creative financing and tax options for small businesses
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Creative Financing and Tax Options for Small Business Ownerspresented by
Trina LangSteven Mills, CPANancy Catarisano, CPA
Insero & Company CPAs, P.C.
November 13, 2013
Insero & Company presents
Seeking Financing
Prior to Seeking FinancingAnalyze the Business First
• Capital Structure – Current Levels of Debt and Equity
• Current Earnings and Cash Flows
• Company Goals, Plans, and Expectations
• Current Owners Objectives and Needs
Business Discussion
• Review Historical Financial Results• Discuss Backlog/Forecast• Look at cash flow indicators - receivables and
payables• Review for unusual or discretionary items:
- one time expenses
- bonus
- owner’s benefits
- tax planning effects
Proforma Financial Results
Net income per financial statement or tax return $ 0
Add-backs
Officer bonus 20,000
Staff bonus 5,000
Profit sharing contributions 10,000
Consultants 5,000
Website 10,000
Discretionary income before one-time only and tax planning initiatives $ 50,000
Purpose of Financing
• What is the financing needed for:• Research & Development• Equipment• Real Estate• Inventory on a Purchase Order• Acquisition• Refinancing or restructuring existing debt• To fund operating losses• To fund normal operating fluctuations
• How much financing is needed:• Budget converted to forecasted cash flow• Make sure its enough
Balance Sheet 12/31/12Actual
ASSETS LIABILITIES
Cash $5,000 Accounts Payable $10,000 Accounts Receivable 20,000 Bank Debt 23,250 Inventory 0
Total Liabilities 33,250
Fixed Assets
Car 15,000 Copier 6,000 Common Stock 500Equipment 10,000 Retained Earnings - 2,250
Total Fixed Assets 31,000 Net Income - Current Year 0
Less: Accum. Depreciation (20,000) Total Owners' Equity 2,750 Net Fixed Assets 11,000
TOTAL LIABILITIES AND TOTAL ASSETS $36,000 OWNERS' EQUITY $36,000
Income Statement
XYZ CompanyIncome StatementFor the Year Ending December 31, 2013
Acutal Actual Budgeted BudgetedQ1 Q2 Q3 Q4 Total 2012
Sales 142,000$ 180,000$ 190,000$ 189,750$ 701,750$
Cost of Goods Sold 99,400 126,000 133,000 130,900 489,300
Gross Profit 42,600$ 54,000$ 57,000$ 58,850$ 212,450$
Expenses:
Advertising 750 750 750 750 3,000Automobile 3,000 3,000 3,000 3,000 12,000Insurance 1,500 1,500 1,500 1,500 6,000Interest Expense 1,200 1,200 1,200 1,200 4,800Offi ce Supplies 1,050 1,050 1,050 1,050 4,200Payroll 18,000 19,000 20,400 20,400 77,800Payroll Taxes 1,800 1,900 2,040 2,040 7,780Rent 7,500 7,500 7,500 7,500 30,000Telephone 1,875 1,875 1,875 1,875 7,500Untilities 1,290 1,290 1,290 1,290 5,160
Total Expenses 37,965 39,065 40,605 40,605 158,240
Net Income 4,635$ 14,935$ 16,395$ 18,245$ 54,210$
ASSETS LIABILITIES
Cash $5,960 Accounts Payable $50,000 Accounts Receivable 60,000 Bank Debt 20,000 Inventory 50,000
Total Liabilities 70,000
Fixed Assets
Car 15,000 Copier 6,000 Common Stock 500Equipment 10,000 Retained Earnings - 2,250
Total Fixed Assets 31,000 Net Income - Current Year 54,210
Less: Accum. Depreciation (20,000) Total Owners' Equity 56,960 Net Fixed Assets 11,000
TOTAL LIABILITIES AND TOTAL ASSETS $126,960 OWNERS' EQUITY $126,960
Balance Sheet 12/31/13Projected
Income Statement
XYZ CompanyIncome StatementFor the Year Ending December 31, 2013
Acutal Actual Budgeted Budgeted Accrual T/R Cash CashQ1 Q2 Q3 Q4 Total 2013 Total 2013 Difference
Sales 142,000$ 180,000$ 190,000$ 189,750$ 701,750$ 661,750$ (40,000)
Cost of Goods Sold 99,400 126,000 133,000 130,900 489,300 (539,300) (50,000)
Gross Profit 42,600$ 54,000$ 57,000$ 58,850$ 212,450$ 122,450$
Expenses:
Advertising 750 750 750 750 3,000Automobile 3,000 3,000 3,000 3,000 12,000Insurance 1,500 1,500 1,500 1,500 6,000Interest Expense 1,200 1,200 1,200 1,200 4,800Offi ce Supplies 1,050 1,050 1,050 1,050 4,200Payroll 18,000 19,000 20,400 20,400 77,800Payroll Taxes 1,800 1,900 2,040 2,040 7,780Rent 7,500 7,500 7,500 7,500 30,000Telephone 1,875 1,875 1,875 1,875 7,500Untilities 1,290 1,290 1,290 1,290 5,160
