In the Know
Money & Pensions
A startup or early-stage company has little chance of getting a significant bank loan. SBA startup loans, for example, are typically limited to $10,000 because lenders aren't willing to put their money on the line unless a business has a proven track record. Where will the money come from? A few ideas:
If you aren't confident enough to put your savings on the line, no one else will likely invest in your venture either. That means cashing in your stocks, selling the boat and even taking a loan from your retirement account, if necessary.
While financial advisers wince at the idea of using plastic to fund your business, the truth is that many small companies charge their way through the first year or two of operation. If you use this option, get a card or several cards with low interest rates.
Many retailers make it easy to furnish your office with no money down, no interest or payments for a year. Make that store's gimmick work for you, but prepare for the day when the bill comes due.
The Next Steps
After you've tapped the "easy" money, try these sources of capital.
Putting your home on the line may sound risky, but it is often the easiest way to get tens of thousands of dollars. There's minimal paperwork and, with Florida's hot home market, often plenty of equity available. A home equity loan makes more sense in light of an SBA loan requirement that if the borrower has 20% equity in his or her home, it must be used as collateral for an SBA loan. So in many cases, the entrepreneur's home would be pledged anyway to get the SBA loan, which requires more paperwork and often higher fees.
There are no listings and few databases for private investors, but Jim Parrish, a financial counselor with the University of South Florida Small Business Development Center, recommends talking with friends and business associates, industry insiders in your specific field and "true believers" in what you are doing. As an example, he says someone starting an environmental business might join the Sierra Club to meet and mingle with like-minded people with money. "There's a huge opportunity here," he says.
Some credit unions are starting to do SBA lending. For the best success with a credit union, go to one where you have a personal account. If you aren't already a credit union member, find one to join by using the online credit union locator at www.joinacu.org or check with the Florida Credit Union League, www.fcul.org. Membership in credit unions has become more open in recent years, although many workplace credit unions still restrict membership to employees.
|Florida's Certified Development Companies|
Business Development Corporation of Northeast Florida
Florida Business Development Corp.
Florida First Capital Finance Corporation
Gulf Coast Business Finance
Jacksonville Economic Development Co.
Southwest Florida Regional Development Corp.
Tampa Bay Economic Development Corp.
This Alabama CDC also makes loans in Florida:
Southern Development Council
SBA Lending Today
Raising capital has become more expensive for entrepreneurs since Congress changed the funding structure for U.S. Small Business Administration loans in 2004. Today, borrowers and lenders shoulder the entire cost of the program through increased fees. The federal government subsidy was eliminated in late 2004. "The process has gotten much slower and more expensive," says Jim Parrish, a financial counselor at the University of South Florida Small Business Development Center.
Change for 2006: The SBA eliminated its popular LowDoc loan program as of September 2005.
7(a) Business Loans (up to $2 million)
This is the SBA's primary loan program. The maximum loan amount is $2 million, with a maximum loan guarantee of $1.5 million. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. (A $2 million loan would have a loan guarantee of $1.5 million, or 75%.) Fees are 2% of the guaranteed portion for loan amounts of $150,000 or less, 3% for loans from $150,000 to $700,000, and 3.5% for loans over $700,000. For loans over $1 million, an additional 0.25% guaranty fee will be charged for the portion greater than $1 million. Interest rates are negotiated with the lender, but are subject to SBA maximums, which are pegged to the Prime Rate. Loan proceeds can be used for fixed assets, working capital, inventory, seasonal line of credit or, for compelling reasons, for debt repayment. Real estate may be financed for up to 25 years and working capital loans for seven years (with terms of 10 years in a select few cases). The maximum repayment for fixed assets other than real estate is the economic life of the asset, but in no cases longer than 25 years.
SBAExpress (up to $350,000)
Lenders use their own forms and processes to approve loans in amounts up to $350,000, providing minimal paperwork to the SBA to obtain a maximum guarantee of 50%. Loan term varies. Interest rates are tied to the Prime Rate, but are negotiated with the lender. For loans $50,000 or less, lenders may charge up to 6.5% over Prime; for loans more than $50,000, the maximum rate is 4.5% above Prime.
Community Express(up to $250,000)
This pilot program is available in geographic areas serving primarily low- to moderate-income entrepreneurs. "They're typically working capital loans," says John Dunn, assistant district director for the SBA's South Florida office. Revolving lines of credit up to seven years are allowed. The maximum guarantee is 85% for loans of $150,000 or less; 75% for loans over $150,000. Collateral may not be required for loans up to $25,000. The program also includes technical and management assistance for the borrower.
