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Cunningham, Malone, & Morton

The Tax Professionals

Starting A Business

This section contains a selection of articles pertinent to starting a business. Click a link in the table of contents to scroll to that part of the guide.

Table of Contents

Starting a Business? 3 Things You Must Know

Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where we can help.

Employer Identification Number (EIN)

Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012 you can only apply for one EIN per day. The previous limit was 5.

State Withholding, Unemployment, and Sales Tax

Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).

Payroll Record Keeping

Payroll reporting and record keeping can be very time consuming and costly, especially if it isn't handled correctly. Also keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:

Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.

Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.

Form of Business Organization: Which Should You Choose?

The decision as to which type of business organization to use when starting a business is a major one. And, it's a decision to be revisited periodically as your business develops. While professional advice is critical in making this decision, it's also important to have a general understanding of the options available. This Financial Guide provides just such an overview.

Businesses fall under one of two federal tax systems:

  1. Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business S-corporation-called the "C-corporation" (C-corp) for reasons we'll see shortly-and the system of taxing first the corporation and then its owners is called the "corporate double tax."
  2. "Pass through" taxation. The entity (called a "flow-through" entity) is not taxed but its owners are each taxed (more or less) on their proportionate shares of the entity's income. The leading forms of pass through entity (further explained below) are:
    • Partnerships, of various types.
    • "S-corporations" (S-corps), as distinguished from C-corps.
    • Limited liability companies (LLCs).

A sole proprietorship such as John Doe Plumbing or Marcus Welby, M.D. is also considered a pass through entity even though no "organization" may be involved.

The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass through entity that has only one level (directly on the owners).

Tip: Co-owners and investors in pass through entities may need to have their operating agreements require a certain level of cash distributions in profit years, so they will have funds from which to pay taxes.

Losses are directly deductible by pass through owners while C-corp losses are deducted only against profits (past or future) and don't pass through to owners.

Tip: Business and tax planners therefore typically advise new businesses-those expected to have startup losses-to begin as pass through entities, so the owners can deduct losses currently against their other income, from investments or another business.

The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership. Liability for corporations and LLCs is generally limited to your actual or promised investment in the business.

Types of Business Entities

C and S-Corps

The S-Corp (so named from a chapter of the tax code) is a tax device created by federal law in 1958. It is a regular corporation with regular limited liability under state law, whose owners elect pass through status for federal tax purposes. That status requires compliance with a number of often constricting rules but, with some exceptions, complying corporations escape federal corporate tax. As regular business S-corporations under state law, they may be taxed under state tax law as regular corporations, or in some other way. Corporations whose owners don't choose to make the federal S-corp election-that choose to be taxed a S-corporations-are called C-corps (after another chapter of the tax code).


Ordinary partnerships, called "general partnerships," do not have limited liability under state law.

Limited partnerships limit liability for some partners but not others. A limited partnership has both general partners (who manage the business) and limited partners (who in essence are passive investors). The liability of limited partners is generally limited to their investments. The liability of general partners is theoretically unlimited, but can be limited in practice where the general partner is an entity, such as a corporation, with limited liability. A limited partner who takes on what state law considers "too much" management participation is treated as a general partner, losing limited liability.

Both general and limited partnerships are treated as pass through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.

A still more recent development, not yet adopted everywhere, is the limited liability partnership (discussed below) which was designed for professional practices.

Other partnership forms are the giant "publicly traded partnerships" (treated as C-corps for tax purposes) and limited liability limited partnerships (adopted in only a few states) which limit the liability of general partners (where two or more) as well as of limited partners.

Limited Liability Companies (LLCs)

LLCs have become the most popular business form for new entities, and many existing entities have converted to this form. They exist in some form in every state. They embody limited liability features of corporations and pass through characteristics of partnerships and S-corps, but are more flexible than S-corps.

For business law purposes, LLC members may be either passive investors or active investor-managers. Unlike with limited partnerships, active management won't affect limitation of liability. For federal tax purposes, LLCs are treated as partnerships (unless they elect otherwise).

Note: Since LLC rules vary from state to state, a characteristic, power or rule in the state where an LLC was created may not apply in some other state where it does business.

Note: Some states do, and some states do not, authorize LLCs with only one member.

Tip: Where one becomes the sole surviving LLC member in a state that doesn't allow single member LLCs, consider quickly incorporating (to regain limited liability) and electing S-corp status (to retain pass through treatment).

Choosing the Tax Treatment

Since 1997, the IRS has allowed business owners a previously unheard-of measure of choice as to how the entity will be federally taxed. It allows you to choose between C-corp and pass through treatment (universally called "check-the-box").

A few choices are not allowed. If the entity is incorporated, it must be treated as a corporation (which doesn't preclude an S-corp election if otherwise available). Publicly traded partnerships and publicly traded LLCs must be treated as C-corps.

Note: Special rules apply to foreign entities.

All other forms of partnership may be taxed either as C-corps or as pass through entities (either as partnerships or, if S-corp status is available and elected, as an S-corp.)

An LLC with two or more members may choose to be taxed as a C-corp, a partnership or an S-corp (if elected). An LLC with a single member (where this is allowed) may choose either to be taxed as a C-corp or an S-corp (if elected) or to have the entity disregarded. In this case, if the LLC is owned by an individual, the individual is taxed directly (and can deduct losses) as with a sole proprietorship.

Typically, partnerships and multimember LLCs choose to be taxed as partnerships while single member LLCs choose to have the entity disregarded. With "check-the-box," the IRS will no longer question your right to combine limited liability with pass through treatment or, if you wish, to waive pass through treatment for an entity otherwise entitled to it (with the exceptions noted above).

Any choice has consequences. For example, if you opted last year for corporate treatment and want partnership treatment this year, you'll be treated as liquidating the corporation, and taxed accordingly (discussed below).

Most-but not all-states that impose corporate taxes follow a taxpayer's federal "check-the-box" choice for state tax purposes. This doesn't necessarily mean that the tax treatment will be the same. For example, a state may accept an LLC's election to be taxed as a partnership and still impose an entity level tax on the LLC.

An election to be taxed as a certain type of entity for federal tax purposes does not make it such an entity under state business law.

Choosing the Form

Let us now consider which form will work best for the way you want to run your business, and capitalize on its profits or startup losses. "Compared to what?" will be a major consideration. We'll need to compare the taxable entity (the C-corp) with pass through entities and compare each of the pass through entity with the others. We'll also look at tax consequences of changing from one entity to another.

A major decision of whether to use a C-corp or some form of pass through C-corp is sometimes necessary from a business standpoint. For example, if interests in the enterprise are to be publicly traded, only the C-corp is appropriate.

Note: For some activities, states may require the corporate form (banks, for example) and S-corp rules may preclude the S-corp form.

From a tax standpoint, while C-corporations present two levels of tax, the first tax (on the corporation) can be at a rate lower than the tax on the owner and the second tax (on the owner) is usually postponed until the owner receives dividends or other assets from the corporation.

