed description of the business and its goals. Discuss the legal structure and ownership. Explain your experience and skills, and list the advantages your business and you have over the competition.
Marketing: Explain the products and services being offered. Identify the demographics of the customer base, i.e., its race, age, gender, etc. Explain the marketing and publicity you plan to use. Give an outline of your pricing strategy.
Financial Management: Include personal financial statements and income statement projections for the first three years of your business.
Business Operations: Provide an outline and schedule of all business activities with a description of hours and days of operation, equipment and supplies that are needed, as well as how inventory will be maintained.
Concluding Statement: In your concluding statement you will briefly summarize all the information in each section of your business plan to give an overall analysis of why you feel your business venture will be successful.
Sample Business PlanThird Eye Books & Things(Bookstore and vending division of Third Eye Publishing, Inc.)
Business Plan1.0 Executive SummaryRationale:More young African Americans are reading now than ever before in the history of the United States. With the rebirth of urban literature and stories that take place within urban settings, this genre has become one of the fastest growing markets in the book industry. In suburban areas most of the bookstores are large chain retail stores like Borders and Barnes & Noble that carry a very small selection of African American books. As an author I’ve toured most of the urban cities within the northeastern states and I’ve asked many of the store clerks who represents most of their customer base. I was surprised to find out that most of them told me African American women. I found this to be even the case for libraries in urban areas where I asked and would receive the same response from clerks.Third Eye Publishing, Inc. currently has two titles published, another releasing on November 20, 2007, and one more releasing December 15, 2007. Third Eye Books & Things will serve as a distribution center for Third Eye Publishing, Inc. (www.thirdeyepublishing.org and www.myspace.com/theroneshellman)
Objective:Third Eye Books & Things will be the bookstore/kiosk and vending division of Third Eye Publishing, Inc. It will carry Third Eye Publishing book titles and other African American titles, as well as children books, financial health literature, natural health and beauty products like soaps, face cream, Shea butter, lotions, and other paraphernalia such as posters and buttons.Its store market emphasis will be to exist as a satellite store (a booth or kiosk approximately ten feet by twelve feet) within a local flea market/mall location where there is a large customer base and the store overhead will be much lower than a store front in the mall. This location will serve as the headquarters for Third Eye Publishing, Inc.’s distribution operations.
1.1 MissionThird Eye Books & Things will develop into the premier location for local Long Island residents to buy African American books and natural healthcare products. Currently most Long Island customers cater to the street vendor market in such areas as Jamaica Avenue (Queens, New York, 125th Street in Harlem, New York). These areas are twenty-five to thirty-five miles away from Long Island. Since Third Eye Books & Things will be a booth that mimics the same model of the street vendor market, Long Island customers will be familiar with the setup, and be able to purchase book titles at discount off-retail prices much closer to home.
1.2 GoalsMake Third Eye Books & Things the premier location for Long Island residents to purchase African American books and natural healthcare products.Achieve a profitable return on investment within two years. Increase sales for Third Eye Publishing titles outside of the mainstream bookstores and street vendor market. Use the profits from Third Eye Books &Things to invest in printing machinery to create a Third Eye Publishing printing division so titles can be produced on demand. Within two years create a replica satellite Third Eye Books & Things at another flea market/mall location.
2.0 Company SummaryThird Eye Books & Things will be a Long Island retailer and distributor of Third Eye Publishing books, other African American titles, financial literacy material, and natural healthcare products and paraphernalia. The company will be formed as a division of Third Eye Publishing, Inc.
2.1 Company OwnershipThird Eye Publishing, Inc. has one principle owner—Therone Shellman. Third Eye Books & Things will have the same principle owner.
2.2 Projected Start-up Financial Plan Start-up Requirements: Store furniture (bookshelves, product stands, tables, counter) $2,500Wireless credit card machine $1,000Equipment-Computer, cash register, fax machine, copier-scanner-phone $2,000Inventory: books and products $6,000Computer software-inventory $600Marketing (business cards, postcards, local newspaper ads, newsletter) $1,000Rent (one month/plus one month security) $2,000-$4,000Total Start-up Expenses $15,100-$17,100
Start-up Assets: Start-up Inventory: Three Third Eye Publishing titles $3,000Total Start-up Assets $3,000
Immediate Liabilities: Not applicable. Kiosks within flea market locations are covered under the flea market’s insurance.
