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Managing Your Finances

6 Posts authored by: Inc.

The U.S. Small Business Administration (SBA) maintains a wide variety of loan and other assistance programs that can be valuable resources to all types of businesses. SBA programs offer excellent flexibility and loans that are “built to last,” says Brian Burke, national SBA lending director at Community Reinvestment Fund, USA, a nonprofit organization that works with banks and other lenders to bring development capital to underserved areas. However, finding and securing the best SBA loan for your business requires effort and diligence.


“SBA loans do involve more upfront effort, due diligence, and paperwork, but patience and positive attitudes are rewarded with excellent terms,” Burke says. You can boost your likelihood of approval for an SBA loan by knowing your numbers, or at least having a trusted advisor who can help you present all aspects of your business, especially the all-important financial characteristics. “Plan your work, and work your plan. Vision and execution are key drivers to long-term business success,” he adds.


It’s also important to keep in mind that the SBA doesn’t actually make loans itself; rather, it guarantees loans made by banks and other lenders, points out Michael K. Menerey, a partner in CFO Edge, LLC, a provider of outsourced financial and operational solutions to businesses. “In seeking a loan for your business, you need a bank that can be a trusted partner. This is especially true in the world of SBA lending, where knowledge of the various loan programs is critical,” he says.


Among the SBA programs of most interest to many small businesses are:

  • SBA Microloans, which provide short-term loans of up to $50,000 to small businesses and some not-for-profits. Proceeds can be used for working capital, inventory, supplies, fixtures, and equipment but not for repayment of existing debts or purchase of real estate.
  • SBAExpress loans, which offer expedited processing, generally range from $50,000 to $150,000, and can be used to launch a business or to assist in the acquisition, operation, or expansion of an existing business.
  • SBA 7(a) loans, which go up to $5 million, are the agency’s most common product for helping small businesses obtain financing. They are also the most flexible, says Rohit Arora, CEO of, an online small business loan matchmaker. The SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on larger loans.
  • SBA disaster loans, which are low-interest, long-term loans for physical and economic damage caused by a declared disaster. Small businesses and most private, nonprofit organizations that suffer substantial financial damages may be eligible for an Economic Injury Disaster Loan of up to $2 million. The proceeds can be used to meet necessary financial obligations related to expenses the business would not have incurred had the disaster not occurred.


“The type of SBA loan you choose depends on the amount of money needed and the use of the money once you borrow it,” Arora says. “Each business’s situation is different, and that will dictate the type of SBA loan for which you ought to apply.” A great resource for helping you find the SBA loan program that is right for your business is the federal government’s BusinessUSA AccessFinancing wizard. The tool walks you through four simple steps related to the purpose of the loan, ownership of your company, areas where you do business, and the industry in which you operate. A results page presents the best SBA options and other government-backed finance programs to meet your needs.


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Make Your Business Less Taxing

Posted by Inc. Apr 3, 2014

Tax law is fundamentally nondiscriminatory, and the federal government does not offer many direct tax breaks to women- and minority-owned businesses, says Mike D’Avolio, a senior tax analyst at Intuit’s professional tax group who is both a CPA and an attorney. “However, the tax code offers many incentives to all business owners, such as enhanced depreciation deductions, the credit for small employer health insurance premiums, and the credit for research and development expenses.” A comprehensive listing and discussion of allowable business expenses and deductions can be found in IRS Publication 535.


One of the few areas where federal tax code does provide direct tax breaks for diverse-owned businesses is incentives for businesses on Indian reservations, including accelerated depreciation and the Indian employment credit. For property used in the active conduct of a trade or business within an Indian reservation, the tax code provides for shorter depreciable lives and, consequently, larger depreciation deductions. “For example, five-year property can be depreciated over a three-year period, and 10-year property can be depreciated over a six-year period,” D’Avolio explains. The federal tax code also includes an Indian employment credit that applies to businesses that hire individuals who live on or near an Indian reservation. In general, the credit is equal to 20 percent of current wages and employee health insurance costs, up to a limit of $20,000.