Caution: Distribution of appreciated assets to the owner, or sale of such assets and distribution of the proceeds, are taxable both to the corporation and then to owners. They are no longer opportunities, as they once were, to avoid two levels of tax.

The tax on the owner may be at reduced capital gains rates. This is the case for appreciated assets distributed in corporate liquidation and, after 2002 and before 2009, it's also usually the case for dividends distributed by ongoing corporations.

Caution: Funds can build up in the corporation at a relatively low rate until distributed. However, the eventual tax on the owner, plus the corporate tax, may eat up more of the profits than the single (pass through) tax on the owner does.

A C-corp can minimize corporate tax by paying out all or almost all of its income to owners in the form of compensation and fringe benefits. Assuming these payments are deductible as business expenses, this approximates pass through treatment, since the corporation isn't taxed on what it receives and then deducts; the owner-recipients alone are taxed on this. This arrangement works best in personal service businesses, where full business expense deduction is more likely to be allowed.

Caution: The IRS and the courts may limit deduction in other settings, finding owner compensation to be "unreasonable" and partly nondeductible where it reflects a distribution of profits from capital or from the efforts of non-owners.

To summarize, some businesses may find C-corp status necessary for business purposes. But only comparatively rarely will it be a preferable tax choice for a new business.

Choosing the Pass through Entity

If you decide on a pass through entity, which of the several do you choose? The following is a brief discussion of the rules applicable to each.


Limitation of liability gives S-corps the edge-for business reasons-over general partnerships, sole proprietorships, limited partnerships (as to limited partners whose partnership activity might expose them to unlimited liability), and LLCs in states that don't allow single member LLCs.

Caution: Limited liability comes at a cost, however, since states may impose a tax on S-corps not imposed on entities with unlimited liability.

S-corps are subject to a number of significant rules and restrictions:

  • All owners must agree to S-corp status. This means that one co-owner can exact a price or impose conditions for his or her agreement.
  • An S-corp can have only one class of stock, which means that income, losses and other tax attributes are allotted among stockholders in proportion to stock ownership.
  • The number of co-owners is limited (to 100, with qualifications, counting members of the same family as one stockholder).
  • There are limitations as to who can be co-owners (for example, a nonresident alien cannot) and as to the kind of business that can qualify for as an S-corp (for example, an insurance company cannot).

Caution: Failure to meet, or ceasing to meet, these requirements means loss of S status and conversion to C-corp status and C-corp taxes.

These limits and restrictions will be contrasted, below, with the more liberal tax rules for partnerships and LLCs.

Note: S-corps are often preferred because they are simple to operate. However, they are not suitable for many businesses. The much wider range of options for partnerships and LLCs introduces tax planning complexity which may be more than many or most small businesses can effectively use or understand.

LLCs vs. S-corporations

LLCs and S-corps share the same business advantage-limitation of liability. S-corps are a bit better understood by the business community because LLCs are new and vary from state to state.

  • The tax advantages of LLCs, as compared to S-corps, are the tax advantages of partnerships. All the points below where LLCs outscore S-corps arise because LLCs can choose partnership tax status.
  • LLC can to some degree allocate tax attributes, like income or certain kinds of income, depreciation deductions, etc., disproportionately among members to suit their individual tax situations (unlike S-corps limited by the effect of the single-class-of-stock rule).
  • S-corp owners can deduct startup or operating losses up to their investment plus any debt that the S-corp owes them. LLC members can do the same but can deduct further, up to their share of the debt the LLC owes others.
  • Adding co-owners after the entity is formed is easier with LLCs. An outsider's transfer of appreciated property for an LLC membership interest is tax-free. A comparable transfer to an S-corp is taxable unless the new co-owner-transferor (or group of transferors) owns more than 80% of the S-corp after the transfer.
  • Complex tax adjustments ("basis adjustments") can be made by the LLC when LLC interests change hands or LLC property is distributed. These adjustments, unavailable with S-corps, can have the effect of reducing amounts taxable to certain LLC members.
  • Distribution of appreciated LLC property to LLC members is not taxable to the LLC. Comparable S-corp distributions to stockholders are taxable to the S-corp.

Tip: Depending on circumstances, S-corp status can be preferable to LLC status when the owners leave the business. The LLC is not taxed when appreciated property is distributed to its members, which is a standard form of business liquidation. But the members would be taxed on distributions exceeding the "basis" (broadly, the amount they invested) of their interests. S-corp owners, on the other hand, can arrange a tax-free exit, via a corporate reorganization in which they transfer their S-corp stock for stock in a corporate acquirer. (Later sale of stock in the acquirer would be taxable.)

Depending on state law, S-corps and LLCs may be taxed at the entity level in states where they do business.

LLCs vs. Partnerships

LLCs, with their limited liability for all members, have the edge on general and limited partnerships from a business standpoint. While the federal tax treatment of partners and LLC members is basically the same, there are occasional special tax rules for limited partners (especially self-employment tax rules).

Note: It is not clear whether these special tax rules extend to non-manager LLC members.

Note: LLCs are more likely than partnerships to be subject to a state tax.

LLCs vs. Proprietorships

LLCs, with their limited liability, are preferable, where available, for sole proprietors from a business standpoint. Where the sole proprietor so elects, the LLC is ignored and the proprietor is taxed directly under federal tax rules as if no separate entity existed.

Note: Some states do-and some do not-ignore the LLC entity for state tax purposes.

Professional Practice Entities

Professional practices (such as doctors and lawyers) have a number of options as to their form of business entity.

Professional Corporations (P.C.s)

These provide limited liability for general business debts but not for the professional's own malpractice and, in some states, no limited liability for malpractice of fellow practitioners in the firm. They may be C-corps or S-corps. Unlike many other C-corps, a P.C. C-corp can use the cash method of accounting.


Most states allow professionals to practice in LLCs, either under a general LLC law or a special Professional Limited Liability Company law (PLLC). In either case, liability is not limited for the professional's own malpractice but, depending on the state, may be limited for the malpractice of other firm members and for other firm debts. These LLCs share the comparative advantages (and minor disadvantages) of other LLCs.

Limited Liability Partnerships (LLPs)

LLPs are general partnerships whose general partners have limited liability. They are designed for professional practices. A partner is liable for his or her own malpractice but not for a partner's malpractice or, depending on state law, other acts of partners. Typically they are required by state law to maintain malpractice insurance, and are obliged to pay a per-partner fee to keep their status, but are not subject to entity level tax.

Sole Proprietors and Partners

Many practitioners choose to practice as sole proprietors or partners, rather than in a limited liability entity. They reason that their main exposure to liability is to malpractice claims, and the entity won't protect against claims for their own malpractice (or, in some states, for a partner's malpractice). They therefore choose to rely on malpractice insurance (which practitioners in limited liability entities may have too).

Tip: Sole proprietorships and partnerships are less likely than limited liability entities to be subject to state entity level tax.