Total Start-up Expenses (from above)$15,100-$17,100Total Assets (from above): $3,000Total Loan Amount Needed: $12,100-$14,100
2.3 Company Location and FacilitiesThird Eye Books & Things will be located within a busy mall in Suffolk County or Nassau County, Long Island (New York). The mall is open seven days a week. People from all over Long Island and the county of Queens come to shop at this location since it houses the most jewelry centers within Long Island, as well as affordable clothing. The booth/kiosk will be the only one in the mall that sells books and natural soaps, oils, and skin care products.
3.0 Market Analysis SummaryAccording to online reports of book sales African American books represent one of the largest segment of growth within the book market. According to publishing industry experts, the trend is expected to continue, and reach, if not surpass, the financial success in the hip-hop industry, which is in the trillions of dollars. Health is always a main concern for people, which makes the healthcare product industry a profitable industry in which to get involved. By combining the two markets of books and healthcare products at an outlet where people can feed their minds and take care of their skin and hair, Third Eye Books & Things will cater to a broad customer base that will extend beyond the African American market.
3.1 Target Market Segment StrategyThe target market profile is Long Island residents who represent many class and educational tiers. Most of the customer base travel considerable distances to purchase books and natural skin and healthcare products. These customers tend to be loyal to merchants who service all their needs at one location. This information I acquired by asking customers who purchased my own personal book titles at book signings. I used my book signings as a platform to do the research for my business plan and a guideline to what I need to do to create businesses which would service customers in the best way as possible.
Selling in Bulk Volume:Much of this business needs to be cultivated through opportunistic networking, and diligent follow-ups of in-store inquiries and leads.
Interstate-shipments:Interstate shipments will be contingent on expansion following the successful implementation of this business plan in the first year or two of operations. This business would develop through direct-mail catalog marketing (newsletter), and an Internet sales operation.
3.2 Market NeedsLittle attention is paid to the opportunities that exist in Long Island concerning African American literature and natural health, skin, and hair products. Brooklyn, New York is the only borough larger than Long Island, so there is a strong market for these products. I’ve lived in Long Island most of my life. Suffolk County to be exact and I have never seen a book store which carried a multitude of African American literature. Even as I did my research and visited beauty supply stores I rarely came across stores which carried a large selection of natural skincare products such as soaps, lotions, body butters, etc. Here you will find hair care products which are made for African Americans.
3.3 Competition and Buying PatternsCompetition in the book and healthcare products combination market is to a large degree non-existent. Third Eye Books & Things will carry Third Eye Publishing’s titles as well as other publishers’ titles, ranging from children’s books to financial wealth and spiritual literature. Titles will mainly be by African American authors. The healthcare products that will be sold include:The first two Third Eye Publishing, Inc. titles have sold about 3,500 copies within the Long Island market to date. President and author, Therone Shellman, is very well known by readers and book purchasers in the Long Island area, most of whom will become store customers of Third Eye Books & Things.
4.0 Strategy and ImplementationLocation is critical to attract the traffic and customer profile required to generate planned sales volumes. The malls represent the best retail opportunities because of their high volume of customer traffic. Three target areas were identified throughout Long Island.Therone Shellman, President of Third Eye Publishing, is a seasoned executive management professional, having previously worked as a production supervisor for Nature’s Bounty, Inc. He also authored Third Eye Publishing, Inc.’s first two titles. The first title, Love Don’t Live Here, released in August 2006, became a best selling title On Booking Matters Magazine which conducts sales of African American titles within a select number of African American stores. The second title, No Love Lost, was an award winner in the African American Fiction category at the Indie Excellence Book Awards in 2007. This title was also a finalist in the African American Fiction Category for USABookNews.com. Shellman is also the co-author of Love.com, which released on December 15, 2007. From his various business experiences and endeavors, Shellman is knowledgeable in general business, sales, and book buyer habits.
