At some point, most small business owners will visit a bank or other lending institution to borrow money. Understanding what your bank wants and how to approach them properly can mean the difference between getting a loan for expansion or scrambling to find 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 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 significantly 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 to keep the depositors’ money safe, the banking regulators happy, and the community’s economic health 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 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 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 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 loan agreement requirements in both letter and spirit. By doing so, you gain the banker’s trust and loyalty, and they 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 crucial to the bank’s success as it is to the small business. 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 or are incapable of planning for your firm’s needs.

What to Do Before You Apply for a Loan

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.”

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. Also, you must understand your statement and explain how your operation works and how your finances stand up to industry norms and standards.

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 them waiting for a week.

Seek Advice from an Experienced Tax and Accounting Professional

Walking into a bank and talking to a loan officer is stressful for just about anyone. Preparation for and a thorough understanding of this evaluation process is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek. If you’re thinking about taking out a small business loan, don’t hesitate to call with any questions or to request a consultation.

If you’re conscientious about financial reporting, you may already have a sense of your company’s worth, but in some instances, you might need a formal business valuation, such as:

• Certain transactions: Are you selling your business? Planning an IPO? Need financing?
• Tax purposes: This includes estate planning, stock option distribution, and S Corporation conversions.
• Litigation: Often needed in cases like bankruptcy, divorce, and damage determinations.

While there isn’t a single formula for valuing a business, there are generally accepted measures that will give you a valid assessment of your company’s worth. Here are three tips that you can use to give your business a more accurate valuation:

1. Take a Close Look at How Your Business Operates

Does it incorporate the most tax-efficient structure? Have sales been lagging, or are you selling most of your merchandise to only a few customers? If so, consider jump-starting your sales effort by bringing in an experienced consultant who can help.

Do you have several products that are not selling well? Maybe it’s time to remove them from your inventory. Redesign your catalog to give it a fresh new look and make a point of discussing any new and exciting product lines with your existing customer base.

It might also be time to give your physical properties a spring cleaning. Even minor upgrades such as a new coat of paint will increase your business valuation.

2. Tangible and Intangible Assets

Keep in mind that business valuation is not just an exercise in numbers where you subtract your liabilities from your assets. It’s also based on the value of your intangible assets.

It’s easy to figure out the numbers for the value of your real estate and fixtures, but what is your intellectual property worth? Do you hold any patents or trademarks? And what about your business relationships or the reputation you’ve established with existing clients and in the community? Don’t forget about key long-term employees whose in-depth knowledge about your business also adds value to its net worth.

3. Choose Your Appraisal Team Carefully

Don’t try to do it yourself by turning to the Internet or reading a few books. You may eventually need to bring in experts like a business broker and an attorney, but your first step should be to contact an experienced tax professional with the expertise you need to arrive at a fair valuation of your business.

If you need a business valuation for whatever reason, please don’t hesitate to call and speak to a tax and accounting professional who can help.

For many nonprofits and taxpayers alike, Giving Tuesday is the start of the charitable giving season. While most organizations are legitimate, taxpayers should always research charities before donating. It is also a good idea to understand the expanded tax benefits of giving to causes that mean something to you personally. Taxpayers should also know that they may be able to deduct donations to tax-exempt organizations on their tax returns.

The first step when deciding where to make donations is to visit IRS.gov and use the Tax Exempt Organization Search tool to search for information about an organization’s federal tax status and filings. Here are several facts about this valuable tool that taxpayers should be aware of:

• Donors can use it to confirm an organization is tax-exempt and eligible to receive tax-deductible charitable contributions.
• Users can find out if an organization had its tax-exempt status revoked. A common reason for revocation is when an organization does not file its Form 990-series return for three consecutive years.
• TEOS does not list certain organizations that may be eligible to receive tax-deductible donations, including churches, organizations in a group ruling, and governmental entities.
• Organizations are listed under the legal name or a “doing business as” name on file with the IRS. No separate listing of common or popular names is searchable.

Taxpayers can also use the interactive tax assistant, Can I Deduct my Charitable Contributions? to help them determine whether a charitable contribution is deductible. As a reminder, taxpayers should get a written acknowledgment for any charitable contributions of $250 or more.

Expanded Tax Benefits in 2021

Tax law now permits taxpayers to claim a limited deduction on their 2021 federal income tax returns for cash contributions they made to certain qualifying charitable organizations even if they don’t itemize their deductions. Taxpayers, including married individuals filing separate returns, can claim a deduction of up to $300 for cash contributions to qualifying charities during 2021. The maximum deduction is $600 for married individuals filing joint returns.

Qualified Charitable Distributions

Taxpayers age 70 1/2 or older can make a qualified charitable distribution, up to $100,000, directly from their IRA, other than a SEP or SIMPLE IRA, to a qualified charitable organization. It’s generally a nontaxable distribution made by the IRA trustee directly to a charitable organization. It is important to note that a qualifying deduction may also count toward the taxpayer’s required minimum distribution requirement for the year. Please call for more information.