Other Pros and Cons of C-Corps

A C-corp can be preferable to pass through entities as to fringe benefits. As employees, owner-employees of a C-corp qualify for certain employee fringe benefits. On the other hand, self-employed persons (partners, LLC members, sole proprietors, and more-than 2% stockholders in S-corps) don't qualify.

Example: Health insurance can be wholly tax-free to C-corp owner-employees (through full deduction by the C-corp and full tax exemption for the owner-employee). However, it is only partly tax-free to the self-employed, because of their limited tax deduction for this item.

Another modest advantage of the C-corp is that they are less likely to be subject to passive loss deduction limitations. These limit the opportunity to deduct losses from activities the taxpayer doesn't "materially participate" in, against income from investments or other businesses. Typically, limited partners have been the group most subject to passive loss limitations.

Another tax disadvantage of C-corp status is its limited ability to report for tax purposes on the cash method of accounting, which generally defers tax as compared to the accrual method.

Further Insights on S-Corps

A qualifying S-corp, generally nontaxable, can be subjected to C-corp taxation on certain items without losing S status for other items. This happens when a C-corp converts to an S-corp and carries over appreciated property later sold at a gain. The S-corp pays a corporate tax on the gain, which is then taxed to stockholders (reduced by the corporate tax). Because S-corps are intended to be operating companies rather than holding companies, this also happens when the S-corp has "excessive" passive investment-type income (interest, dividends, and the like, in excess of 25% of gross receipts). Here the excess is subject to corporate tax and is then taxed to stockholders (minus the corporate tax).

Some see S-corps as a way to reduce employment taxes. For example, one earning $120,000 in a sole proprietorship might convert to an S-corp and take $70,000 in pay and $50,000 in dividends. Income taxes are unchanged by this but, it's reasoned, $50,000 now received as dividends escapes employment tax (the $120,000 of self-employment earnings was subject to both retirement and Medicare tax up to $102,000 for 2008 and $97,500 for 2007 and Medicare tax above that). In abuse situations, such as where little or no wages were paid, IRS has treated the dividends as pay subject to employment taxes on the owner-employees and on the S-corp employer. But in cases where substantial wages were paid, along with substantial dividends, IRS has not objected.

Changing To Another Entity

The many advantages of LLCs, for both business and tax reasons, have encouraged many business owners to convert, or consider converting, to the LLC form. But other changes of entity may suit particular situations-for example, general partnership to LLP (for business reasons) or C-corp to S-corp (for tax reasons). For tax purposes, a change of entity via a check-the-box decision is treated for tax purposes as an actual change of the entity (whatever may happen under state business law).

Here, briefly and in broad outline, is what happens for federal tax purposes when entity status is changed (or treated as changed under-check-the-box). How these apply in your own situation must be reviewed in depth with a tax/business advisor.

  • C-corp converts to S-corp or vice versa. No tax on the conversion. Pass through treatment applies while it is an S-corp.
  • C- corp or S-corp converts to LLC, partnership or sole proprietorship. Generally, a tax on the liquidation of the corporation, with pass through treatment for the new entity (in modified form in the case of a liquidating S-corp).
  • Partnership converts to LLC or vice versa; sole proprietorship converts to single member LLC or vice versa. No tax on conversion-pass through treatment continues.
  • LLC, partnership or sole proprietorship converts to C or S-corp. Generally, no tax on conversion. Pass through treatment (in modified form) for S-corp income.

Government and Non-Profit Agencies

The Small Business Association (SBA) has offices located throughout the United States. Contact SBA through their website.

Advantages of Incorporating

Why Incorporate?

All legal and tax professionals agree, if your business is not incorporated you may be throwing away thousands of dollars in tax savings and deductions. In addition, all of your personal assets such as your home, cars, boats, savings and investments are at risk and could be used to satisfy any law suits, debt or liability incurred by the business. Forming a Corporation can provide the protection and tax savings needed to give you peace of mind and make your business even more successful and profitable.

Some Benefits Include:

Liability Protection: Properly forming and maintaining a corporation will provide personal liability protection to the owners or shareholders of the corporation for any debt or liability incurred by the business. Personal liability of the shareholders is normally limited to the amount of money invested in the corporation.

Tax Advantages: Another important benefit is that a corporation can be structured many ways to provide substantial tax savings. You can minimize self-employment taxes and increase the number of allowable deductions lowering the taxes you pay on the income of the business. Many corporations structure retirement and tax deferred savings plans for their owners and employees which can provide even greater tax savings.

Raising Capital: Sale of stock for the purposes of raising capital is often more attractive to investors than other forms of equity sales. A corporation can also issue Corporate Bonds to raise capital for expenditures without compromising the ownership of the business.

Advantages of Limited Liability Companies

Combining the Best Aspects of Partnerships and Corporations

A Limited Liability Company, or LLC, is not a corporation, although it offers many of the same advantages. An LLC is best described as a combination of a corporation and a partnership. LLCs offer the limited liability of a corporation, while allowing more flexibility in managing the business and organization.

An LLC does not pay any income tax itself. It's a "flow through" entity that allows profits and losses to flow through to the tax returns of the individual members, avoiding the double taxation of C corporations.

While setting up an LLC can be more difficult than creating a partnership (or sole proprietorship), running one is significantly easier than running a corporation. Here are the main features of an LLC:

Limited Personal Liability

Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."

While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. See Exceptions to Limited Liability.

LLC Taxes

Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. This means that business income passes through the business to the LLC members, who report their share of profits -- or losses -- on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.

While an LLC itself doesn't pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC's profits (or losses), which the IRS reviews to make sure the LLC members are correctly reporting their income.

LLC Management

The owners of most small LLCs participate equally in the management of their business. This arrangement is called "member management."

The alternative management structure -- somewhat awkwardly called "manager management" -- means that you designate one or more owners (or even an outsider) to take responsibility for managing the LLC. The non-managing owners (sometimes family members who have invested in the company) simply sit back and share in LLC profits. In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC.

Business Plans: How To Prepare An Effective One

One of the major steps in starting a new business or getting financing is to prepare a business plan. This Financial Guide provides you with the basic information that you need to include in your business plan.

A well thought out business plan is a valuable tool for any new company or one that is seeking financing. It also provides milestones to gauge your success and the process of developing a business plan helps you think through some important issues that you may not have considered yet.

Before you begin preparing your business plan, take time to explore and evaluate your business (and personal) goals. You can then use this information to build a comprehensive and effective business plan that will help you reach these goals.

The purpose of this Financial Guide is to provide a basic introduction to preparing a business plan, rather than specific details to be incorporated into the plan, since those depend on your specific goals and the nature of the specific business. Professional guidance is recommended when it comes to the actual preparation of the plan, particularly for the financial components.