4.1 Revenue PotentialRegarding Third Eye Publishing’s titles, Third Eye Books & Things is forecasting average sales of eight hundred to one thousand books (ten dollars per book) for each title during the first year, four thousand to six thousand book sales (eight to fifteen dollars per book) from other publishers during the first year, and urban magazine sales of three hundred to six hundred copies (prices vary). Natural products—soaps, lotions, Shea butter, Muslim oils, and incense—will make up the bulk of the stores sales.
Sales Forecast:Sales FY2008 FY2009 FY2010Third Eye Publishing titles$20,000 $35,000 $45,000Other companies’ titles$40,000 $50,000 $60,000Soaps, lotions, Shea butter, oils$45,000 $50,000 $65,000Posters, buttons, etc $8,000 $12,000 $15,000
4.2 Sales ProgramThird Eye Publishing, Inc. has an established Web site (www.thirdeyepublishing.org) and myspace accounts:www.myspace.com/theroneshellmanwww.my...
A proprietary Web site will be created for Third Eye Books & Things to enhance customer service, supplier commerce, and direct sales. Peripheral sales and marketing collaterals (such as pens, refrigerator magnets, and buttons) will be used to expand product lines and customer awareness of the store.Therone Shellman is an author with three published titles who has done signings at many bookstores. He knows how to present his merchandise in a professional and eye-catching manner. The booth layout for Third Eye Books & Things will be personally overseen by Shellman.
4.3 Strategic Alliance/Concluding StatementTherone Shellman belongs to many writer and publisher organizations. Third Eye Books & Things will seek out opportunities to establish viable strategic alliances with authors, publishing companies, and community organizations. Third Eye Books & Things will enable Third Eye Publishing, Inc. to expand as a recognizable brand. Third Eye Publishing will then enable Third Eye Books & Things to flourish since the Third Eye Publishing’s titles will provide a ready-made customer base for Third Eye Books & Things.
Part 3: Finding Capital for Your Business
There are many options to consider when looking for start-up capital for your business. It’s a good idea to think things through and evaluate all your options before making any decisions.
A. Personal Savings Most new businesses are financed primarily by the business owner’s personal savings. Most owners will use their personal credit cards. Although your personal savings may be the easiest route to take, remember that most businesses fail because of a lack of resources. In most cases, a lack of knowledge and capital cause businesses to close within the first year.
B. Friends and Relatives Your friends and relatives may lend you start-up money, and do so interest free or at a low interest rate, which can be a bonus. Every dollar saved when getting started is a big plus.
C. Banks and Credit Unions If your business proposal is solid and thorough, then there is a very good chance for you to obtain a business loan. I will talk more about the different types of business loans below.
D. Venture Capital Firms These firms do provide funding to some start-ups, but in most cases they help expanding companies grow in exchange for interest on the loan or partial ownership of the company.
Business Loans
Most people assume that it is very difficult to obtain a small business loan, but this is not always the case. If you have a felony on your record, then you may have some difficulty obtaining a loan. In that case, you may want to search for SBA programs where the qualifications are less strict. But other than that issue, a sound business loan proposal along with a good credit rating should get you in the door.Requesting a loan when you do not have everything together is one of the main reasons why loan proposals are turned down. It means you’re not prepared, and if you’re not prepared, you’re not going to be successful in business. Banks lend money to make money, not lose it. The better prepared and organized you are, the more successful you will be in obtaining a loan. You must know exactly how much capital you will request, how it will be used, and how it will be paid back.
Types of Business Loans There are two basic types of loans: short-term and long-term. In most cases, a short-term loan has a life of up to twelve months. These loans are usually working capital loans, accounts-receivable loans, and lines of credit.Long-term loans generally have a life span greater than one year and up to seven. Equipment and real estate loans have a life span of up to twenty-five years. Long-term loans are acquired for major business expenses such as purchasing facilities, furniture, and vehicles.
How Your Loan Proposal Will Be AnalyzedThe first question a bank considers when a loan request is reviewed is how the borrower intends to pay back the loan. Lenders also want to know whether you are intending to invest some of your own capital to fund the business. In most cases lenders will not finance 100 percent of the business. Lenders also analyze your credit report, work history, and letters of recommendation to determine whether you are a sound candidate to pay back the loan. Some other questions lenders consider are the following:
Do you have enough work experience and knowledge to run a business successfully?Does your loan proposal and business plan demonstrate your understanding of the business?Can the business make monthly payments based upon its cash flow demonstrated within the business plan?