Total Expenses 37,965 39,065 40,605 40,605 158,240 118,240 40,000
Net Income 4,635$ 14,935$ 16,395$ 18,245$ 54,210$ 4,210$ (50,000)Debt (3,250)
960$
Debt Service Coverage Ratios (DSCR) 12/31/13
Accrual Cash
Net Income $54,210 $4,210
Add Back:Depreciation 0 0Interest Expense 4,800 4,800
Cash Flow Available for Debt Service 59,010 9,010
DEBT
Annual Principal and Interest Payments - existing 8,050 8,050Line of Credit - $50,000 2,250 2,250
10,300 10,300
DSCR 5.70 0.87
GOAL 1.20 1.20
Collateral Coverage
TERM LOAN
BookValue FMV
EQUIPMENT 11,000 28,000
DEBT 23,250 23,250
LOAN TO VALUE 83%
OPERATING LINE OF CREDIT Year 1 Year 2 Accounts Receivable 20,000 60,000 Approved borrowing rate 75% 75%
Accounts Receivable borrowing limit $15,000 $45,000
Inventory 0.00 $50,000 Approved borrowing rate 50% 50%
Inventory borrowing limit $0 $25,000
Total collateral value $15,000 $70,000
Borrowing Capacity
General Rule
Cash 100%
Accounts Receivable
Eligible 75%
Ineligible 0%
Inventory
Raw Material 30 – 60%
Work-In-Process 0%
Finished Goods 50%
Other Assets 0%
Property 75 – 80%
Equipment
Existing 50%
New 75 – 85%
Talk with your
lender and ask how they are
computing for your
business.
Bank Financing for Businesses
• Collateral Options: Personal real estate, cash surrender value life insurance policy, investment accounts• Home equity loans 85% loan to property value• Banks will typically loan even if 1st mortgage is with
another lender
• Loans under $100k not as much paperwork required; however if lower credit score, more involved financing package necessary• Expect to personally guarantee any loan until the
Balance Sheet of the business is strong• May require covenants, typical DSCR of 1.2
Documents Needed for Financing
1. Personal Financial Statement2. Two Years Personal and Business Tax Returns3. Interim Financial Statements4. Budget – 2 to 5 years5. If Tax Returns show losses include a Quarterly
Summary Recap6. Accounts Receivable and Accounts Payable
Aging Reports7. Backlog report/Significant New Customers etc.8. Business Plan – if available
Entity SelectionWhich one is right for your business?
So many choices…
Types of entities to choose from:
• Sole proprietorship
• C-Corporation
• S-Corporation
• Limited Liability Corporation (LLC)
• General/Limited Partnerships
Sole Proprietorship
Most common type: Over 22 million filed tax returns as sole proprietorship in 2008, according to IRS “Statistics of Income Bulletin.”
Advantages
• The easiest and least expensive to set up
• Owned by one person who receives all
profits
• Easy tax form to file each year (Schedule C)
• Examples: Consultants, Contractors, Sales
Sole Proprietorship
Sole Proprietorship
Disadvantages
• Unlimited liability ; Creditors can attach to owner’s personal property. Possible solution: create a Single Member LLC.
• All profit is subject to self-employment tax.• Business succession is difficult.• Hard to raise capital. Financing is directly
linked to personal assets.
Most recognizable type of business
Thoughts of large multi-national corporations come to mind
Is it right for a small business?
C-Corporation
Advantages
• Separate legal entity; investors have limited liability if company fails. Personal liability is never shielded – consult your attorney.
• Unlimited longevity regardless of health or even death of investors
• Ability to raise capital by selling stock• Easy to transfer ownership• Various small tax benefits, such as possible
lower tax brackets, fringe benefits, etc.
C-Corporation
Disadvantages
• Double Taxation, Double Taxation• Can be costly to form• Many formalities related to formation
C-Corporation
Most prevalent type of corporate tax return:Over 4 million returns filed in 2010 regardless of industry, according to IRS, “Statistics of Income Tax Bulletin.”
S-Corporation
Advantages
• Separate legal entity; owner has limited liability. Personal liability is never shielded – consult your attorney.