If You're Starting a New Business

If the reason for preparing the business plan is that you are starting a new business, you should first examine your reasons for wanting to go into business. Some of the most common reasons for starting a business are:

  • You want to be your own boss.
  • You want financial independence.
  • You want creative freedom.
  • You want to fully use your skills and knowledge.

Next, you need to determine is what business is "right for you." Ask yourself these questions:

  • What do I like to do with my time?
  • What technical skills have I learned or developed?
  • What do others say I am good at?
  • Will I have the support of my family?
  • How much time do I have to run a successful business?
  • Do I have any hobbies or interests that are marketable?

Then, you should identify the niche your business will fill. Start by conducting the research necessary to answer questions like these:

  • What business am I interested in starting?
  • What services or products will I sell?
  • Is my idea practical, and will it fill a need?
  • What is my competition?
  • What is my business's advantage over exiting firms?
  • Can I deliver a better quality service?
  • Can I create a demand for my business?

You will also need to consider several options for getting your business off the ground:

  • Do you want to purchase an existing business or start one from scratch?
  • Are there franchises available for this type of business? If so, does a franchise make sense for you?

The final step before developing your plan is the pre-business checklist. You should answer these questions:

  • What skills and experience do I bring to the business?
  • What will be my legal structure?
  • How will my company's business records be maintained?
  • What insurance coverage will be needed?
  • What equipment or supplies will I need?
  • How will I compensate myself?
  • What financing will I need?
  • Where will my business be located?
  • What will I name my business?

Your answers will help you create a focused, well-researched business plan, and that should serve as a blueprint. It should detail how the business will be operated, managed, and capitalized.

Based upon your initial answers to the questions listed above, the next step is to formulate a business plan. A business plan sets forth the mission or purpose of the business venture, describes the product or services to be provided, presents an analysis of the market state, outlines goals that the business has and how it intends to achieve those goals, and last but not least, includes a formal financial plan.

In most cases, a business plan is necessary to obtain external capital for your business, but it also serves a number of other purposes. It forces you to critically evaluate the feasibility of your business and whether it will provide a return which is appropriate to the time and money you will invest in the business. The plan provides a benchmark against which you can evaluate the success of your business in later years.

What the Business Plan Should Include

Whether you are starting a new business, seeking financing for an existing business, attempting to analyze a new market, or wanting to define and evaluate future growth, the following outline of a typical business plan can serve as a guide. However, you should adapt it to your specific business.

Introduction and Mission Statement

In the introductory section of your business plan, you should:

  • Give a detailed description of the business and its goals.
  • Discuss the ownership of the business and its goals.
  • List the skills and experience you bring to the business.
  • Discuss the advantages you and your business have over your competition.

Products, Services and Markets

In this section, you must describe your products and/or services and:

  • Identify the customer demand for your product/service.
  • Describe how your product/service is unique.
  • Identify your market, as well as its size and locations.
  • Explain how your product/service will be advertised and marketed.
  • Explain the pricing strategy.

Financial Management

In this section, you should:

  • Explain the source and amount of initial equity capital.
  • Develop a monthly operating budget for the first year.
  • Develop an expected (return on investment), or ROI, and a monthly cash flow for the first year.
  • Provide projected income statements and balance sheets for a two-year period.
  • Discuss your break-even point.
  • Explain your personal balance sheet and method of compensation.
  • Discuss who will maintain your accounting records and how they will be kept.
  • Provide "what if" statements that address alternative approaches to any problem that may develop.


In this section it is important to:

  • Explain how the business will be managed on a day-to-day basis.
  • Discuss hiring and personnel procedures.
  • Discuss insurance, lease or rent agreements, and issues pertinent to your business.
  • Account for the equipment necessary to produce your product or services.
  • Account for production and delivery of products and services.

Concluding Statement

In the ending statement, you summarize your business goals, objectives, and express your commitment to the success of your business.

Once you have completed your business plan, review it with a friend or business associate. When you feel comfortable with the content and structure, make an appointment to review and discuss it with your banker. The business plan is a flexible document that should change as your business grows.

Raising Capital: How To Get Money For a Small Business

In addition to drive, ambition and a great deal of planning, starting and expanding a small business generally requires capital. Capital may come from family, friends, lenders or others. This Financial Guide provides an overview of how to get the capital you need to start or grow your business.

One key to successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is one of the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy; in fact, it can be a complex and frustrating process.

However, if you are informed and have planned effectively, raising money for your business will not be a painful experience. Professional guidance should be considered in this quest, especially as to the financial information for the loan proposal.

This Financial Guide focuses on ways a small business can raise money and explains how to prepare a loan proposal.

Finding Sources of Money

There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision. These include:

  • Personal Savings. The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans.
  • Friends and Relatives. Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started.
  • Banks and Credit Unions. The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.
  • Venture Capital Firms. These firms help expanding companies grow in exchange for equity or partial ownership.

Borrowing Money

It is often said that small business people have a difficult time borrowing money, but this is not necessarily true. Banks make money by lending money; however, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests.

Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: "High Risk!" To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

Terms ofloans may vary from lender to lender, but there are two basic types of loans: short-term and long-term.

A short-term loan generally has a maturity date of one year. These include working-capital loans, accounts-receivable loans and lines of credit.

Long-term loans generally mature between one and seven years. Real estate and equipment loans are also considered long-term loans, but may have a maturity date of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

How to Write a Loan Proposal

Approval of your loan request depends on how well you present yourself, your business and your financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal.

A good loan proposal will contain the following key elements:

General Information

  • Business name, names of principals, social security number for each principal, and the business address.
  • Purpose of the loan: exactly what the loan will be used for and why it is needed.
  • Amount required: the exact amount you need to achieve your purpose.

Business Description

  • History and nature of the business: details of what kind of business it is, its age, number of employees and current business assets.
  • Ownership structure: details on your company's legal structure.

Management Profile

Develop a short statement on each principal in your business; provide background, education, experience, skills and accomplishments.

Market Information

Clearly define your company's products as well as your markets. Identify your competition and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs.

Financial Information

  • Financial statements: balance sheets and income statements for the past three years. If you are just starting out, provide projected balance sheets and income statements.
  • Personal financial statements on yourself and other principal owners of the business.
  • Collateral you would be willing to pledge as security for the loan.

How Your Loan Request Will Be Reviewed

When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues:

  • Have you invested savings or personal equity in your business totaling at least 25% to 50% of the loan you are requesting? (Remember, a lender or investor will not finance 100% of your business.)
  • Do you have a sound record of credit-worthiness as indicated by your credit report, work history and letters of recommendation? This is very important.
  • Do you have sufficient experience and training to operate a successful business?
  • Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
  • Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

SBA Programs

The SBA offers a variety of financing options for small businesses. The SBA's assistance usually is in the form of loan guaranties, - i.e., it guarantees loans made by banks and other private lenders to small business clients. Generally, the SBA can guarantee up to $750,000 or 75% of the total loan value, whichever is less. The average size of an SBA-guaranteed loan is $175,000, and the average maturity is about eight years.