Many states offer direct or indirect tax breaks and incentives to minority- and women-owned businesses, says Judith H. McQuown, author of Inc. Yourself: How to Profit by Setting up Your Own Corporation (Career Press Inc.; 10th edition May 2004), which is coming out in its 11th edition in 2014. “In New York State, for example, START-UP NY offers 10 tax-free zones to new businesses.” While the program is not exclusive to diverse-owned businesses, the generous tax breaks it provides are particularly appealing to them. They include:

  • A state tax credit that would eliminate any state tax liability for businesses with 100 percent of their assets and payroll in a tax-free area.
  • Exemption from the state organization tax, license fee, and annual maintenance fee.
  • Credit or refund for sales and taxes paid for goods and services used or consumed by the business’ operation in a tax-free area.
  • Exemption from the real estate transfer tax for leases or real property to approved businesses in tax-free areas.


Many other states offer programs that provide significant tax breaks and/or incentives to diverse-owned businesses. “The best way to find out about these programs is to contact your state’s Small Business Administration (SBA) office or Department of Economic Development,” McQuown advises.


Whenever tax incentives are offered to diverse-owned (or any other) businesses, they are typically accessed by claiming them in the company’s tax return, with no need for additional filings, says Jonathan Barsade, founder and CEO of Extractor, Inc., a developer of end-to-end solutions for secure tax sales recordkeeping and compliance, based in Wynnewood, Pennsylvania. However, successfully claiming them requires diligent recordkeeping and close attention to detail. “The most common reason businesses are denied tax breaks, such as exemptions, is because of the absence of proper supporting documentation,” he says. “Exempt transactions are red flags for auditors. The absence of sufficient support is enough to deny the tax break and place the seller on the hook for taxes owed as well as fines and penalties.”


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The federal government sponsors a number of programs designed to help minority-owned enterprises succeed in their business, and one of the most extensive is the Small Business Administration’s 8(a) Business Development Program. The program offers a broad scope of assistance to firms that are owned and controlled at least 51 percent by socially and economically disadvantaged individuals, and its stated goal is to provide such businesses with “access to the economic mainstream of American society” by helping them gain a foothold in government contracting. It is a nine-year program, with participation divided into a four-year developmental stage and a five-year transition stage.


The main benefit of the program is that 8(a) certified businesses gain exclusive access to sole-source contracts of up to $4 million for goods and $6.5 million for manufacturing per contract, says Jean Kristensen, president and CEO of Jean Kristensen Associates, LLC, a New York-based consulting firm that provides tools and resources to small, minority, and women-owned firms seeking to increase revenues through government contracting, certification, and innovative business strategies. “As an 8(a) graduate, I can attest to the fact that certain sole-source contracts provided my firm with the ability to gain experience with government contracting, human capital management, and regulatory compliance that increased our ability to bid for competitive contracts in my industry,” she says. “Many government agencies do require that firms have strong past performance and experience in working with government agencies as a precondition to winning government contracts, and the 8(a) program allowed us to get that experience.”


Exclusive access to those sole-source contracts is surely one of the most important advantages of 8(a) certification, but there are others as well, says Rick Otero, president and CEO of Tampa, Florida-based Cloveer, Inc., which has helped more than 1,500 businesses navigate the 8(a) application process. Among them are:

  • Limiting your potential competition. Larger firms that might otherwise compete for the same contracts do not have access to them, and there are fewer than 10,000 8(a)-certified business concerns in the entire country.
  • Making you more attractive to larger federal government prime contractors. Since businesses not considered “small” by the SBA definition for this program do not have access to 8(a) contracts, certification makes your company more attractive for teaming, joint ventures, or mentor/protégé relationships.
  • Making it easier for federal agencies to purchase your products or services because 8(a) set-aside contracts require less time, paperwork, and bureaucracy than other types of federal contracts.
  • Faster start times, because 8(a) contracts take less time to be awarded than most other procurement methods.


Applicants to the 8(a) Business Development program undergo a rigorous screening process designed to ensure that only the most qualified firms receive certification, Kristensen says. The general eligibility requirements are:

  • The business must be majority owned by an individual or individuals, and they must be American citizens by birth or naturalization.
  • The business must be majority owned and controlled/managed by socially and economically disadvantaged individual(s), and they must meet the SBA requirements for both social and economic disadvantage. Social disadvantage eligibility is presumed for members of certain groups, including African Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. Applicants are presumed to be economically disadvantaged if they can provide documentation proving their assets, income, and net worth fall below these threshold levels: $4 million, $250,000 averaged over three years, and less than $250,000, respectively.
  • The business must be a “small” business by SBA 8(a) standards, a designation that is subject to a range of variables.
  • The business must demonstrate potential for success.
  • The principals must show good character.


