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THE BIG PICTURE: SMALL-BUSINESS

LOANS IN TODAY’S ECONOMY Tips for Getting Your Loan Approved

Contributor: Catherine Corley, Vice President of Member Strategy for Sam’s Club

(Sam’s Club is a division of Wal-Mart Stores, Inc. (NYSE:WMT)

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CONTENTS

1. THE ECONOMIC IMPACT ON SMALL-BUSINESS LOANS

2. TYPES OF SMALL-BUSINESS LOANS

3. HOW TO OBTAIN AND USE SMALL-BUSINESS LOANS

Things to consider before requesting a loan

Basics for applying for a loan

Be prepared to answer questions from your lender

4. GOVERNMENT ASSISTANCE

5. TAX CREDITS

6. EXPERT OUTLOOKS ON OBTAINING SMALL-BUSINESS LOANS

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Even with the economy being the number one factor facing small businesses in 2009, small-

business loans are still expected to increase this year. With job losses high and traditional

employment options limited, many people will turn to self-employment and small business, says

the

THE ECONOMIC IMPACT ON SMALL-BUSINESS LOANS

Small Business Labs 2009 Top 10 Small Business Trends article—from the website dedicated

to tracking and forecasting the trends impacting the future of small business.

As proof, the previous three recessions have seen an increase in the number of small businesses

being formed, and now it’s easier and cheaper than ever to invest in a start-up. While failure

rates will also increase, these failures won’t be great enough to offset the number of new small

and personal businesses.

Additionally, baby boomers will have to extend their working years, and small businesses will be

their best, and sometimes only, option. And on the flip side, “Generation Y” will continue to be

more entrepreneurial than youth in recent generations. Small businesses are appearing more

attractive to this generation due to limited opportunities with big businesses and the low costs

and risks of starting their own companies.

There are many types of small-business loans available for owners and operators, both short- and

long-term. Of course the type of loan you should apply for depends upon your individual

situation. Below is a list of just some of the small-business loans available.

TYPES OF SMALL-BUSINESS LOANS

• Accounts Receivable Financing—Loans taken out to provide working capital for

a small business, with its accounts receivable (invoices sent out to clients for

goods or services) rendered as collateral.

• Asset-Based Lending Loan—A short-term loan secured by a company's assets.

An asset-based lending loan is one where the borrower pledges related business

assets as collateral.

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• Bootstrapping—A type of business funding that seeks to avoid relying on outside

investors. By not relying on outside sources of funding, the business will not have

to dilute ownership through issuing equity, and will not rely on outside banks for

debt.

• Bridge Loan—A short-term loan to fund a business project. It is not typically

acquired from a bank; it usually comes from private lenders or funding

companies.

• Business Credit Card—Small-business credit cards have become a much

demanded product and are often used as a source of funding to start up a business.

• Equipment Financing Loan—A type of business loan where equipment serves as

collateral.

• Factoring Invoice—Financing where an accounts receivable factoring company

purchases the invoices (accounts receivable) of other businesses at a discounted

price (usually 60–75 percent of the value of the invoice, depending on how old it

is), and takes on the risk and responsibility of collecting the money owed from the

smaller businesses’ clients.

• Franchise Loan—Used for purchasing a new franchise or expanding an existing

one.

• Hard Money Loan—Asset-based loan financing where the borrower receives

funds that are secured with real estate.

• Home Equity Loan—Personal property acts as collateral for obtaining this type of

a business loan.

• Inventory Financing Loan—Inventory serves as collateral for this financing.

• Line of Credit less than $100K and more than $100K A lender agrees to loan a

specific amount of money for a specified amount of time, and allows the borrower

to borrow the money again once it has been repaid.

• Retail/Merchant Cash Advance—A business loan based on projected credit card

receivables.