Whether you are looking for a long-term loan for machinery and equipment, a general working capital loan, a revolving line of credit, or a "microloan," the SBA has a financing program to fit your needs.

Note: The SBA has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital. It guaranteed over 60,000 loans totaling $9.9 billion to America's small businesses in fiscal year 1995. It also gives management and technical assistance to nearly 1 million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers.

The 7(a) Loan Guaranty Program, financing that can satisfy the requirements of almost any new or growing small business. The SBA offers a number of specialized loan and lender delivery programs.

  • The 7(m) MicroLoan Program(very small loans to small businesses.)
  • CAPLines - short-term lending for short-term needs.
  • Export Working Capital and International Trade loans short- and long-term financing for exporters.
  • DELTA - loans to fund defense conversion.
  • Pre-qualified Loans for Minorities and Women loan packaging support and the SBA's commitment before going to a lender.
  • SBA Express (FA$TRAK) - Increased lender authority to provide an SBA guaranty on small loans no extra paperwork, no waiting for SBA approval.
  • The Certified and Preferred Lenders Program faster service through licensed lenders.

The 7(a) Loan Guaranty Program

The 7(a) Loan Guaranty Program is the SBA's primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.

The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs.

When a small business applies to a lending institution for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty. SBA backing on the loan is then requested by the lender. In guaranteeing the loan, the SBA assures the lender that, in the event the borrower does not repay the loan, the government will reimburse the lender for its loss. By providing this guaranty, the SBA helps tens of thousands of small businesses every year get financing they would not otherwise obtain.

To qualify for an SBA guaranty, a small business must meet the 7(a) criteria and the lender must certify that it could not provide funding on reasonable terms except with an SBA guaranty. The SBA can then guarantee as much as 80% on loans of up to $100,000 and 75% on loans of more than $100,000. In most cases, the maximum guaranty is $750,000 (75% of $1 million). Exceptions are the International Trade, DELTA and 504 loan programs, which have higher loan limits.

How The Procedure Works. You submit a loan application to a lender for initial review. If the lender approves the loan subject to 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 make monthly loan payments directly to the lender. As with any loan, you are responsible for repaying the full amount of the loan. There are no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans. Repayment plans may be tailored to each individual business.

Permissible Use of Proceeds. You can use a 7(a) loan to: expand or renovate facilities; purchase machinery, equipment, fixtures and leasehold improvements; finance receivables and augment working capital; refinance existing debt (with compelling reason); finance seasonal lines of credit; construct commercial buildings; and/or purchase land or buildings.

Terms. The length of time for repayment depends on the use of the proceeds and the ability of your business to repay:

  • Usually up to 7 years for working capital
  • Up to 25 years for fixed assets such as the purchase or major renovation of real estate or purchase of equipment (not to exceed the useful life of the equipment).

Interest Rates. Both fixed and variable interest rates are available. Rates are pegged at no more than 2.25% over the lowest prime rate (the lowest prime rate as published in The Wall Street Journal on the day the application is received by the SBA) for loans with maturates of less than seven years and up to 2.75% for seven years or longer. For loans under $50,000, rates may be slightly higher.

Fees. The SBA charges the lender a nominal fee to provide a guaranty, and the lender may pass this charge on to you. The fee is based on the maturity of the loan and the dollar amount that the SBA guarantees. On any loan with a maturity of one year or less, the fee is just 0.25% of the guaranteed portion of the loan. On loans with maturates of more than one year where the portion that the SBA guarantees is $80,000 or less, the guaranty fee is 2% of the guaranteed portion. On loans with maturates of more than one year where the SBA's portion exceeds $80,000, the guaranty fee is figured on an incremental scale, beginning at 3%.

Collateral. You must pledge sufficient assets, to the extent that they are reasonably available, to adequately secure the loan. Personal guaranties are required from all the principal owners of the business. Liens on personal assets of the principals also may be required. However, in most cases a loan will not be declined where insufficient collateral is the only unfavorable factor.

Eligibility. Your business generally must be operated for profit and fall within the size standards set by the SBA. The SBA determines if the business qualifies as a small business based on the average number of employees during the preceding 12 months or on sales averaged over the previous three years. Loans cannot be made to businesses engaged in speculation or investment.

Maximum Size Standards. The precise ceiling depends upon your company's Standard Industrial Classification (SIC) code.

  • Manufacturing - from 500 to 1,500 employees;
  • Wholesaling - 100 employees;
  • Services - from $2.5 million to $21.5 million in annual receipts;
  • Retailing - from $5 million to $21 million;
  • General construction - from $13.5 million to $17 million;
  • Special trade construction - average annual receipts not to exceed $7 million;
  • Agriculture - from $0.5 million to $9 million;

Here are the ceilings at which businesses are ineligible to participate:

What You Need to Take to the Lender. Documentation requirements may vary; contact your lender for the information you must supply. Common requirements include the following:

  • Purpose of the loan
  • History of the business
  • Financial statements for three years (existing businesses)
  • Schedule of term debts (existing businesses)
  • Aging of accounts receivable and payable (existing businesses)
  • Projected opening day balance sheet (new businesses)
  • Lease details
  • Amount of investment in the business by the owner(s)
  • Projections of income, expenses and cash flow
  • Signed personal financial statements
  • Personal resume(s)

What the SBA Looks For. Here are the qualifications the SBA is on the lookout for:

  • Good character
  • Management expertise and commitment necessary for success
  • Sufficient funds, including the SBA-guaranteed loan, to operate the business on a sound financial basis (for new businesses, this includes the resources to withstand start-up expenses and the initial operating phase)
  • Feasible business plan
  • Adequate equity or investment in the business
  • Sufficient collateral
  • Ability to repay the loan on time from the projected operating cash flow

In addition to the standard loan guaranty, the SBA has targeted programs under 7(a) that are designed to meet specialized needs. Unless otherwise indicated, they are governed by the same rules, regulations, interest rates, fees, etc. as the regular 7(a) loan guaranty.

The CAPLines Program

The CAPLines Loan Program is the program under which the SBA helps small businesses meet their short-term and cyclical working-capital needs. A CAPLines loan can be for any dollar amount (except for the Small Asset-Based Line), and the SBA will guarantee 75% up to $750,000 (80% on loans of $100,000 or less).

There are five short-term working-capital loan programs for small businesses under CAPLines:

  1. Seasonal Line. This line advances funds against anticipated inventory and accounts receivables for peak seasons and seasonal sales fluctuations. It can be revolving or non-revolving.
  2. Contract Line. This line finances the direct labor and material costs associated with performing assignable contract(s). It can be revolving or non-revolving.
  3. Builders Line. If you are a small general contractor or builder constructing or renovating commercial or residential buildings, this line can finance your direct labor and material costs. The building project serves as the collateral, and loans can be revolving or non-revolving.
  4. Standard Asset-Based Line. This is an asset-based revolving line of credit that provides financing for cyclical, growth, recurring, and/or short-term needs. Repayment comes from converting short-term assets into cash, which is remitted to the lender. Businesses continually draw, based on existing assets, and repay as their cash cycle dictates. This line generally is used by businesses that provide credit to other businesses. Because these loans require continual servicing and monitoring of collateral, additional fees may be charged by the lender.
  5. Small Asset-Based Line. This is an asset-based revolving line of credit of up to $200,000. It operates like a standard asset-based line except that some of the stricter servicing requirements are waived, providing the business can consistently show repayment ability from cash flow for the full amount.