Obtaining 8(a) certification requires a high level of involvement on the part of the applicant and the willingness to commit to a nine-year process, during which time all eligibility requirements have to be maintained. The SBA recommends that potential applicants start by taking an online training and self-evaluation course. If you do not meet the key eligibility criteria in the self-assessment test, you will be directed to other SBA resources deemed most appropriate for your business at its present stage of development.


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Equipment: Lease or Loan?

Posted by Inc. Mar 27, 2014

One of the most common cash-flow considerations business owners face is making the right choice between leasing or buying equipment. There are plenty of good tools available to help you analyze the decision on a dollars-and-cents basis—such as this Excel template and this online calculator, but often there are non-financial factors that must be considered as well.


Making the right buy-vs.-lease decision requires an understanding of some basic characteristics and how they affect cash flow and asset management, says Tim Lemmons, a business consultant and educator at the University of Nebraska-Lincoln. Leasing generally entails a smaller initial outlay of capital than buying does, and lease payments are often lower than traditional installment loan payments, resulting in less liability on the balance sheet. However, when you buy a piece of equipment you gain asset value on the balance sheet, and that value may be used as collateral against other loans. Owned equipment does not require a security deposit as leased equipment often does, so capital that would have been tied up for the duration of the lease is available for other purposes.


There are three major kinds of leases: financial, operating, and sale/leaseback.

  • Financial leases
  • Operating leases
  • In a sale/leaseback scenario, often used for buildings and other commercial property, you sell an asset you own to another party and immediately lease it back for a set period of time. The capital that would otherwise have been encumbered by the asset is freed up for use elsewhere in your business.


In most head-to-head scenarios, buying equipment usually ends up costing less than leasing it, as long as you can take advantage of associated tax benefits, particularly the Section 179 deduction, which essentially allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. However, two of the most attractive aspects of Section 179 expired at the end of 2013. Unless Congress acts to change the law, the limit on capital purchases eligible for the 179 deduction and the maximum deduction allowed drop from $2 million and $500,000, respectively, in 2013 to $200,000 and $25,000 (plus an adjustment for inflation) in the current tax year. In addition, the 50 percent bonus depreciation allowed for tax year 2013 has also expired.


The least-vs.-buy decision is one that can only be made on a case-by-case basis, and making that choice is only the start of the process. If you decide leasing makes the most sense, you need to choose your leasing company carefully. Choosing the right financial partner if you decide buying is the best option is just as important.


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Opinion remains sharply divided on whether the Affordable Care Act (ACA) will turn out to be good, bad, or inconsequential for American businesses, but it is now the law of the land and has an impact on businesses of all sizes. Those least affected by tax, regulatory, and reporting issues are businesses with fewer than 50 full-time equivalent employees (FTEs), although they do face additional requirements in reporting and tax withholding. Companies with fewer than 25 FTEs also face minimal additional duties from ACA, plus they may be eligible for significant tax credits if they provide health care coverage for their employees.


The Small Business Health Care Tax Credit may be the most interesting aspect of ACA for companies with fewer than 25 employees, says Jeffrey Ingalls, president of The Stratford Financial Group, an insurance consulting and brokerage firm, and author of Healthcare Reform Made Easy. In order to claim the credit, a business must cover at least 50 percent of the cost of single (not family) health care coverage for each of its employees, and those employees must have average annual wages of less than $50,000, a figure that will be adjusted for inflation beginning this year. Additionally, employers will have to purchase insurance through the Small Business Health Options Program (SHOP) Marketplace to be eligible for the credit for tax year 2014 and subsequent years.


Businesses in states that have set up their own exchange sites can purchase qualifying insurance coverage through those sites (click here to see if your state has a site). Launch of the federal government’s SHOP Marketplace for businesses in states that don’t have their own site has been postponed until November, but businesses can still qualify for the 2014 credit by enrolling their employees in coverage through an agent, broker, or insurer that offers a certified SHOP plan and has agreed to conduct enrollment according to Department of Health and Human Services standards.


While ACA does not mandate businesses with fewer than 50 FTEs to provide health care insurance to their employees, it does impose notification requirements on any employer covered by the Fair Labor Standards Act (FLSA). (In general, any firm that has at least one employee and at least $500,000 in annual dollar volume of business is covered by the FLSA.) Those businesses must provide notification to their employees about the new Health Insurance Marketplace where employees can obtain coverage on their own. Most people are required to have basic health coverage as of January 1 of this year or be subject to a penalty. Businesses covered by the FLSA must also inform their employees that they may be eligible for a premium tax credit if they purchase coverage through the Marketplace, and they must advise employees that if they purchase a plan through the Marketplace, they may lose the employer contribution, if any, to any health benefits plan offered by the employer. A sample notice for employers who do not offer a health care plan is available here; as is one for employers who do offer a health plan is available.