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• SBA Loan—Loans made by a local bank and guaranteed by the U.S. Small

Business Administration. There are various types of SBA loans, but the four

major categories are—

a. Basic 7(a) Loan Guaranty—Serves as the SBA’s primary business loan

program to help qualified small businesses obtain financing when they might

not be eligible for business loans through normal lending channels.

b. Certified Development Company (CDC), a 504 Loan Program—Provides

long-term fixed-rate financing to small businesses to acquire real estate,

machinery or equipment for expansion or modernization.

c. Microloan, a 7(m) Loan Program—Provides short-term loans of up to $35,000

to small businesses and not-for-profit child-care centers for working capital or

the purchase of inventory, supplies, furniture, fixtures, machinery and/or

equipment.

d. ARC Bridge Loans—The newest form of SBA loan, that began on June 15,

2009, and will be available through September 30, 2010, or when the money

is depleted. These are deferred-payment loans of up to $35,000 available to

established, viable for-profit small businesses that are suffering a current

hardship and need short-term help to make principal and interest payments on

existing debt. These loans are interest-free to the borrower (you), and 100

percent guaranteed by the SBA. (For other government assisted programs,

refer to the “Government Assistance” section below.)

• Term-Loan—Short-term loans must usually be repaid in a year or less. They are

often set at a fixed interest rate, and many require some sort of collateral or

security.

• Unsecured Business Loan More Than $25K and Less Than $25K—These lending

packages do not require you to put up collateral in exchange for financing.

• Working Capital Loan—A short-term loan that is used to help sustain a business

during a time of need.

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Things to consider before requesting a loan

HOW TO OBTAIN AND USE SMALL-BUSINESS LOANS

It’s a good idea to ask yourself these questions before applying for any type of small-business

loan:

• “Do I need more capital or can I manage existing cash flow more effectively?”

• “How do I define my need? Do I need money to expand or use as a cushion

against risk?”

• “How urgent is my need?” You can obtain the best terms when you anticipate

your needs, rather than looking for money under pressure.

• “How great are my risks?” All businesses carry risks, and the degree of risk will

affect cost and available financing alternatives.

• “In what state of development is my business?” Needs are most critical during

transitional stages.

• “For what purposes will the capital be used?” Any lender will require that capital

be requested for very specific needs.

• “What is the state of my industry?” Depressed, stable, or growth conditions

require different approaches to money needs and sources. Businesses that prosper

while other similar ones are in decline will often receive better funding terms.

• “Is my business seasonal or cyclical?” Seasonal needs for financing generally are

short term. Loans advanced for cyclical industries such as construction are

designed to support a business through depressed periods.

• “How strong is my management team?” Management is one of the most important

elements assessed by money sources.

• Perhaps most important, “How does my need for financing mesh with my

business plan?” If you don't have a business plan, you should make writing one

your first priority. All capital sources will want to see your business plan for the

start-up and growth of your business.

Source: Financing Basics, www.sba.gov

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Basics for applying for a loan

Once you have gone through the questions above and decide you still need a loan, here are the

steps to get you started:

• Determine what loan is right for you—do your homework, research the different

types of loans and seek the advice of an expert.

• Prepare a written loan proposal, including—

a) Description of Business: Provide a written description of your business,

including the type of organization, location, product or service, brief history,

proposed future operation, competition, customers and suppliers.

b) Management Experience: Resumes of each owner and key management

members.

c) Personal Financial Statements: The SBA requires financial statements for

all principal owners (20 percent or more) and guarantors. Financial statements

should not be older than 90 days. Make certain that you attach a copy of last

year's federal income tax return to the financial statement.

d) Loan Repayment: Provide a brief written statement indicating how the loan

will be repaid, including repayment sources and time requirements. Cash-flow

schedules, budgets, and other appropriate information should support this

statement.

e) Existing Business: Provide financial statements for at least the last three

years, plus a current dated statement (no older than 90 days), including

balance sheets, profit and loss statements, and a reconciliation of net worth.

