For some, usually well-established aggregates businesses with good credit records, affordable financing may be available. For the most part however, many
For some, usually well-established aggregates businesses with good credit records, affordable financing may be available. For the most part however, many banks find it profitable ó and safer ó to invest funds borrowed from the Federal Reserve in government securities rather than risk lending to small businesses.
Not only are loans often hard to come by, they also are more expensive. This slows down economic recovery, since businesses that cannot borrow often cannot expand. Lawmakers have responded with a number of programs and proposed funding programs to boost small-business lending.
One bill, if passed, will extend the American Recovery and Reinvestment Act small-business lending program that eliminated the fees normally charged for loans through the Small Business Administration. The provision also would increase the amount guaranteed on the SBA's 7(a) loans from 75% to 90%. Fortunately, few aggregates business owners need to wait for these bills to become laws or for new lending programs to emerge.
Borrowing often means a loan from the operation's owner or shareholder. Our tax laws create a number of obstacles that must be overcome in order to avoid the penalties and corresponding higher tax bills that can result when IRS auditors restructure loans that don't meet their criteria.
WHENEVER A LOAN is made between related entities, or when a shareholder makes a loan to his or her incorporated aggregates business, our tax laws require a fair-market interest be included. If not, the IRS will step in and make adjustments to the below-market interest rate transaction in order to properly reflect imputed interest. How large the tax impact depends on the effect of added interest income to the lender and the bite of an offsetting interest expense deduction felt by the borrower.
In addition to those loans that a business receives from its owner, there are a number of other types of funding available from a variety of sources. One method of raising capital involves selling business assets.
A sale-leaseback can generate needed funds and help improve cash flow by negotiating favorable terms when leasing that equipment or other business asset. Also frequently ignored are the tax benefits of sale-leaseback transactions, both for the business and its owners or executives.
Sale-leasebacks are usually structured to unlock the equity a business has in its buildings, machinery and equipment. Generally, the business sells its assets at fair-market value to a financial institution or to the business's owner or executives, for a lump-sum payment. The new owner then leases the equipment back to the business.
Any quest for business funding should begin with an understanding of the various types of financing, where that funding may be found, and at what cost. It boils down to determining what type of funding can best help the business. There are two basic ways to fund the business: debt financing or equity financing.
With debt financing, capital is received via a loan, which must be repaid. With equity financing, capital is received in exchange for part ownership in the quarry or business.
EQUITY FINANCING CAN come from a variety of sources, including the aggregates operation itself, the owner's pockets, as well as from private investors. But remember, keeping control of a business is more difficult when outside investors are involved.
A unique and temporary tax break may help incorporated aggregates businesses raise needed capital through the sale of stock to friends, business associates or suppliers. An extra incentive is now available to individuals who invest in small businesses.
Investors in qualified small business stock can exclude 75% of the gain upon sale of the stock. This increased exclusion applies only if the qualified stock is acquired after Feb. 17, 2009, and before Jan. 1, 2011. It also must be held for more than five years. For previously acquired stock, the exclusion rate remains at 50% in most cases.
Originally used to describe investors in Broadway shows, ìangelî now refers to those who invest their money in an entrepreneurial company ó unlike institutional venture capitalists who invest other people's money. Angel investing has soared in recent years as a growing number of individuals seek better returns on their money than they can get from traditional investment vehicles. And contrary to popular belief, most angels are not millionaires.
Some potential angels are those who provide services to the business, such as lawyers, insurance agents or accountants. Angels also may be business associates that can include suppliers and vendors, customers, employees and even the competition.
Selling company stock to employees through an Employee Stock Ownership Plan is an often overlooked and usually misunderstood option for raising capital. Best of all, it doesn't mean selling to strangers. With an ESOP, the incorporated aggregates business issues new shares of stock. The ESOP then borrows funds to buy the stock. The operation or business can use the stock proceeds for its own purposes.
The company repays the loan by making tax-deductible contributions to the ESOP. The interest and principal on ESOP loans are tax-deductible, which can reduce the number of pre-tax dollars needed to repay the principal by as much as 34% depending on the operation's tax bracket. However, the tax shield does not help with S corporations since they don't pay corporate income taxes. Capital gains deferral, however, can make ESOPs attractive to these pass-through business entities.