• Profits taxed once, to owners. Sometimes at a lower rate (some exceptions apply).
• Elimination of double taxation• Profits not subject to employment taxes (but
see next page…)
S-Corporation
Disadvantages
• Limited number of owners• Same formalities as c-corporations• Owners must be paid a “reasonable” salary• Owners must be U.S Citizens or residents• Deductible losses (for owners) limited to cash
actually contributed to the company (basis).
S-Corporation
A hybrid form of both a Corporation and a Partnership
Limited Liability Company (LLC)
Advantages
• Members enjoy limited liability against debts or judgments. Personal liability is not shielded – always consult attorney.
• Profits taxed to owners once, much like s-corporations
• Fewer formalities and compliance issues• Unlimited longevity• Flexibility in creating operating structure• Owners can deduct losses if financed by debt and
they are responsible for paying back.
Limited Liability Company (LLC)
Disadvantages
• Most members subject to self-employment taxes on profits
• Raising capital; hard to find outsiders willing to invest
• Fees charged by states • Can be difficult to understand tax allocation
to members if operating agreement is complicated.
Limited Liability Company (LLC)
Advantages
• Very similar to LLC • Members may enjoy limited liability against debts
or judgments. Personal liability is not shielded – always consult attorney.
• Profits taxed to owners once, much like s-corporations
• Fewer formalities and compliance issues• Flexibility in creating operating structure• Owners can deduct losses if financed by debt they
are responsible for paying back.
General/Limited Partnerships
Disadvantages
• Most members subject to self-employment taxes on profits
• Raising capital; members left to finance • Can be difficult to understand tax allocation
to members if operating agreement is complicated.
General/Limited Partnerships
Every business will have a different answer!
Which one will you choose…
• Health Insurance
• Retirement Plans
• Cash or Accrual Method
• State tax filings
• Governance
But, what about…
Financing Options
Characteristics of Common Types of Financing
Source Purpose SecurityEvaluation
Criteria Advantages Disadvantages
Banks/Credit Unions/Financial Institutions
Working capital, term loans, mortgages
A/R, Inventory, equipment, real estate, etc.
Credit analysis, collateral coverage and cash flow
Lower interest rates, no ownership dilution
Difficult to fund future growth without proven results, restrictive covenants
Asset-based loans Working capital, term loans
A/R, Inventory, equipment
Value of collateral Easier to obtain than traditional bank loans
Expensive
Leasing Facilities and equipment
Facilities and equipment
Value of collateral Various financial, accounting, and income tax benefits
Higher implicit interest rates, no benefit from asset residual values
Factoring Working capital A/R Value of receivables Easier to obtain than traditional bank loans, reduces collection efforts
Expensive
Government financing
Varies by Program Varies by Program Varies by Program Favorable rates and terms, financing opportunities for businesses that might not qualify for other financing
Complex paperwork, lengthy time delays, contractual and legal requirements
Venture capital Start-up and growth Equity in company Potential market leaders, high growth potential
Access to large dollar amounts and management advice
Difficult to obtain, dilutes ownership
Friends and Family/Angel investors
Start-up and growth Equity in company Higher-risk, start-up businesses
Often flexible and informal
Difficult to find, dilutes ownership
SBA
• Guarantee Programs *See handouts.
• 7A (most common program)
• SBA Guarantees up to 85%
• No SBA fees on loan <$150K
• SBA Express- may be used for revolving line of credit – 50% guaranty
• 504 Program(long-term, fixed-asset loans) Bank 50%/NYBDC/SBA 40%/Borrower 10%
Leasing Option:Decision to Buy or Lease
Leasing Purchasing
100% Financing Some leases provide 100% financing
Down payments are usually required
Cash Flow Lower initial cash outlays Larger initial cash outlays
Cancellation Option Some grant the option to cancel.Risk of obsolescence to lessor.
Not cancellable
Fixed Payments Typically fixed Variable if floating interest rates
Covenants Usually none Operating restrictions & covenants may exist
Interest Rates Usually higher Usually lower
Residual Value Lessor conservatively estimates to retain residual
Retain any salvage value
New York State Programs
• Linked Deposit Program• Small Business Revolving Loan Fund• Excelsior Jobs Program
http://www.empire.state.ny.us/BusinessPrograms.html
Linked Deposit Program
• Purpose to provide reduced rate loans to promote businesses to undertake projects that:• Improve their competitiveness• Gain market access• Modernize equipment• Expand facilities
• Apply through your bank• 2 – 3% interest rate savings
Linked Deposit Program
• Maximum loan of $2,000,000 for 4 years• 2011 Amendment – Lifetime limit increased from
$1 Million to $2 Million and extended another 4 years.
