Author: Leon Clinton

Business Financial Planning

Small Business Financing: Securing a Loan

At some point, most small businesses owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants, and how to properly approach them, can mean the difference between getting your money for expansion and having to scrape through finding cash from other sources. Unfortunately, many business owners fall victim to several common, but potentially destructive myths regarding financing, such as:

  • Lenders are eager to provide money to small businesses.
  • Banks are willing sources of financing for start-up businesses.
  • When it comes to seeking money, the company speaks for itself.
  • A bank, is a bank, is a bank, and all banks are the same.
  • Banks, especially large ones, do not need and really do not want the business of a small firm.

Understand the basic principles of banking.

It’s vital to present yourself as a trustworthy businessperson, dependable enough to repay borrowed money and demonstrate that you understand the basic principles of banking. Your chances of receiving a loan will greatly improve if you can see your proposal through a banker’s eyes and appreciate the position that they are coming from.

Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank’s cautious perspective may be irritating to a small business owner, it is necessary in order to keep the depositors’ money safe, the banking regulators happy, and the economic health of the community growing.

Each banking institution is different.

Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans.

Selection of a bank is essentially limited to your choices from the local community. Typically, banks outside of your area of business are not as anxious to make loans to your firm because of the higher costs of checking credit and of collecting the loan in the event of default.

Furthermore, a bank will typically not make business loans to any size business unless a checking account or money market account is maintained at that institution. Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future.

If you need assistance deciding which bank best suits your needs and provides the greatest value for your business operation, don’t hesitate to call the office.

Build rapport.

Building a favorable climate for a loan request should begin long before the funds are actually needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis. Devote time and effort to building a background of information and goodwill with the bank you choose and get to know the loan officer you will be dealing with early on.

Bankers are essentially conservative lenders with an overriding concern for minimizing risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust. One way to build rapport and establish trust is to take out small loans, repay them on schedule, and meet all requirements of the loan agreement in both letter and spirit. By doing so, you gain the bankers trust and loyalty, and he or she will consider your business a valued customer and make it easier for you to obtain future financing.

Provide the information your banker needs to lend you money.

Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks–and providing the evidence required to ease normal banking concerns–is the most effective approach to getting what is needed.

A sound loan proposal should contain information that expands on the following points:

  • What is the specific purpose of the loan?
  • Exactly how much money is required?
  • What is the exact source of repayment for the loan?
  • What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
  • What alternative source of repayment is available if management’s plans fail?
  • What business or personal assets, or both, are available to collateralize the loan?
  • What evidence is available to substantiate the competence and ability of the management team?

Even a brief examination of these points suggests the need for you to do your homework before making a loan request because an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm’s needs.

Before you apply for a loan here’s what you should do:

1. Write a Business Plan

Your loan request should be based on and accompanied by a complete business plan. This document is the single most important planning activity that you can perform. A business plan is more than a device for getting financing; it is the vehicle that makes you examine, evaluate, and plan for all aspects of your business. A business plan’s existence proves to your banker that you are doing all the right activities. Once you’ve put the plan together, write a two-page executive summary. You’ll need it if you are asked to send “a quick write-up.”

2. Have an accountant prepare historical financial statements.

You can’t talk about the future without accounting for your past. Internally generated statements are OK, but your bank wants the comfort of knowing an independent expert has verified the information. In addition, you must understand your statement and be able to explain how your operation works and how your finances stand up to industry norms and standards.

3. Line up references.

Your banker may want to talk to your suppliers, customers, potential partners or your team of professionals, among others. When a loan officer asks for permission to contact references, promptly answer with names and numbers; don’t leave him or her waiting for a week.

Walking into a bank and talking to a loan officer will always be something of a stressful situation. Preparation for and thorough understanding of this evaluation process is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek.

The advice and experience of an accounting and tax professional is invaluable. Don’t be shy about calling the office with any questions or to request a consultation.

Tax

Are your Social Security Benefits Taxable?

Social security benefits include monthly retirement, survivor, and disability benefits. If you received Social security benefits in 2016, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount.

Note: Supplemental Security Income (SSI) payments are not taxable.

If Social Security was your only source of income in 2016 your benefits might not be taxable. You also may not need to file a federal income tax return this year; however, if you receive income from other sources, then you may have to pay taxes on some of your benefits.

Your income and filing status affect whether you must pay taxes on your Social Security. An easy method of determining whether any of your benefits might be taxable is to add one-half of your Social Security benefits to all of your other income, including any tax-exempt interest.

Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. In 2016, the three base amounts are:

  • $25,000 – for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year
  • $32,000 – for married couples filing jointly
  • $0 – for married persons filing separately who lived together at any time during the year

Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet. Please call if you need assistance figuring this out.

