FORMING AND FINANCING A SMALL BUSINESSVeterans’ Entrepreneur Seminar Small Business Assistance Office November 3, 2010
Three Questions • Do you know what you want? .... Products and markets • Can you overcome barriers to entry? • Do you know how to make money? .... The limit of competition? (Price taker markets)
How will you structure your business? • ► Liability • ► Financing • ► Taxes
Sole Proprietorship • Assumed Name filing • Taxes on personal return • Liability issues • Financing and asset issues
Single Member LLC • Popular alternative to sole proprietorship • Insulation from liability • Election to be taxed as a “Disregarded Entity” or as a corporation • Formal filing with the Secretary of State * Debt financing still tied to owner’s credit.
Corporation • The corporation is a legal “person” • Formal filing with the Secretary of State Office • Insulation from liability for owner • ‘C’ corporation pays taxes • ‘S’ corporation a pass through entity • Corporation can be a debtor on loans
Money maters over the life of a business • Overcoming cost barriers to entry • Sustaining production and competition • Providing business flexibility • Providing for acquisition of assets and expansion of productive capacity
Debt Capital • Loans and other “credit facilities” • Deductable interest payments • Generally straight forward loan agreements • No dilution of ownership
Equity Capital • Sale of an ownership interest • Most often business stage, size, industry specific • Expensive offering • Often complicated agreements
What this means for you as a potential borrower: • An even greater emphasis on a good business plan; • A clear statement of the use of funds and the sources of repayment; • A high personal credit score for the business owner; • Owner’s cash equity; • A personal guaranty and/or other secondary sources of payment.
Small Business Jobs Act of 2010P.L. 111-240 signed on 9/27/2010 • Permanently raises 7(a) loan limits from $2 million to $5 million total loan amount. • Extends guarantee amount and fee elimination through December 31, 2010. After January 1, 2011 guarantee reverts to 75 percent of loans over $150,000 and 85 percent of loans up to $150,000. • Increases maximum Express loan amount to $1 million (from $350K) through 9/27/2011.
Permanently increases microloan limits from $35,000 to $50,000 • Establishes new intermediary-facilitated loan program for “…start-up, newly established, and growing small business concerns for working capital, real estate, or the acquisition of materials, supplies, or equipment.” Maximum loan to be $200,000. Intermediaries to selected by SBA. (CDCs and other nonprofits).
Business Start-Up Loans : Interest-Free Loans • $400,000 revolving loan fund • Same pot of money as the Economic Injury Loans • Same terms • $5,000 - $20,000 • $20K max by enabling statute • $5K min for admin efficiency • Do the math: 20 loans @ $20K • Loan term: 4 ½ years • No repayments the first 1 ½ years • Equal monthly payments over remaining 3 years • No interest
Business Start-Up Loans : Eligible Veteran • Recently separated veteran • On active duty on or after September 11, 2001 • Separated from service under honorable conditions • On active duty for at least 181 consecutive days or for the full period for which called to active duty (or after reason of disability incurred while on active duty)
Business Start-Up Loans : Eligible Small Business • Must be majority owned and operated by a recently separated veteran • Small business as defined by Minn. Stat. 645.445: • a for profit business entity which is not an affiliate or subsidiary of a business dominant in its field of operations, and • has either 20 or fewer full-time employees, or • had less than $1 million in annual gross revenue in the preceding fiscal year, or • if the business is a technical or professional service, has less than $2.5 million in annual gross revenue in the preceding fiscal year
Business Start- up Loans: Application Review Criteria • Main criteria: • Is the business a “small business”? • Is the business owned and operated by an eligible veteran? • How likely is the applicant to repay the loan? • How likely will the loan help the applicant execute the submitted business plan to make it a successful business?
Loan Applications • Fill in forms available on the DEED website • 4 pages plus 9 exhibits • First 4 pages are geared toward loan program eligibility • 9 exhibits mirror SBA loan applications • Personal history • Personal financial statement • Business financial statements • Credit Reports and Scores • History of business/Background of owner • Details re any bankruptcies, lawsuits, etc. • Small Business Development Centers can assist with filling out loan applications • Applications will be reviewed in order received • When the loan fund is depleted, no further loans until repayments are received
Loan Making Procedure • Applicant completes and submits loan application (economic injury or start-up) • DEED and applicant execute a loan agreement • DEED and applicant execute a promissory note • Applicant/owner provides personal guaranty of repayment • At this time, not anticipating an applicant will need to provide other security for the loan
Minnesota Reservist and Veteran Business Loan Program • Complete program information and applications are on the DEED website • Search “Reservist and Veteran Business Loan” • Any questions? • Contact person: • Jeff Nelson • 651-259-7523 • Jeff.M.Nelson@state.mn.us
Minnesota Small Business Assistance Office Minnesota Department of Employment & Economic Development 1st National Bank Bldg. 332 Minnesota St., Suite E200 St. Paul, MN 55101 651/ 259-7478 Deed.firstname.lastname@example.org