Cash Donations

Most cash donations made to charity qualify for the deduction. Cash contributions include those made by check, credit card, or debit card, as well as unreimbursed out-of-pocket expenses in connection with volunteer services to a qualifying charitable organization. Cash contributions don’t include the value of volunteer services, securities, household items, or other property.

There are some exceptions (they also apply to taxpayers who itemize their deductions), however. Cash contributions that are not tax-deductible include those:

• Made to a supporting organization
• Intended to help establish or maintain a donor-advised fund
• carried forward from prior years
• Made to most private foundations
• Made to charitable remainder trusts

Questions about charitable giving this tear? Don’t hesitate to contact the office.

While similar to FSAs (Flexible Savings Plans) in that both allow pretax contributions, Health Savings Accounts or HSAs offer taxpayers several additional tax benefits. Let’s take a look:

What is a Health Savings Account?

A Health Savings Account is a type of savings account that allows you to set aside money pretax to pay for qualified medical expenses. Contributions that you make to a Health Savings Account (HSA) are used to pay current or future medical expenses (including after you’ve retired) of the account owner, their spouse, and any qualified dependent.

There are several caveats that individuals should be aware of, however, such as:

• Medical expenses that are reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return are not eligible.
• You cannot be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care, and you cannot be claimed as a dependent on someone else’s tax return.
• Spouses cannot open joint HSAs. Each spouse who is an eligible individual who wants an HSA must open a separate HSA.
• Insurance premiums for taxpayers younger than age 65 are generally not considered qualified medical expenses unless the premiums are for health care continuation coverage (such as coverage under COBRA), health care coverage while receiving unemployment compensation under federal or state law.

Tax-Advantaged Savings Accounts

Health Savings Accounts (HSAs) offer a triple tax advantage:

• Contributions are made pretax.
• Growth is tax-free.
• Distributions are tax-free as long as they are used for qualified health care expenses.

Contributions to an HSA, which can be opened through your bank or another financial institution, must be made in cash. Contributions of stock or property are not allowed. An employee may be able to elect to have money deposited directly into an HSA account through payroll withholdings. If your employer does not offer this option, you must wait until filing a tax return to claim the HSA contributions as a deduction. Unlike contributions to FSAs, you may change the amount withheld at any time during the year as well, and unused funds automatically roll over into the next calendar year (there is no “use it or lose it”).

Funds in the account may be invested much like any other retirement savings account; however, less than 10 percent of account holders do so, according to the Employee Benefit Research Institute. Whether funds can be invested depends on whether the HSA administrator offers this option. There may also be a minimum balance requirement, which could limit individuals with smaller account balances.

High Deductible Health Plans

However, a Health Savings Account is not available to everyone and can only be used if you have a High Deductible Health Plan (HDHP). Typically, high-deductible health plans have lower monthly premiums than plans with lower deductibles, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible).

A high-deductible plan can be combined with a health savings account, allowing you to pay for certain medical expenses with tax-free money that you have set aside. Using the pretax funds in your HSA to pay for qualified medical expenses before you reach your deductible and other out-of-pocket costs such as copayments reduces your overall health care costs.

Calendar year 2021. For the calendar year 2021, a qualifying HDHP must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. The beneficiary’s annual out-of-pocket expenses, such as deductibles, copayments, and coinsurance, are limited to $7,000 for self-only coverage and $14,000 for family coverage. This limit doesn’t apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only use deductibles and out-of-pocket expenses for services within the network to figure whether the limit applies.

Last-month rule. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).

You can make contributions to your HSA for 2021 until April 15, 2022. Your employer can make contributions to your HSA between January 1, 2022, and April 15, 2022, that are allocated to 2021. The contribution will be reported on your 2021 Form W-2.

Summary of HSA Tax Advantages

• Tax deductible. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
• Pretax dollars. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• Tax-free interest on earnings. Contributions remain in your account until you use them and are rolled over year after year. Any interest or other earnings on the assets in the account are tax-free. Furthermore, an HSA is “portable” and stays with you if you change employers or leave the workforce.
• Tax-free distributions. Distributions may be tax-free if you pay qualified medical expenses.
• Additional contributions for older workers.Employees, aged 55 years and older are able to save an additional $1,000 per year.
• Tax-free after retirement. Distributions are tax-free at age 65 when used for qualified medical expenses including amounts used to pay Medicare Part B and Part D premiums, and long-term care insurance policy premiums. You cannot, however, use money in an HSA to pay for supplemental insurance (e.g., Medigap) premiums.

Help is Just a Phone Call Away

Please contact the office if you have any questions about health savings accounts.