1. Insero & Company presents
Creative Financing and Tax Options for
Small Business Owners
presented by
Trina Lang
Steven Mills, CPA
Nancy Catarisano, CPA
Insero & Company CPAs, P.C.
November 13, 2013

2. Seeking Financing

3. Prior to Seeking Financing
Analyze the Business First
•
•
•
•
Capital Structure – Current
Levels of Debt and Equity
Current Earnings and Cash
Flows
Company Goals, Plans,
and Expectations
Current Owners Objectives
and Needs

4. Business Discussion
• Review Historical Financial Results
• Discuss Backlog/Forecast
• Look at cash flow indicators - receivables and
payables
• Review for unusual or discretionary items:
-
one time expenses
bonus
owner’s benefits
-
tax planning effects

5. Proforma Financial Results
Net income per financial statement or tax return
$
0
Add-backs
Officer bonus
Staff bonus
Profit sharing contributions
Consultants
Website
Discretionary income before one-time only and tax planning initiatives
20,000
5,000
10,000
5,000
10,000
$ 50,000

6. Purpose of Financing
• What is the financing needed for:
• Research & Development
• Equipment
• Real Estate
• Inventory on a Purchase Order
• Acquisition
• Refinancing or restructuring existing debt
• To fund operating losses
• To fund normal operating fluctuations
• How much financing is needed:
• Budget converted to forecasted cash flow
• Make sure its enough

7. Balance Sheet 12/31/12
Actual
ASSETS
Cash
Accounts Receivable
Inventory
LIABILITIES
$5,000
20,000
0
Accounts Payable
Bank Debt
Total Liabilities
$10,000
23,250
33,250
Fixed Assets
Car
Copier
Equipment
Total Fixed Assets
Less: Accum.
Depreciation
Net Fixed Assets
TOTAL ASSETS
15,000
6,000
10,000
31,000
(20,000)
11,000
$36,000
Common Stock
Retained Earnings Net Income - Current
Year
500
2,250
Total Owners' Equity
2,750
0
TOTAL LIABILITIES AND
OWNERS' EQUITY
$36,000

8. Income Statement
XYZ Company
Income Statement
For the Year Ending December 31, 2013
Acutal
Q1
Sales
$
Cost of Goods Sold
Gross Profit
142,000
Actual
Q2
$
99,400
$
42,600
180,000
Budgeted
Q3
$
126,000
$
54,000
190,000
Budgeted
Q4
$
133,000
$
57,000
189,750
Total 2012
$
130,900
$
58,850
701,750
489,300
$
212,450
Expenses:
Advertising
Automobile
Insurance
Interest Expense
Office Supplies
Payroll
Payroll Taxes
Rent
Telephone
Untilities
750
3,000
1,500
1,200
1,050
18,000
1,800
7,500
1,875
1,290
750
3,000
1,500
1,200
1,050
19,000
1,900
7,500
1,875
1,290
750
3,000
1,500
1,200
1,050
20,400
2,040
7,500
1,875
1,290
750
3,000
1,500
1,200
1,050
20,400
2,040
7,500
1,875
1,290
3,000
12,000
6,000
4,800
4,200
77,800
7,780
30,000
7,500
5,160
Total Expenses
37,965
39,065
40,605
40,605
158,240
Net Income
$
4,635
$
14,935
$
16,395
$
18,245
$
54,210

9. Balance Sheet 12/31/13
Projected
ASSETS
Cash
Accounts Receivable
Inventory
LIABILITIES
$5,960
60,000
50,000
Accounts Payable
Bank Debt
Total Liabilities
$50,000
20,000
70,000
Fixed Assets
Car
Copier
Equipment
Total Fixed Assets
Less: Accum.
Depreciation
Net Fixed Assets
TOTAL ASSETS
15,000
6,000
10,000
31,000
(20,000)
11,000
$126,960
Common Stock
Retained Earnings Net Income - Current
Year
500
2,250
54,210
Total Owners' Equity
56,960
TOTAL LIABILITIES AND
OWNERS' EQUITY
$126,960