Aging of accounts payable and accounts receivable should be included, as

well as a schedule of term debt. Other balance sheet items of significant value

contained in the most recent statement should be explained.

f) Proposed Business: Provide a pro-forma balance sheet reflecting sources and

uses both of equity and borrowed funds.

g) Projections: Provide a projection of future operations for at least one year or

until positive cash flow can be shown. Include earnings, expenses, and

reasoning for these estimates. The projections should be in profit and loss

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format. Explain assumptions used if different from trend or industry standards

and support your projected figures with clear, documentable explanations.

h) Other Items As They Apply: Provide items such as lease (copies of

proposal), franchise agreement, purchase agreement, articles of incorporation,

plans and specifications, copies of licenses, letters of reference, letters of

intent, contracts and partnership agreements.

i) Collateral: List real property and other assets to be held as collateral. Few

financial institutions will provide non collateral-based loans. All loans should

have at least two identifiable sources of repayment. The first source is

ordinarily cash flow generated from profitable operations of the business. The

second source is usually collateral pledged to secure the loan.

Be prepared to answer the following questions from your lender

• Can the business repay the loan? (Is cash flow greater than debt service?)

• Can you repay the loan if the business fails? (Is collateral sufficient to repay the

loan?)

• Does the business collect its bills?

• Does the business control its inventory?

• Does the business pay its bills, and on time?

• Are the officers committed to the business?

• Does the business have a profitable operating history?

• Does the business match its sources and uses of funds?

• Are sales growing?

• Does the business control expenses?

• Are profits increasing as a percentage of sales?

• Is there any discretionary cash flow?

• What is the future of the industry?

• Who is your competition and what are their strengths and weaknesses?

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The

GOVERNMENT ASSISTANCE

American Recovery and Reinvestment Act of 2009 (Recovery Act) was signed into law by

President Obama on February 17, 2009. It is an unprecedented effort to jumpstart our economy,

create or save millions of jobs, and put a down payment on addressing long-neglected challenges

so that our country can thrive in the 21st century.

This Act is an extraordinary response to a crisis unlike any since the Great Depression, and

includes measures to modernize our nation's infrastructure, enhance energy independence,

expand educational opportunities, preserve and improve affordable health care, provide tax

relief, and protect those in greatest need.

The bill provides $730 million to the SBA and makes changes to the agency’s lending and

investment programs so that it can reach more small businesses that need help. The funding

includes—

• $375 million to temporarily eliminate fees on SBA-backed loans and raise the

SBA's guarantee percentage on some loans to 90 percent. The elimination of fees,

announced on March 16, 2009, will remain in effect until the end of the calendar

year or until the funding is exhausted. The elimination of fees is retroactive to the

day the Recovery Act was signed into law.

• $255 million for a new loan program to help small businesses meet existing debt

payments

• $30 million to expand the SBA’s Microloan program, enough to finance up to $50

million in new lending and $24 million in technical assistance grants to micro-

lenders

• $20 million for technology systems to streamline the SBA’s lending and oversight

processes

• $15 million to expand the SBA’s Surety Bond Guarantee program

• $25 million to staff up to meet demands for new programs

• $10 million for the Office of Inspector General

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The following section includes tax credits your small business might overlook. For additional

information on small-business tax credits, visit the

TAX CREDITS

IRS website.

Source: AllBusiness.com, Published April 14, 2009

• Energy Breaks: Businesses can take advantage of a growing list of energy

conservation and alternative energy resource credits, offered to reduce

dependence on fossil fuels. The credits for alcohol used as fuel and biodiesel and

renewable diesel fuels provide additional benefits because businesses that use

alternative fuels for transportation can file for the credits on quarterly returns

(Form 4136) rather than waiting for the end of the tax year. Upgrading your

heating and air conditioning systems, adding solar energy to buildings, and

building alternative energy projects all trigger tax credits, helping lower these

project costs.

• New Assets: Every year, businesses can deduct the entire cost of new assets under

Section 179 rather than depreciating them over time. Using Section 179 saves the

cost of setting up depreciation schedules for relatively low-cost assets, such as

printers, cell phones, and office furniture, but also applies to vehicles, machinery,

and other equipment with a longer life. Businesses can elect Section 179

treatment on Form 4562 where they depreciate other assets. The limit on how

much can be written off in a year increases annually, so look up this limit as part

of your tax planning.