504 Loan Program
This program uses fixed, long-term financing to finance fixed assets for for-profit businesses with less than $7 million in net worth and less than $2.5 million in after-tax profits. The money can be used for assets such as land, buildings, machinery and equipment. Funds cannot be used for working capital or inventory. Typically a bank will loan 50% of the project's cost, a Certified Development Company provides SBA-guaranteed funds for 40% of the total cost up to $4 million for small manufacturers (SBA limit is $2 million or less for businesses that are not small manufacturers, but meet other job creation, community development or public policy goals) and the remaining 10% comes from the owner's down payment. Repayment is over 20 years for real estate, 10 years for equipment. Interest rates are pegged to an increment above the current market rate for five-year and 10-year U.S. Treasury issues.
Pensions & Retirement
You've Earned It!
For entrepreneurs, one of the goals of building a successful business is generating a comfortable living for themselves, their families and their employees. But what happens when it's time to call it quits? A small business retirement plan can have short-term and long-term benefits. Short term, a business that offers a SEP-IRA, Simple-IRA or 401(k) may find it easier to recruit skilled employees. Long term, the financial cushion provided by the retirement plan will give the business owner and employees the freedom to decide when to sell (or leave) the business. Today, there are more small business retirement plan options. They offer less paperwork, but often have strict rules. "The tax-qualified plans are more complicated animals," says Sharon Dixon, a Miami tax attorney with Stearns Weaver Miller. Of IRAs, she adds, "Generally, these aren't as onerous." Here are two choices that are popular.
Eligibility: Any employer with 100 or fewer employees.
Set Up: IRS Forms 5304-Simple or 5305-Simple. No annual filing requirement.
Maximum Contribution: Employee - $10,000 plus catch-up contributions for those age 50 and over. Employer - Match employee contributions 100% of the first 3% of compensation (can be reduced to 1% in any two out of five years) or contribute 2% of each eligible employee's compensation.
Employer Contribution: Must make matching contribution or 2%.
Coverage: Must be offered to all employees who have compensation of at least $5,000 in any prior two years and who are reasonably expected to earn at least $5,000 in the current year.
Eligibility: Any employer with one or more employees.
Set Up: IRS Form 5305-SEP. No annual filing requirement for employer.
Maximum Contribution: Up to 25% of compensation, but no more than $44,000 in 2006.
Employer Contribution: Employer can decide whether to make contributions year to year.
Coverage: Must be offered to all employees who are at least 21 years of age, employed by the employer for three of the last five years and had annual compensation of $450.
|Call It or Click It|
Check out these pension resources jointly developed by the Internal Revenue Service and U.S. Department of Labor. To order, call (866) 444-3272 (Department of Labor) or (800) 829-3676 (IRS).
Choosing a Retirement Solution for Your Small Business (Pub. 3998). This 8-page pamphlet provides an overview of retirement plans.
401(k) Plans for Small Businesses (Publication 4222). This booklet provides detailed information on setting up and running a 401(k) plan.
SIMPLE IRA Plans for Small Businesses (Publication 4334). This booklet gives details on one of the most popular types of retirement plans designed for small businesses.
Federal Grants 101
Neither the U.S. Small Business Administration nor most other federal and state agencies offer grants for starting or developing a business. Grants are available for businesses doing innovative research and development on projects that will have applications for both government and commercial markets.
Catalog of Federal Domestic Assistance - [ cfda.org ]
This website includes a searchable database of all federal programs for private profit organizations as well as state and local governments, nonprofit organizations, specialized groups and individuals.
Small Business Innovation Research (SBIR) Grants - [ sba.gov/sbir ]
The SBIR program is a competitive federal program that provides research and development contracts, in part based on the market potential of the research. It is the largest source of early-stage research and development funding for small technology companies. Ten federal agencies award grants through the program. Most agencies solicit award applications once or twice a year. To qualify, small businesses must be for-profit, have no more than 500 employees and be working on research and development that will serve both government and commercial markets. Funding for the SBIR program is divided into three phases: In phase 1, companies can receive up to $100,000 for a six-month feasibility study. If phase 1 is successful, companies may be awarded a phase 2 contract for as much as $750,000 to further develop the idea. The small business retains the intellectual property rights for the project. Phase 3 is for commercialization of the results of phase 2. Private money or non-SBIR government funding must be used for this phase. The SBIR funding agencies are NASA, the National Science Foundation, Environmental Protection Agency and the departments of Agriculture, Commerce, Defense, Education, Energy, Health and Human Services and Transportation.
Small Business Technology Transfer Program (STTR) - [ sba.gov/sttr ]
Small businesses and nonprofit research institutions may compete for grants from five federal agencies: NASA, the National Science Foundation and the departments of Defense, Energy and Health and Human Services.