10. Income Statement
XYZ Company
Income Statement
For the Year Ending December 31, 2013
Acutal
Q1
Sales
$
Cost of Goods Sold
Gross Profit
142,000
Actual
Q2
$
99,400
$
42,600
180,000
Budgeted
Q3
$
126,000
$
54,000
190,000
Budgeted
Q4
$
133,000
$
57,000
189,750
Accrual
Total 2013
$
130,900
$
58,850
T/R Cash
Total 2013
701,750
$
212,450
$
661,750
(40,000)
(539,300)
489,300
$
Cash
Difference
(50,000)
122,450
Expenses:
Advertising
Automobile
Insurance
Interest Expense
Office Supplies
Payroll
Payroll Taxes
Rent
Telephone
Untilities
750
3,000
1,500
1,200
1,050
18,000
1,800
7,500
1,875
1,290
750
3,000
1,500
1,200
1,050
19,000
1,900
7,500
1,875
1,290
750
3,000
1,500
1,200
1,050
20,400
2,040
7,500
1,875
1,290
750
3,000
1,500
1,200
1,050
20,400
2,040
7,500
1,875
1,290
3,000
12,000
6,000
4,800
4,200
77,800
7,780
30,000
7,500
5,160
Total Expenses
37,965
39,065
40,605
40,605
158,240
Net Income
$
4,635
$
14,935
$
16,395
$
18,245
$
118,240
54,210
$
Debt
$
40,000
4,210
(3,250)
960
(50,000)

11. Debt Service Coverage Ratios
(DSCR) 12/31/13
Accrual
Net Income
Cash
$54,210
$4,210
0
4,800
0
4,800
59,010
9,010
8,050
2,250
10,300
8,050
2,250
10,300
DSCR
5.70
0.87
GOAL
1.20
1.20
Add Back:
Depreciation
Interest Expense
Cash Flow Available for Debt Service
DEBT
Annual Principal and Interest Payments - existing
Line of Credit - $50,000

12. Collateral Coverage
TERM LOAN
EQUIPMENT
DEBT
Book
Value
11,000
23,250
LOAN TO VALUE
OPERATING LINE OF CREDIT
Accounts Receivable
Approved borrowing rate
Accounts Receivable borrowing limit
Inventory
Approved borrowing rate
Inventory borrowing limit
Total collateral value
FMV
28,000
23,250
83%
Year 1
20,000
75%
Year 2
60,000
75%
$15,000 $45,000
0.00 $50,000
50%
50%
$0 $25,000
$15,000 $70,000

13. Borrowing Capacity
General Rule
Cash
100%
Accounts Receivable
Eligible
75%
Ineligible
0%
Inventory
Raw Material
30 – 60%
Work-In-Process
0%
Finished Goods
50%
Other Assets
Property
0%
75 – 80%
Equipment
Existing
New
50%
75 – 85%
Talk with
your
lender and
ask how
they are
computing
for your
business.

14. Bank Financing for Businesses
• Collateral Options: Personal real estate, cash
surrender value life insurance policy, investment
accounts
• Home equity loans 85% loan to property value
• Banks will typically loan even if 1st mortgage is with
another lender
• Loans under $100k not as much paperwork
required; however if lower credit score, more
involved financing package necessary
• Expect to personally guarantee any loan until the
Balance Sheet of the business is strong
• May require covenants, typical DSCR of 1.2

15. Documents Needed for Financing
1.
2.
3.
4.
5.
Personal Financial Statement
Two Years Personal and Business Tax Returns
Interim Financial Statements
Budget – 2 to 5 years
If Tax Returns show losses include a Quarterly
Summary Recap
6. Accounts Receivable and Accounts Payable
Aging Reports
7. Backlog report/Significant New Customers etc.
8. Business Plan – if available

16. Entity Selection
Which one is right for your business?

17. So many choices…

18. Types of entities to choose from:
• Sole proprietorship
• C-Corporation
• S-Corporation
• Limited Liability Corporation (LLC)
• General/Limited Partnerships

19. Sole Proprietorship
Most common type: Over 22
million filed tax returns as sole
proprietorship in 2008,
according to IRS “Statistics of
Income Bulletin.”