• New Hires: Hiring military veterans as they reenter the workforce can reduce

payroll expenses through the work opportunity credit, which reduces tax liabilities

by as much as $2,400 of the first-year salary paid to a veteran. The amount rises

to $4,800 if the new employee is a disabled veteran. There is no limit to the

number of veterans an employer can hire. Work opportunity credits also support

hiring nonveterans with disabilities, people who have received food stamps or

other temporary public assistance, participants in welfare-to-work, low-income

youth hired for the summer, and ex-felons. Use Form 5884 to claim these credits.

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• FICA Tax Credits: Food-service employers can receive credits for Social

Security and Medicare taxes on the amount of tips that raise an employee's pay

above the minimum wage. While the minimum wage is now $6.55 per hour, the

credit is for amounts more than the older level of $5.15.

• Retirement Plans: Self-employed IRA plans permit contributions to these

deferred-tax retirement programs of up to $49,000 per year for business owners

and for any participating employee. This is much higher than the $16,500 limit for

401(k) contributions (participants over age 50 can contribute $22,000). Adding

employees to a SEP-IRA can earn a credit for small-employer pension plan

startup costs that is $500 per year in each of the first three years of a new plan.

The employer may elect to take the credit in the year prior to starting the plan.

Economic downturn has harmed the ability of small businesses to secure loans and lines of

credit; however the severity of the effects on entrepreneurs is still being debated by the experts.

EXPERT OUTLOOKS ON OBTAINING SMALL-BUSINESS LOANS

Overall, the majority of experts believe that the lending outlook looks bleak—suggesting that it

is not a good time to borrow money. “I think the appetite for lenders, in general, is very dried up.

Lending for small businesses, which has always been difficult, will just get more difficult in this

environment,” said Dennis Ceru, professor of entrepreneurship at Babson College. Martha

Doron, associate professor for the School of Accountancy at the San Diego State University

mirrors Ceru’s sentiment: “It has always been the case that banks are not willing to offer money

when one needs it the most. New companies looking for cash still have to look at alternative

methods—banks do not want take the risk.”

Even when economic growth returns, however, experts don’t see banks planning to resume

normal lending too soon. The Federal Reserve’s most recent survey of senior loan officers found

that most expect to maintain higher lending standards throughout the second half of 2010. And

for riskier borrowers—including many small businesses—credit “will remain tighter than

average for the foreseeable future,” according to the survey. Credit-card lending, once an easy

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source of unsecured funds, has also been curbed: 58 million cardholders had their limits reduced

between April 2008 and April 2009, according to the Fair Isaac Corp. (FICO).

Source: Entrepreneurs Turn to Alternative Finance, Sept. 1, 2009 Business Week

But there’s reason to believe it’s “less dire for smaller businesses” than the numbers show,

according to Holly Wade, policy analyst at the National Federation of Independent Business.

Small businesses traditionally have a variety of capital sources—they tend to cut back on

borrowing when sales decline and/or borrow from smaller banks that have sidestepped the toxic-

loan issues. And the federal Small Business Administration is offering some stimulus-package

relief, reducing bank fees and increasing the percentage of each loan that the government will

guarantee. In fact, in the last two fiscal years, $3.3 billion of completely authorized funds were

left on the table unspent for SBA504 loans. Next year, this amount is expected to increase to $4-

4.5 billion, according to Business Week and Fox Business. All these factors appear to be

helping—the banks are at least saying they are open for business. As long as a borrower doesn’t

expect “pre-2008” terms, “we have money to lend and a strong desire to do so,” said Robert

McGannon, chief lending officer at the Kansas City, Mo.–based Country Club Bank.

Source: For Small Businesses, Borrowing Is Not So Dire, Sept. 2, 2009, The Wall Street Journal

While it may take a little more effort to secure their loan these days, small business owners have

never been shy to hard work. So the experts agree that the best place to start when securing a

small business loan is through smaller bank branches and credit unions. “Small community

banks are the way to go. These smaller lending agents provide the largest opportunity for you to

secure your loan,” said Bill Dunkelberg, chief economist, National Federation of Independent

Business, in Washington. “We let the big banks get so big that they are too big to manage and

that means, too big to fail.”