Use of Proceeds. CAPLines may be used to:

  • Finance seasonal working-capital needs
  • Finance direct costs needed to perform construction, service and supply contracts
  • Finance direct costs associated with commercial and residential building construction without a firm commitment for purchase
  • Finance operating capital by obtaining advances against existing inventory and accounts receivable
  • Consolidate short-term debt.

Terms. Each of the five lines of credit has a maturity of up to five years, but, because each is tailored to your individual needs, a shorter initial maturity may be established. You may use CAPLines funds as needed throughout the term of the loan to purchase assets, as long as sufficient time is allowed to convert the assets into cash by maturity.

Interest Rates

Interest rates are negotiated with your lender, up to 2.25% over the prime rate. The guaranty fee is the same as for any standard 7(a) loan. The SBA places no servicing-fee restrictions on the lender for the Standard Asset-Based Line but requires full disclosure to ensure that fees are reasonable. On all other CAPLines, the servicing fee is restricted to 2% based on the average outstanding balance.

Collateral. The primary collateral will be the short-term assets financed by the loan.

The International Trade Program

The International Trade Program helps small businesses that are engaged in international trade, preparing to engage in international trade, or adversely affected by competition from imports.

The SBA can guarantee as much as $1.25 million in combined working-capital and fixed-asset loans. The working-capital portion of the loan may be made according to the provisions of the Export Working Capital Program (see below) or other SBA working-capital programs.

Use of Proceeds. Proceeds may be used for:

  • Working capital; and/or
  • Purchasing land and buildings, building new facilities; renovating, improving or expanding existing facilities; purchasing or reconditioning machinery, equipment and fixtures; and making other improvements that will be used within the United States to produce goods or services for export.

Proceeds may not be used to repay existing debt.

Terms, Interest Rates and Fees. Loans for facilities or equipment can have maturates of up to 25 years. The working capital portion of a loan under Export Working Capital Program provisions has a maximum maturity of three years. Rates and fees are the same as for the general 7(a) loan.

Collateral. The lender must take a first-lien position (or first mortgage) on items financed under an international trade loan. Only collateral located in the United States, its territories and possessions is acceptable as collateral under this program. Additional collateral may be required, including personal guaranties, subordinate liens or items that are not financed by the loan proceeds.

The Export Working Capital Program

The Export Working Capital Program was developed in response to the needs of exporters seeking short-term working capital. The SBA guarantees 90% of the principal and interest, up to $750,000.The EWCP uses a one-page application form and streamlined documentation, and turnaround is usually within 10 days. You may also apply for a letter of pre-qualification from the SBA.

You may have other current SBA guaranties, as long as the SBA's exposure does not exceed $750,000 for all of your loans. When an EWCP loan is combined with an international trade loan, the SBA's exposure can go up to $1.25 million.

Terms. Typically, EWCP loan maturates either match a single transaction cycle or support a line of credit, generally with a term of 12 months. Unlike other 7(a) programs, interest rates and fees are negotiated between you and your lender. The SBA charges the lender a nominal guaranty fee, which may be passed on to you.

DELTA (Defense Loan and Technical Assistance) Program

If you own a defense-dependent small firm adversely affected by defense cuts, DELTA can help you diversify into the commercial market. The DELTA (Defense Loan and Technical Assistance) Program provides both financial and technical assistance. A joint effort of the SBA and the Department of Defense, it offers about $1 billion in gross lending authority.

The SBA processes, guarantees and services DELTA loans through the regulations, forms and operating criteria of the 7(a) Program and the 504 Certified Development Company Program. Maximum Loan Amount. The maximum gross loan amount under 7(a) is $1.25 million for a DELTA loan. The maximum guaranty under 504 is $1 million. If both types of loans are used or if there is an existing SBA loan, the combined total may not exceed $1.25 million.

Collateral. DELTA loans may not be typical 7(a) or 504 loans and may require special handling because of complicated credit analyses. While you may have significant collateral, you may not be able to show the ability to repay based on past operations because of your firm's state of transition. New revisions to the law allow the SBA to resolve reasonable doubts in your favor.

Eligibility. If seeking a DELTA loan, you will be required to certify that your company meets DELTA eligibility standards as well as 7(a) criteria. To be eligible, your business must

Meet SBA size standards

Have derived at least 25% of total company revenues during the preceding fiscal year from Department of Defense contracts, defense-related contracts with the Department of Energy, or subcontracts in support of defense-related prime contracts.

In addition, your business must be adversely impacted by reductions in defense spending and use the loan to retain jobs of defense workers; or be located in an adversely impacted community and create new economic activity and jobs; or modernize or expand your plant so it can diversify operations while remaining in the national technical and industrial base.

Minority and Women's Pre-qualification Programs

If you are a woman or minority who owns or wants to start a business, The Minority and Women's Pre-qualification Programs can help. Intermediaries assist you in developing a viable loan application package and securing a loan. On approval the SBA provides a letter of pre-qualification you can take to a lender. The women's program uses only nonprofit organizations as intermediaries; the minority program uses for-profit intermediaries as well.

Once your loan package is assembled, the intermediary submits it to the SBA for expedited consideration; a decision usually is made within three days.

If your pplication is approved, the SBA issues a letter of pre-qualification stating the agency's intent to guarantee the loan. The intermediary will then help you locate a lender offering the most competitive rates.

Maximum Loan Amount

The maximum amount for loans under the women's program is $250,000; under the minority program, it is generally the same, although some district offices set other limits. With both programs, the SBA will guarantee up to 75% (80% on loans of $100,000 or less).

Intermediaries may charge a reasonable fee for loan packaging. These programs are available through a number of SBA district offices nationwide. To find out if these programs are available in your area, contact your nearest SBA district office.

Here are the eligibility rules for these programs.

  • Businesses at least 51% owned, operated and managed by people of ethnic or racial minorities, or by women
  • Businesses with average annual sales for the preceding three years that do not exceed $5 million
  • Businesses that employ fewer than 100, including affiliates
  • Businesses that are not engaged in speculation or investment.


The SBA Express (FA$TRAK) Loan Program makes capital available to businesses seeking loans of up to $350,000 without requiring the lender to use the SBA process. Lenders use their existing documentation and procedures to make and service loans. The SBA guarantees up to 50% of a FA$TRAK loan. Your local SBA office can provide you with a list of FA$TRAK lenders.