20. Sole Proprietorship
Advantages
• The easiest and least expensive to set up
• Owned by one person who receives all
profits
• Easy tax form to file each year (Schedule C)
• Examples: Consultants, Contractors, Sales

21. Sole Proprietorship
Disadvantages
• Unlimited liability ; Creditors can attach to
owner’s personal property. Possible
solution: create a Single Member LLC.
• All profit is subject to self-employment tax.
• Business succession is difficult.
• Hard to raise capital. Financing is directly
linked to personal assets.

22. C-Corporation
Most recognizable type of business
Thoughts of large multi-national corporations
come to mind
Is it right for a small business?

23. C-Corporation
Advantages
• Separate legal entity; investors have limited
liability if company fails. Personal liability is
never shielded – consult your attorney.
• Unlimited longevity regardless of health or
even death of investors
• Ability to raise capital by selling stock
• Easy to transfer ownership
• Various small tax benefits, such as possible
lower tax brackets, fringe benefits, etc.

24. C-Corporation
Disadvantages
• Double Taxation, Double Taxation
• Can be costly to form
• Many formalities related to formation

25. S-Corporation
Most prevalent type of
corporate tax return:
Over 4 million returns filed in
2010 regardless of industry,
according to IRS, “Statistics of
Income Tax Bulletin.”

26. S-Corporation
Advantages
• Separate legal entity; owner has limited
liability. Personal liability is never shielded –
consult your attorney.
• Profits taxed once, to owners. Sometimes at a
lower rate (some exceptions apply).
• Elimination of double taxation
• Profits not subject to employment taxes (but
see next page…)

27. S-Corporation
Disadvantages
•
•
•
•
•
Limited number of owners
Same formalities as c-corporations
Owners must be paid a “reasonable” salary
Owners must be U.S Citizens or residents
Deductible losses (for owners) limited to cash
actually contributed to the company (basis).

28. Limited Liability Company (LLC)
A hybrid form of both a
Corporation and a Partnership

29. Limited Liability Company (LLC)
Advantages
• Members enjoy limited liability against debts or
judgments. Personal liability is not shielded – always
consult attorney.
• Profits taxed to owners once, much like scorporations
• Fewer formalities and compliance issues
• Unlimited longevity
• Flexibility in creating operating structure
• Owners can deduct losses if financed by debt and
they are responsible for paying back.

30. Limited Liability Company (LLC)
Disadvantages
• Most members subject to self-employment
taxes on profits
• Raising capital; hard to find outsiders willing
to invest
• Fees charged by states
• Can be difficult to understand tax allocation
to members if operating agreement is
complicated.

31. General/Limited Partnerships
Advantages
• Very similar to LLC
• Members may enjoy limited liability against debts
or judgments. Personal liability is not shielded –
always consult attorney.
• Profits taxed to owners once, much like scorporations
• Fewer formalities and compliance issues
• Flexibility in creating operating structure
• Owners can deduct losses if financed by debt they
are responsible for paying back.

32. General/Limited Partnerships
Disadvantages
• Most members subject to self-employment
taxes on profits
• Raising capital; members left to finance
• Can be difficult to understand tax allocation
to members if operating agreement is
complicated.