• 2% Reduction • To manufacturers with 500 or less employees• Service Companies with 100 or less employees
• 3% Reduction • Distressed area located businesses• Certified Minority or Women-Owned businesses to
fulfill NYS or Federal Contract
New York State Small Business Revolving Loan Fund
• 1.5 Million allocated to our region• Targeted for Small Businesses having
difficulty accessing regular credit markets• Information on state website is for
statewide.• Administered by Pathstone Enterprise
Center, Inc. for Finger Lakes and Western New York Regions
Pathstone Enterprise Center, Inc.
• Mission to provide Training/Technical Assistance and lending to small businesses
• Loans range between $1,000 - $500,000• Businesses with impact to the community• Approximately $10 Million in total funding
available including state allocated money• Al Hartsig – (585) 340-3304
Excelsior Jobs Program
The Excelsior Jobs Program is the NYS replacement to the Empire Zone/QEZE credit regime
For more information:http://nyworks.ny.gov
Excelsior Jobs Program
Four new Fully Refundable tax credits exist:
1. The Excelsior Jobs Tax Credit: A credit of 6.85% of wages per new job to cover portion of the associated payroll cost.
2. The Excelsior Investment Tax Credit: Valued at 2% of qualified investments.
Excelsior Jobs Program
3. The Excelsior Research & Development Tax Credit: A credit of 50% of the Federal Research & Development credit up to 3% of research expenditures in NYS.
4. The Excelsior Real Property Tax Credit: Available to firms located in certain distressed areas (See Investment Zone list) and to firms in targeted industries that meet higher employment and investment thresholds (Regionally Significant Project).
Genesee Finger LakesRegional Planning Council
Regional Revolving Loan Fund• Loans $20,000 minimum/$200,000 max• Available for fixed assets/working capital• Must be turned down by traditional lender or used
for gap funding• Service/Industrial/Manufacturing Industries, Non-
retail• Job growth and retention must be proven• Application process-contact Finger Lakes
Regional Planning Council (David Zorn – (585) 454-0190, X14 for initial meeting ) or local IDA where project is located
Economic Development Programs
• SBA 504 (previously discussed)• Great Rate Program
• Interest Rate Subsidy – 3%/4% if local• Non-retail, for profit business• Loan must create one job for every $75,000 or increase
employment by 10% whichever is less
• Great Rebate Program• Rebates on equipment purchases of at least $50,000 and
purchased without borrowed funds; meets job creation requirement
• $4,000 rebate or $5,000 if purchased locally
• Monroe Manufacturing Rewards Program• Provides manufacturing businesses with a rebate on mfg
equipment purchases of $25K - $49,999; $1,000 rebate upon proof
Who is NYSERDA?
New York State Energy Research and Development Authority
• Public Benefit Corporation established by NYS law in 1975• Works through 26 Regional Outreach Contractors (ROCs)• Helping NYS reach its energy goals: reducing energy
consumption, promoting renewables, protecting the environment
• NYSERDA has partnered with Greater Rochester Enterprise (GRE)
Greater Rochester Enterprise(Regional Outreach Contractor)Economic Development Growth Extension (EDGE)
• Regionally-based access to NYSERDA’s energy efficiency, renewable energy and R+D programs
• Matching project needs w/ the appropriate programs• Creating partnerships to encourage projects that spur investment and
job growth• Supporting efforts of the FLREDC• Assisting with the Consolidated Funding Application (CFA)• Educating business owners, community leaders and homeowners on
the benefits of energy efficient and renewable technologies
Haley RotterGreater Rochester Enterprise (GRE)[email protected](585) 530-6205
Excell Partners
• Venture Capital fund that invests in seed and early stage high-tech start-ups in Upstate NY.
• Formed in partnership with University of Rochester and the State of New York
• Helps to launch and grow high tech start-ups by providing critical funding and business building expertise
• Bridges the seed stage funding gap • www.excellny.com• (585) 458-SEED (7333)
Questions ?
Thank You
Thank you for your attendance attoday’s program.
For more information regarding the topics discussed today, please feel free to contact:
Trina Lang Steven Mills, [email protected] [email protected]
585.697.9686 585.697.9629
Nancy Catarisano, [email protected]
585.697.9661
Insero & Company CPAs, P.C.www.inserocpa.com
Insero & Company CPAs, P.C.Certified Public AccountantsBusiness & Financial Advisors
Rochester >> 585.454.6996Corning >> 607.973.2075
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