Retired Abroad?

Retirement income is generally not taxed by other countries. As a U.S. citizen retiring abroad who receives Social Security, for instance, you may owe U.S. taxes on that income, but may not be liable for tax in the country where you’re spending your retirement years.

If Social Security is your only income, then your benefits may not be taxable, and you may not need to file a federal income tax return. If you receive Social Security, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits.

However, if you receive income from other sources as well, from a part-time job or self-employment (either U.S. or the country you’ve retired to), you may have to pay U.S. taxes on some of your benefits.

You may also be required to report and pay taxes on any income earned in the country where you retired. Each country is different, so consult a local tax professional or one who specializes in expat tax services.

State Taxes

Some states tax social security income as well: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

Note: Even if you retire abroad, you may still owe state taxes–unless you established residency in a no-tax state before you moved overseas. Also, some states honor the provisions of U.S. tax treaties; however, some states do not, therefore it is prudent to consult a tax professional.

Questions about income related to Social Security? Don’t hesitate to call.

Tax

Six Overlooked Tax Breaks for Individuals

Confused about which credits and deductions you can claim on your 2016 tax return? You’re not alone. Here are six tax breaks that you won’t want to overlook.

1. State Sales and Income Taxes

Thanks to the PATH ACT of 2015, taxpayers filing their 2016 returns can deduct either state income tax paid or state sales tax paid, whichever is greater.

Here’s how it works. If you bought a big-ticket item like a car or boat in 2016, it might be more advantageous to deduct the sales tax, but don’t forget to figure any state income taxes withheld from your paycheck just in case. If you’re self-employed, you can include the state income paid from your estimated payments. In addition, if you owed taxes when filing your 2015 tax return in 2016, you can include the amount when you itemize your state taxes this year on your 2016 return.

2. Child and Dependent Care Tax Credit

Most parents realize that there is a tax credit for daycare when their child is young, but they might not realize that once a child starts school, the same credit can be used for before and after school care, as well as day camps during school vacations. This child and dependent care tax credit can also be taken by anyone who pays a home health aide to care for a spouse or other dependent–such as an elderly parent–who is physically or mentally unable to care for him or herself. The credit is worth a maximum of $1,050 or 35 percent of $3,000 of eligible expenses per dependent.

3. Job Search Expenses

Job search expenses are 100 percent deductible, whether you are gainfully employed or not currently working–as long as you are looking for a position in your current profession. Expenses include fees paid to join professional organizations, as well as employment placement agencies that you used during your job search. Travel to interviews is also deductible (as long as it was not paid by your prospective employer) as is paper, envelopes, and costs associated with resumes or portfolios. The catch is that you can only deduct expenses greater than two percent of your adjusted gross income (AGI). Also, you cannot deduct job search expenses if you are looking for a job for the first time.

4. Student Loan Interest Paid by Parents

Typically, a taxpayer is only able to deduct interest on mortgage and student loans if he or she is liable for the debt; however, if a parent pays back their child’s student loans that money is treated by the IRS as if the child paid it. As long as the child is not claimed as a dependent, he or she can deduct up to $2,500 in student loan interest paid by the parent. The deduction can be claimed even if the child does not itemize.

5. Medical Expenses

Most people know that medical expenses are deductible as long as they are more than 10 percent of Adjusted Gross Income (AGI) for tax year 2016. What they often don’t realize is which medical expenses can be deducted, such as medical miles (19 cents per mile in 2016 and 17 cents per mile in 2017) driven to and from appointments and travel (airline fares or hotel rooms) for out of town medical treatment.

Other deductible medical expenses that taxpayers might not be aware of include health insurance premiums, prescription drugs, co-pays, and dental premiums and treatment. Long-term care insurance (deductible dollar amounts vary depending on age) is also deductible, as are prescription glasses and contacts, counseling, therapy, hearing aids and batteries, dentures, oxygen, walkers, and wheelchairs.

If you’re self-employed, you may be able to deduct medical, dental, or long-term care insurance. Even better, you can deduct 100 percent of the premium. In addition, if you pay health insurance premiums for an adult child under age 27, you may be able to deduct those premiums as well.

6. Bad Debt

If you’ve ever loaned money to a friend, but were never repaid, you may qualify for a non-business bad debt tax deduction of up to $3,000 per year. To qualify, however, the debt must be totally worthless in that there is no reasonable expectation of payment.

Non-business bad debt is deducted as a short-term capital loss, subject to the capital loss limitations. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. Any amount you are not able to deduct can be carried forward to reduce future tax liability.

Are you getting all of the tax credits and deductions that you are entitled to?

Maybe you are…but maybe you’re not. Why take a chance? Call the office today and make sure you get all of the tax breaks you deserve.

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