Make sure you also consider each of these questions before approaching your lender for a loan. If you have positive answers to these questions, then you are more likely to get approved for your loan.
Small Business Association Financial Assistance ProgramsThe largest source of business financing in the U.S. is the Small Business Administration (SBA). The best way to determine if you qualify for one of the SBA’s programs is to contact your local bank. The bank must be a qualified SBA lender. Or you can contact the SBA directly and speak to a loan officer. He or she can direct you to a lending institution which can assist you according to your business loan needs. If you have the time stop by your bank and ask to speak to their loan officer. You may need to set up an appointment because most banks have a loan officer which may handle either a few or several branches. Once you get a chance to speak to them find out what SBA loans they participate in and what are the criteria of each. From there you’re on your way.Below are various loan programs offered by the SBA.
7(a) Loan Guaranty ProgramThe 7(a) Loan Guaranty Program is the SBA’s primary loan program. Under this program the SBA reduces risk to lenders by guaranteeing a major portion of loans made to small businesses. This helps lenders provide loans to small businesses when funding in other cases is unavailable. This loan program should be a last resort option for owners trying to obtain funds. The eligibility requirements and credit criteria for the program are very broad, so they allow for many considerations in small business financing needs. To qualify for an SBA 7(a) loan, a small business must meet the 7(a) criteria, and the lender must assert that it cannot provide the financing on reasonable terms except with assistance from the SBA. In most cases the maximum guarantee is seven hundred fifty thousand dollars. The SBA can guarantee as much as 80 percent on loans of up to one hundred thousand dollars, and 75 percent on loans of more than one hundred thousand dollars. There are other loan programs where the SBA guarantees more. Some of these programs are DELTA, 504 loan programs, and the International Trade program.
How It HappensA small business applies to a lending institution for a loan; the lender reviews the application and decides if the business has all the necessary requirements to obtain financing on its own, or if it requires additional support in the form of an SBA guarantee. The lender then requires that the SBA back the loan. Under this program, the SBA guarantees the lender that in the event the borrower does not pay back the loan, the government will.If the lender approves the loan based on an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds. You then make monthly loan payments directly to the lender. Repayment plans may be specially tailored to each business. There are no balloon payments, prepayment penalties, or application fees.
Financing UsesPermitted uses for a 7(a) loan are very broad and include expanding or renovating facilities, purchasing machinery, equipment, and fixtures, improving the leasehold, financing receivables, keeping on-hand working capital, and refinancing existing debt.
Interest Rates, Fees, and TermsThe repayment length of time depends on how the proceeds are intended to be used, and the ability of the business to repay. Payment terms in most cases are five to ten years for working capital, and up to twenty-five years for fixed assets such as major renovation of real estate, or the purchase thereof. The purchase of equipment can also fall under fixed assets.Both fixed and variable interest rates are available. For loans under fifty thousand dollars, rates may be slightly higher than 2.75 percent. But for loans with maturities under seven years, rates are somewhere around 2.25 percent. The SBA charges the lending institution a fee to provide the guaranty, and in most cases the lender passes this charge on to the borrower.
CollateralPersonal guarantees are required from all the principal owners of the business. Liens on personal assets of the owners may be required. In most cases a loan will not be declined where sufficient collateral is the only criteria not met. This is so because the SBA depending on the loan amount can guarantee up to 80 percent of the loan.
EligibilityTo be eligible for a 7(a) loan, the business must be operated for profit and fall within the size standards set by the SBA. A business is deemed a small business based on the average number of employees during a twelve-month period, or on sales averaged over three years. A manufacturing business can have from 500-1,500 employees, and a wholesaling business can have 1-100 employees.