Like most 7(a) loans, maturates are usually five to seven years for working capital and up to 25 years for real estate or equipment. For revolving credits, you may take up to five years after the first disbursement to repay the loan.

Certified and Preferred Lenders Program

The most active and expert lenders qualify for SBA's Certified and Preferred Lenders Program. Participants are delegated partial or full authority to approve loans, which results in faster service.

Certified lenders are those that have been heavily involved in regular SBA loan-guaranty processing and have met certain other criteria. They receive a partial delegation of authority and are given a three-day turnaround on their applications (they may also use regular processing). Certified lenders account for 10% of all SBA business loan guaranties.

Preferred lenders are chosen from among the SBA's best lenders and enjoy full delegation of lending authority. This authority must be renewed at least every two years, and the lender's portfolio is examined by the SBA periodically. Preferred loans account for 18% of SBA loans. A list of participants in the Certified and Preferred Lenders Program may be obtained from your local SBA office.

The 7(m) MicroLoan Program

The 7(m) MicroLoan Program provides small loans ranging from under $100 to $25,000. Under this program, the SBA makes funds available to nonprofit intermediaries; these, in turn, make the loans. The average loan size is $10,000. Completed applications usually are processed by the intermediary in less than one week. This is a pilot program available at a limited number of locations.

Use of Proceeds. Microloans may be used to finance machinery, equipment, fixtures and leasehold improvements. They may also be used to finance receivables and for working capital. They may not be used to pay existing debts.

Terms Interest Rates and Fees. Depending on the earnings of your business, you may take up to six years to repay a microloan. Rates are pegged at no more than 4% over the prime rate. There is no guaranty fee.

Collateral. Each nonprofit lending organization will have its own requirements, but must take as collateral any assets purchased with the microloan. In most cases, the personal guaranties of the business owners are also required.

Eligibility. Virtually all types of for-profit businesses that meet SBA eligibility requirements qualify.

The Certified Development Company (504) Loan Program

The Certified Development Company (504) Loan Program enables growing businesses to secure long-term, fixed-rate financing for major fixed assets, such as land and buildings. A certified development company is a nonprofit corporation set up to contribute to the economic development of its community or region. CDCs work with the SBA and private-sector lenders to provide financing to small businesses. There are about 290 CDCs nationwide.

The program is designed to enable small businesses to create and retain jobs; the CDC's portfolio must create or retain one job for every $35,000 of debenture proceeds provided by the SBA. Typically, a 504 project includes:

  • A loan secured with a senior lien from a private-sector lender covering up to 50% of the project cost,
  • A second loan secured with a junior lien from the CDC (a 100% SBA-guaranteed debenture) covering up to 40% of the project cost
  • A contribution of at least 10% equity by the borrower.

The maximum SBA debenture generally is $750,000 (up to $1 million in some cases).

Use of Proceeds. Proceeds from 504 loans must be used for fixed-asset projects such as:

  • Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping
  • Construction, modernizing, renovating or converting existing facilities
  • Purchasing machinery and equipment.

The 504 Program cannot be used for working capital or inventory, consolidating or repaying debt, or most refinancing.

Terms, Interest Rates and Fees. Interest rates on 504 loans are based on the current market rate for five-year and 10-year U.S. Treasury issues plus an increment above the Treasury rate, based on market conditions. Only maturates of 10 and 20 years are available. Fees total approximately 3% of the debenture and may be financed with the loan.

Collateral. Generally the project assets being financed are used as collateral. Personal guaranties of the principal owners are also required.

Eligibility. To be eligible, the business generally must be operated for profit and fall within the size standards set by the SBA. Under the 504 Program, a business qualifies as small if it does not have a tangible net worth in excess of $6 million and does not have an average net income in excess of $2 million after taxes for the preceding two years, or if it meets standard 7(a) criteria. Loans cannot be made to businesses engaged in speculation or investment.

Small Business Investment Company Program

There are a variety of alternatives to bank financing for small businesses, especially business start-ups. The Small Business Investment Company Program fills the gap between the availability of venture capital and the needs of small businesses that are either starting or growing. Licensed and regulated by the SBA, SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans. They use their own funds plus funds obtained at favorable rates with SBA guaranties and/or by selling their preferred stock to the SBA.

SBICs are for-profit firms whose incentive is to share in the success of a small business. In addition to equity capital and long-term loans, SBICs provide debt-equity investments and management assistance.

The SBIC Program provides funding to all types of manufacturing and service industries. Some investment companies specialize in certain fields, while others seek out small businesses with new products or services because of the strong growth potential. Most, however, consider a wide variety of investment opportunities.

Surety Bond Program

By law, prime contractors to the federal government must post surety bonds on federal construction projects valued at $100,000 or more. Many state, county, city and private-sector projects require bonding as well. The SBA can guarantee bid, performance and payment bonds for contracts up to $1.25 million for small businesses that cannot obtain bonds through regular commercial channels. Bonds may be obtained in two ways:

  • Prior Approval. Contractors apply through a surety bonding agent. The guaranty goes to the surety.
  • Preferred Sureties. Preferred sureties are authorized by the SBA to issue, monitor and service bonds without prior SBA approval.

Quick Reference to SBA Loan Programs

Here is a handy guide to the various SBA loan programs. Click here to review synopses of SBA Loan Programs. If you are interested in obtaining further information for a specific Loan Program listed below, click on the Loan Program and you will be brought to the SBA Web site.

PROGRAM: 7(a) Loan Guaranty Program (the SBA's primary loan program).

Maximum Amount Guaranteed: $750,000 in most cases Percent of Guarantee (Max.): 75% (80% if total loan is $100,000 or less)

Use of Proceeds: Expansion or renovation; construction of new facility; purchase land or buildings; purchase equipment, fixtures, leasehold improvements; working capital; refinance debt for compelling reasons; seasonal line of credit; inventory acquisition

Maturity: Depends on ability to repay; generally working capital is up to 7 years; machinery/equipment, real estate, construction, up to 25 years (not to exceed life of equipment) Maximum Interest Rates: Negotiable with lender: loans under 7 years, max. prime + 2.25%; 7 years or more, max. 2.75% over prime; under $50,000, rates may be slightly higher Guaranty and Other Fees: Paid by lender (usually passed onto borrower).