ACA also requires any business, regardless of size, that offers a health insurance plan to its employees to provide employees with a standard “Summary of Benefits and Coverage” form explaining what the plan covers and how much it costs.    Likewise, all employers are responsible for withholding the increased portion of Medicare Part A Hospital Insurance that ACA imposed on employees with incomes of more than $200,000 for single filers and $250,000 for married joint filers as of January 1, 2013. The law increases the employee portion from 1.45 percent to 2.35 percent on wages in excess of those thresholds, but the employer portion of the tax remains unchanged at 1.45 percent.


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“Capital structure” is a phrase that often comes up when professional investors, analysts, and pundits discuss the current state and future prospects of publicly traded companies. But every business, no matter how large or small, has a capital structure, and it’s important for business owners to understand this concept and what it means for them. Simply speaking, capital structure is about the ratio of different types of capital being used by a business. Debt and equity are the two most common sources of capital for most businesses, but a third type, hybrid securities, combines some aspects of the first two.


Debt financing involves a contractual agreement between a company and a third party that calls for payment of a predetermined claim (interest) regardless of the company’s operating performance. Interest payments are generally tax-deductible, and debt has a fixed life. Bank loans, commercial paper, and corporate bonds are examples of debt financing. Equity financing is permanent because it involves exchanging a share of ownership in the business in exchange for capital. Examples include owners’ equity, venture capital, and common equity (stock. It often provides for the payment of dividends, which generally are not tax-deductible. Hybrid securities share some characteristics of both debt and equity, with the most common type being a convertible bond, which can be converted to equity at a predetermined time and conversion rate.


The optimal capital structure (OCS) for any business is a mix of liabilities and equity that meets all its business objectives at the lowest cost to the business while adhering to all regulatory requirements and allowing for the adoption of relevant industry best practices and appropriate risk management. Formulating OCS can be a complicated undertaking for large, diversified organizations, but the basic steps involved in the process are the same for any business:

  • Define the capital needed and the business objectives. This is necessary to determine whether there are any elements of the business plan that may dictate parts of the capital structure.
  • Identify regulatory restrictions to make sure the capital structure you are planning will be in compliance with all applicable rules and regulations, both local laws affecting all commercial enterprises and industry-specific ones affecting the field in which you operate.
  • Identify risk restrictions, including liquidity (your ability to meet maturing obligations as they come due), interest rate risk on debt that does not have a fixed rate, and exchange rate risk if you operate in more than one country or plan to.
  • Identify the range, amount, and cost of funding instruments available. Many variables can affect the options available to you, including the legal structure of your company, the market(s) where you operate, and the regulations to which your business is subject.
  • Build the optimal capital structure, that is, fill any capital need identified with the lowest-cost funding instruments available to you as determined in the previous step.
  • Analyze the total financial cost of the OCS by estimating its weighted average cost of capital (WACC), which is the sum of each funding instrument’s after-tax cost multiplied by the percentage of the total capital structure it represents.


OCS for most growth-oriented companies will focus on internal over external financing, says Iqbal Ashraf, CEO of consulting firm Mentors Guild. “In general, avoid external funding, and if you have to raise external funding, get as much debt as you can service through at least one year of bad business.” Debt is easier to raise and cheaper than equity, and it leaves control of the business intact with the owners. The main risk of high debt is repayment when cash is tight, which can give you sleepless nights, lower the possibility of further financing, “and may even put your business at risk,” he says.


“Try equity after you are leveraged to your board’s comfort level or the industry average, whichever is higher, and get it from those who bring more to the table than just cash,” Ashraf adds. “Get ready for scrutiny, CPAs, and lawyers, and be prepared to share your profits in perpetuity.”


Optimizing capital structure can be a challenge even for those with a sophisticated financial background, but getting a grasp of the fundamentals is important for any business owner. A great resource that provides an easily understandable dissection of the concept and the process for achieving it is Optimizing Capital Structure Toolkit, a step-by-step guide with sample spreadsheets created by Women’s World Banking.


Disclaimer: Since the details of your situation are unique, you should always seek the services of a qualified CPA, tax advisor, and/or other financial professional.


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Content created exclusively for Bank of America.


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