What You Need for The Lender’s ReviewDocumentation requirements may vary, so contact your lender for the specific information you must supply. Below is a list of some of the documentation and information you must provide.1. Purpose of loan.2. History of the business.3. Amount of investment in business by owners.4. Signed personal financial statements.5. Personal resumes.6. Financial statements for three years (existing businesses)
There are a number of specialized programs under 7(a) that address specific needs of new and established businesses. These specialized programs are all usually governed by the same rules, so make sure you speak to your lender or an SBA loan officer about your available options.
Low Documentation Loan (LowDoc)One of the SBA’s most popular loan programs is the LowDoc program. If you meet the requirements of your lender, LowDoc only requires a simple one-page SBA application form. The LowDoc is a way to get rapid approval for loans up to one hundred thousand dollars. For loans over fifty thousand dollars, you must also provide a copy of U.S. Income Tax Schedule C, or the front page of the corporate or partnership returns for the past three years. The SBA guarantees up to 80 percent of the loan amount. Applications are usually processed within two to three business days. The funds cannot be used to repay most existing debt.
FastrakThis program allows lenders to provide capital to businesses seeking loans up to one hundred thousand dollars without SBA approval. Lenders use their existing documents and procedures to make and service loans. The SBA guarantees up to 50 percent of a Fastrak loan. Maturities are usually five to seven years. Be aware that not all lenders participate in the Fastrak program.
CAPLinesUnder this program there are five short term loans and revolving lines of credit for the working capital needs of businesses. CAPLines may be used to finance direct costs for construction needs, service supply contracts, finance direct costs associated with commercial and residential construction, and finance working capital by obtaining advances against inventory and accounts receivables.
International Trade LoanThis program is designed for businesses engaged in international trade, or those preparing to engage in international trade. This loan is for short-term and long-term financing. The SBA can guarantee up to $1.25 million for a combination of fixed asset financing and permanent working capital.
The Export Working Capital Program (EWCP)The EWCP uses a one-page application form, and turnaround time is usually within ten days. This program was designed specifically for exporters seeking short-term working capital. The SBA guarantees up to 90 percent of the principal, and interest up to seven hundred fifty thousand dollars. You can also apply for a letter of prequalification from the SBA. A EWCP loan can combine with an international trade loan as long as the SBA’s exposure is not above $1.25 million.
504 Certified Development CompaniesThese non-profit organizations are sponsored by private interests or by state and local governments. The SBA can cover as much as 40 percent of a 504 project up to $1 million. Proceeds from 504 loans must be used for fixed-asset projects such as purchasing land, construction of new facilities, renovation of existing facilities, or purchasing machinery and equipment. The 504 program cannot be used for working capital or inventory, or for repaying debt.
The 7(m) Microloan ProgramThis program provides small loans up to twenty-five thousand dollars. The average loan is ten thousand dollars. This is a pilot program available at a limited number of lenders. With this loan the SBA makes funds available to intermediary non-profit organizations, and in turn these organizations make loans to small businesses.
The Small Business Investment Company (SBIC)SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans. SBICs are for-profit firms whose purpose is to share in the success of a small business. The SBIC program is regulated by the SBA, and is designed for new or established businesses.
Women’s Pre-Qualification Loan ProgramSelected non-profit intermediaries work with applicants to develop a viable business plan and loan application. A loan request is then presented to the SBA, and in most cases a decision is made within three business days. Upon approval, the SBA provides a letter of prequalification. The applicant can then take this letter to a lending institution and apply for an SBA guaranteed loan of up to two hundred fifty thousand dollars. Contact your local SBA office to check for other requirements regarding approval.
The Minority Pre-Qualification Pilot Loan ProgramThis program utilizes local, private sector organizations as intermediaries to assist in the loan process. A prospective borrower works with the intermediary to develop a solid loan application. The application is then sent immediately to the SBA for consideration of a loan pre-qualification. Generally the loan application is for loans of two hundred fifty thousand dollars or less. Businesses that are 51% owned and managed by a racial or ethnic minority person(s), or not engaged in rental real estate are eligible.
Before you go into business, do your research. Contact your local branch of the Service Core of Retired Executives (SCORE). SCORE provides counseling and assistance on how to put together a business plan, and it will link you with someone who has previous work experience, or ownership of the type of business you would like to open. You may also contact the SBA for information on counseling and lending programs.
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