WHILE THEY ARE not cheap, asset-based loans are a proven, effective financing strategy that any cash-strapped aggregates business owner can employ to meet short-term cash needs. One advantage is that asset-based lenders often advance funds when funds from more traditional sources are unavailable.
Commercial finance companies are often willing to lend to businesses that for various reasons cannot secure credit from a bank. Assets such as receivables, inventory, equipment and sometimes real estate, are what secures the credit.
While asset-based lenders usually advance capital more quickly and more readily than banks, they charge more for the higher risk. As a rule of thumb, when using accounts receivable to secure a loan, expect to get about 75% of the face value of fresh invoices. The loan-to-value ratio drops rapidly for older accounts. When inventory is used to secure loans, loan amounts vary widely from about 30% to 80% of the inventory's value.
Surprisingly, funding from sources closer to home is often more available and usually less expensive. One of the best sources of assistance ó and in many cases funding ó can be found in the many state, regional and local economic development agencies. There are nearly 12,000 economic development groups in the United States that provide economic growth and development by encouraging new or expanding businesses to locate or remain in their area.
Even those who are aware of public funding often have misconceptions about who will and will not qualify. Many of these programs are looking for businesses with proven track records. The state, regional and local agencies are willing to help them expand their sales, which in turn will help expand the tax base as well as increase employment.
Obviously, financing any aggregates business is a complex affair further complicated by the current credit crunch. Making matters worse, just as our economy appears to be emerging from recession, another bogeyman is waiting in the wings. Once again, it's a hangover from the days of free spending and easy credit. This time, however, it's not mortgage-backed securities or consumer credit that is the problem. Rather, it is longer-dated corporate and government debt that is due for refinancing in 2012 and later.
Massive demand for new money from capital markets is coming and it is coming from all corners. In 2012, over $860 billion of U.S. government bonds will reach maturity and require refinancing. Add to that an anticipated and still growing federal deficit that also will need to be funded. Over the same period, companies that borrowed on easy terms between 2003 and 2008 will be seeking to rollover their debts by taking out new loans.
Fortunately, many quarry operators can avoid the upcoming credit crunch while, at the same time, side-stepping today's spotty capital shortages with alternative financing.
Mark E. Battersby is a freelance writer with more than 25 years specializing in tax and finance. He is the author of four books and a frequent contributor to Rock Products.
Financing Outside the Box
A number of critics complain the Federal Reserve is attempting to jawbone banks into lending, but the government is doing everything it can to curtail the financial industry. Lawmakers are pushing a number of new laws and regulations that they claim will help ease the current credit crunch by making more funds available to small business.
Congress is, for example, considering legislation designed to boost bank lending to small businesses struggling to gain access to credit due to the financial crisis. The House is considering the Small Business Lending Fund Act (H.R. 5297). If passed, it will establish a $30 billion fund to boost lending to small businesses looking to hire and expand their operations by providing additional capital to community banks.
The program is completely separate from Toxic Asset Relief Program and mandates accountability and oversight by Congress, the Government Accountability Office and the Treasury Department's Inspector General. The bill calls for the capital to be repaid by community banks over time.
When passed, the bill will provide federal funding for state lending programs that use small amounts of public resources to generate substantial private bank financing. Such programs are designed to address many of the reasons banks are having trouble increasing lending to small businesses, including lenders' desire to hold greater reserves against certain loans and concerns about collateral shortfalls on the part of borrowers.
While the international bank levy, a worldwide fee on financial institutions that surely would have been passed along to borrowers, appears to have fizzled out. The United States is in the process of reforming its financial system. The financial reform package now in Congress will limit the size and scope of banks. Under the new rules no bank could own, invest in or sponsor hedge funds, private equity funds or proprietary trading operations unrelated to serving customers. According to some, the legislation will mean smaller bank profits which, in turn, would mean less money to lend.
There's been much talk and a lot of wheel-spinning, but attention is focused on the funding needed by small businesses, which can't be entirely bad.