Amount of SBA exposure (based on maturity):

  • 1 year or less - 0.25%
  • Over 1 year and SBA share $80,000 or less - 2%;
  • Over 1 year and SBA share more than $80,000 - figured on incremental scale

Eligibility: Must be operated for profit; meet SBA size standards; show good character, management expertise and commitment, and always show ability to repay; may not be involved in speculation or investment

PROGRAM: CAPLines, Short-Term and RLCs; Seasonal, Contract, Builders, Standard Asset-Based, Small Asset-Based

Maximum Amount Guaranteed: $750,000 (except Small Asset-Based); Small Asset-Based $200,000 (total loan amount)

Percent of Guarantee (maximum): 75%, see 7(a)

Use of Proceeds: Finance seasonal working-capital needs; costs to perform; construction costs; advances against existing inventory and receivables; consolidation of short-term debts possible

Maturity: Up to 5 years

Maximum Interest Rates: 2.25%

Guaranty and Other Fees: See 7(a); Under Standard Asset-Based, no restrictions on servicing fees

Eligibility: Existing businesses, see 7(a)

PROGRAM: International Trade Loan Program, Short- and Long-Term Financing

Maximum Amount Guaranteed: $1.25 million

Percent of Guarantee (maximum): 75%, see 7(a)

Use of Proceeds: Working capital; improvements in U.S. for producing goods or services; may not be used to repay existing debt

Maturity: Up to 25 years

Maximum Interest Rates: See 7(a)

Guaranty and Other Fees: See 7(a)

Eligibility: Small businesses engaged or preparing to engage in international trade or adversely affected by competition from imports; see 7(a) for other qualifications

PROGRAM: Export Working Capital Program

Features: 1-page application, fast turnaround; may apply for pre-qualification letter

Maximum Amount Guaranteed: $750,000 (may be combined with International Trade Loan)

Percent of Guarantee (maximum): 90%, see 7(a)

Use of Proceeds: Short-term working-capital loans to finance export transactions

Maturity: Matches single transaction cycle or generally 1 year for line of credit

Maximum Interest Rates: No cap

Guaranty and Other Fees: See 7(a); no restrictions on servicing fees

Eligibility: Small business exporters who need short-term working capital; see 7(a) for other qualifications

PROGRAM: DELTA, Defense Loan and Technical Assistance Program

Features: Provides financial and technical assistance to help defense-dependent firms diversify into commercial market; joint effort of SBA and DoD

Maximum Amount Guaranteed: 7(a) or combined with 504: $1.25 million (total loan amount). 504: $1 million SBA share (up to 40% of project)

Percent of Guarantee (maximum): Depends on whether done under 7(a) or 504; see both

Use of Proceeds: Defense conversion; see 7(a), 504

Maturity: See 7(a), 504

Maximum Interest Rates: See 7(a), 504

Guaranty and Other Fees: See 7(a), 504

Eligibility: Defense-dependent small firms adversely affected by defense cuts; see 7(a), 504 for qualifications (program authority will expire 9/30/98)

PROGRAM: Minority and Women's Pre-qualification Loan Program

Features: Help to prepare application and secure loan; SBA pre-qualification letter; pilot programs, limited sites

Maximum Amount Guaranteed: Minority Pre-qualification Loan Program $250,000 generally (total loan amount); Women's Pre-qualification Loan Program $250,000 (total loan amount)

Percent of Guarantee (maximum): 75%, see 7(a)

Use of Proceeds: See 7(a)

Maturity: See 7(a)

Maximum Interest Rates: See 7(a)

Guaranty and Other Fees: See 7(a); plus minority program may use for-profit intermediaries; women's program uses nonprofit only; both may charge fees

Eligibility: Must be at least 51% owned and operated by racial/ethnic minority or women; $5 million or less annual sales for past 3 years; employ 100 or fewer, focus on credit history, ability to repay, probability of success


Features: Lender approves loan, no additional paperwork for SBA; pilot program, limited sites

Maximum Amount Guaranteed: $100,000 (total loan amount)

Percent of Guarantee (maximum): 50%

Use of Proceeds: Same as 7(a); limitations on real estate and construction; may be used for term loans or revolving credits

Maturity: Term loan same as 7(a); no more than 5 years on revolving line of credit

Maximum Interest Rates: See 7(a)

Guaranty and Other Fees: See 7(a)

Eligibility: See 7(a)

PROGRAM: 7(m) MicroLoan Program

Maximum Amount Guaranteed: $25,000 (total loan amount)

Percent of Guarantee (maximum): NA

Use of Proceeds: Purchase equipment, machinery, fixtures, leasehold improvements; finance increased receivables; working capital; may not be used to repay existing debt

Maturity: Shortest term possible, not to exceed 6 years

Maximum Interest Rates: Negotiable with intermediary

Guaranty and Other Fees: No guaranty fee

Eligibility: Same as 7(a)

The Certified Development Company (504) Loan Program

Features: Long-term, fixed-asset loans through nonprofit development companies; must create or retain 1 job per $35,000 of debenture proceeds

Maximum Amount Guaranteed: Limit on SBA portion of project is $750,000 to $1 million

Percent of Guarantee (maximum): 40% of project (100% SBA-backed debenture); private lender unlimited

Use of Proceeds: Purchase of major fixed assets such as land, buildings, improvements, long-term equipment, construction, renovation

Maturity: 10 or 20 years only

Maximum Interest Rates: Based on current market rate for 5- and 10-year Treasury issues, plus an increment above Treasury rate

Guaranty and Other Fees: Fees related to debenture, approx. 3%

Eligibility: For-profit businesses that do not exceed $6 million in tangible net worth and did not have average net income over $2 million for past 2 years

Government and Non-Profit Agencies

U.S. Small Business Administration

The SBA has offices located throughout the United States. For the one nearest you, look under "U.S. Government" in your telephone directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To send a fax to the SBA, dial (202) 205-7064. For the hearing impaired, the TDD number is (704) 344-6640.

The Home-Based Business: Some Basics You Should Consider

More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements and attics are being transformed into the corporate headquarters of the newest entrepreneurs - home-based businesspeople.

And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for "service-oriented" businesses, the opportunities seem to be endless.

This Financial Guide discusses some of the basics you should consider in starting a home-based business. It does not attempt to cover all aspects of home-based businesses, but rather, addresses the general requirements of what's needed to start up a business in your home.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money take a few moments to answer the following questions:

  • Can you describe in detail the business you plan on establishing?
  • What will be your product or service?
  • Is there a demand for your product or service?
  • Can you identify the target market for your product or service?
  • Do you have the talent and expertise needed to compete successfully?

Before you dive head first into a home-based business, it's essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what's involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no "best" or "right" reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

  • Are you a self-starter?
  • Can you stick to business if you're working at home?
  • Do you have the necessary self-discipline to maintain schedules?
  • Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has the space for a business, and whether you can successfully run the business from your home.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.


Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

  • Work certificate or a license from the state (your business's name may also need to be registered with the state)
  • Sales tax number
  • Separate business telephone
  • Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you'll find that you can avoid most financial difficulties. When drawing up a financial plan, don't worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.

Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don't forget to include your normal living expenses. Your business must not only meet its own needs, but make sure it meets yours as well.

Projecting Income

It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points and cash-flow statements. Use your marketing research to estimate initial sales volume.

Determining Cash Flow

Working capital--not profits--pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you're broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.


Remember, preparation is the foundation of success. Learn how to strengthen your home-based business. Success doesn't just happen--you have to make it happen.

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