33. Which one will you choose…
Every business will have a different answer!

34. But, what about…
• Health Insurance
• Retirement Plans
• Cash or Accrual Method
• State tax filings
• Governance

35. Financing Options

36. Characteristics of Common
Types of Financing
Source
Purpose
Security
Evaluation
Criteria
Advantages
Disadvantages
Banks/Credit
Unions/Financial
Institutions
Working capital,
term loans,
mortgages
A/R, Inventory,
equipment, real
estate, etc.
Credit analysis,
collateral coverage
and cash flow
Lower interest rates,
no ownership
dilution
Difficult to fund
future growth
without proven
results, restrictive
covenants
Asset-based loans
Working capital,
term loans
A/R, Inventory,
equipment
Value of collateral
Easier to obtain
than traditional
bank loans
Expensive
Leasing
Facilities and
equipment
Facilities and
equipment
Value of collateral
Various financial,
accounting, and
income tax benefits
Higher implicit
interest rates, no
benefit from asset
residual values
Factoring
Working capital
A/R
Value of receivables
Easier to obtain
than traditional
bank loans, reduces
collection efforts
Expensive
Government
financing
Varies by Program
Varies by Program
Varies by Program
Favorable rates and
terms, financing
opportunities for
businesses that
might not qualify for
other financing
Complex
paperwork, lengthy
time delays,
contractual and
legal requirements
Venture capital
Start-up and growth
Equity in company
Potential market
leaders, high growth
potential
Access to large
dollar amounts and
management advice
Difficult to obtain,
dilutes ownership
Friends and
Family/Angel
investors
Start-up and growth
Equity in company
Higher-risk, start-up
businesses
Often flexible and
informal
Difficult to find,
dilutes ownership

37. SBA
• Guarantee Programs *See handouts.
• 7A (most common program)
• SBA Guarantees up to 85%
• No SBA fees on loan <$150K
• SBA Express- may be used for revolving
line of credit – 50% guaranty
• 504 Program(long-term, fixed-asset loans)
Bank 50%/NYBDC/SBA 40%/Borrower 10%

38. Leasing Option:
Decision to Buy or Lease
Leasing
Purchasing
100% Financing
Some leases provide 100%
financing
Down payments are
usually required
Cash Flow
Lower initial cash outlays
Larger initial cash outlays
Cancellation Option
Some grant the option to
cancel.
Risk of obsolescence to
lessor.
Not cancellable
Fixed Payments
Typically fixed
Variable if floating interest
rates
Covenants
Usually none
Operating restrictions &
covenants may exist
Interest Rates
Usually higher
Usually lower
Residual Value
Lessor conservatively
Retain any salvage value
estimates to retain residual

39. New York State Programs
• Linked Deposit Program
• Small Business Revolving Loan Fund
• Excelsior Jobs Program
http://www.empire.state.ny.us/BusinessProgra
ms.html

40. Linked Deposit Program
• Purpose to provide reduced rate loans to
promote businesses to undertake projects
that:
•
•
•
•
Improve their competitiveness
Gain market access
Modernize equipment
Expand facilities
• Apply through your bank
• 2 – 3% interest rate savings

41. Linked Deposit Program
• Maximum loan of $2,000,000 for 4 years
• 2011 Amendment – Lifetime limit increased from
$1 Million to $2 Million and extended another 4
years.
• 2% Reduction
• To manufacturers with 500 or less employees
• Service Companies with 100 or less employees
• 3% Reduction
• Distressed area located businesses
• Certified Minority or Women-Owned businesses to
fulfill NYS or Federal Contract

42. New York State Small Business
Revolving Loan Fund
• 1.5 Million allocated to our region
• Targeted for Small Businesses having
difficulty accessing regular credit markets
• Information on state website is for
statewide.
• Administered by Pathstone Enterprise
Center, Inc. for Finger Lakes and Western
New York Regions

43. Pathstone Enterprise Center, Inc.
• Mission to provide Training/Technical
Assistance and lending to small businesses
• Loans range between $1,000 - $500,000
• Businesses with impact to the community
• Approximately $10 Million in total funding
available including state allocated money
• Al Hartsig – (585) 340-3304

44. Excelsior Jobs Program
The Excelsior Jobs Program
is the NYS replacement to
the Empire Zone/QEZE
credit regime
For more information:
http://nyworks.ny.gov

45. Excelsior Jobs Program
Four new Fully Refundable tax
credits exist:
1. The Excelsior Jobs Tax Credit: A
credit of 6.85% of wages per new
job to cover portion of the
associated payroll cost.
2. The Excelsior Investment Tax
Credit: Valued at 2% of qualified
investments.

46. Excelsior Jobs Program
3. The Excelsior Research &
Development Tax Credit: A credit of
50% of the Federal Research &
Development credit up to 3% of
research expenditures in NYS.
4. The Excelsior Real Property Tax Credit:
Available to firms located in certain
distressed areas (See Investment Zone
list) and to firms in targeted industries
that meet higher employment and
investment thresholds (Regionally
Significant Project).

47. Genesee Finger Lakes
Regional Planning Council
Regional Revolving Loan Fund
• Loans $20,000 minimum/$200,000 max
• Available for fixed assets/working capital
• Must be turned down by traditional lender or used
for gap funding
• Service/Industrial/Manufacturing Industries, Nonretail
• Job growth and retention must be proven
• Application process-contact Finger Lakes
Regional Planning Council (David Zorn – (585)
454-0190, X14 for initial meeting ) or local IDA
where project is located

48. Economic Development Programs
• SBA 504 (previously discussed)
• Great Rate Program
•
•
•
Interest Rate Subsidy – 3%/4% if local
Non-retail, for profit business
Loan must create one job for every $75,000 or increase
employment by 10% whichever is less
• Great Rebate Program
•
•
Rebates on equipment purchases of at least $50,000 and
purchased without borrowed funds; meets job creation
requirement
$4,000 rebate or $5,000 if purchased locally
• Monroe Manufacturing Rewards Program
•
Provides manufacturing businesses with a rebate on mfg
equipment purchases of $25K - $49,999; $1,000 rebate upon
proof

49. Who is NYSERDA?
New York State Energy Research and
Development Authority
• Public Benefit Corporation established by NYS law in 1975
• Works through 26 Regional Outreach Contractors (ROCs)
• Helping NYS reach its energy goals: reducing energy
consumption, promoting renewables, protecting the
environment
• NYSERDA has partnered with Greater Rochester
Enterprise (GRE)

50. Greater Rochester Enterprise
(Regional Outreach Contractor)
Economic Development Growth Extension (EDGE)
•
•
•
•
•
•
Regionally-based access to NYSERDA’s energy efficiency, renewable
energy and R+D programs
Matching project needs w/ the appropriate programs
Creating partnerships to encourage projects that spur investment and
job growth
Supporting efforts of the FLREDC
Assisting with the Consolidated Funding Application (CFA)
Educating business owners, community leaders and homeowners on
the benefits of energy efficient and renewable technologies
Haley Rotter
Greater Rochester Enterprise (GRE)
Haley@RochesterBiz.com
(585) 530-6205

51. Excell Partners
• Venture Capital fund that invests in seed and early
stage high-tech start-ups in Upstate NY.
• Formed in partnership with University of
Rochester and the State of New York
• Helps to launch and grow high tech start-ups by
providing critical funding and business building
expertise
• Bridges the seed stage funding gap
• www.excellny.com
• (585) 458-SEED (7333)

52. Questions ?

53. Thank You
Thank you for your attendance at
today’s program.
For more information regarding the topics discussed today,
please feel free to contact:
Trina Lang
trina.lang@inserocpa.com
585.697.9686
Steven Mills, CPA
steven.mills@inserocpa.com
585.697.9629
Nancy Catarisano, CPA
nancy.catarisano@inserocpa.com
585.697.9661
Insero & Company CPAs, P.C.
www.inserocpa.com

54. Insero & Company CPAs, P.C.
Certified Public Accountants
Business & Financial Advisors
Rochester >> 585.454.6996
Corning >> 607.973.2075
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