New stimulus legislation could help small businesses

20 Apr New stimulus legislation could help small businesses

Over the past few months, more and more start-up entrepreneurs and small business clients have been struggling to get up and running or make ends meet. Obviously, the current economy is the main catalyst for most of these struggles. However, another commonly cited reason for the plight of many small businesses is the lending freeze that our country is experiencing.
In an effort to brighten some of the doom and gloom we have become so accustomed to reading about, I have asked my colleague, Phil Koutnik, to discuss a few components of the recent American Recovery and Reinvestment Act of 2009 that could provide a helping hand to small businesses. For related ideas, see my recent columns on minority and women-owned businesses and new bond opportunities for tech companies.
SBA Loan Programs
The SBA 7(a) Loan Program is designed to assist certain small businesses in obtaining credit from lenders. In a nutshell, the government guarantees a portion of loans made to small businesses by lenders who participate in the 7(a) program. The idea is that lenders will be more willing to take risk and issue loans to small businesses if the government serves as a backstop for the bulk of potential losses. Formerly, the SBA was willing to guarantee 85 percent of a loan whose principal amount was $150,000 or less and 75 percent of a loan whose principal amount was $150,000 or more. However, on March 16, 2009, it was announced that as part of the larger economic stimulus package, these guarantees would be temporarily increased to 90 percent. The hope is that this increased guarantee will help thaw the credit markets and assist small businesses in accessing capital.
Another modification to the 7(a) program is the elimination of certain upfront fees passed on to the borrower on the guaranteed portion of the loans. This fee waiver is retroactive for all 7(a) loans approved on or after February 17, 2009. So, if your small business received a 7(a) loan during the past few weeks, and that loan included upfront fees, you should consider applying for a refund.
Also, it is important to understand that the SBA does not directly loan money to small businesses under the 7(a) program. Instead, borrowers are required to apply for capital from traditional financing sources. The SBA simply serves as a partial guarantor to help get the deal done. A lender cannot be forced to make a loan—even if the SBA guarantees the majority of its repayment. Therefore, it is very important for small businesses to maintain solid relationships with their lenders and understand the SBA’s eligibility requirements prior to applying for credit.
For more information on 7(a) loans and their eligibility requirements, visit the website of the Wisconsin District Office of the SBA at: http://www.sba.gov/localresources/district/wi/index.html. This website also provides a listing of SBA Certified Lenders and Preferred Lenders who deal frequently with 7(a) loans and are able to process applications quickly. Lastly, although it is not discussed in this column, similar incentives have been implemented with respect to the SBA’s 504 Development Company Program.
Another incentive that may help relatively small start-ups or going concerns seeking a small capital infusion is the expansion of the SBA’s Microloan Program. In brief, “microloans” are loans of $35,000 or less issued to small businesses by SBA-approved, non-profit intermediary lenders. These loans impose certain training and/or planning requirements on the small business-borrowers. The recent stimulus legislation has expanded the microloan program by allocating additional capital to the intermediary lenders. If this type of loan may help your business, visit the following website to learn more about the program: http://www.sba.gov/localresources/district/wi/financing/WI_WIMICRO.html.
There are several other SBA programs that have been affected by the stimulus legislation, including the secondary market for SBA loans, and even though some details still need to be worked out (see, for example: http://milwaukee.bizjournals.com/milwaukee/stories/2009/04/06/newscolumn2.html), many of the modifications discussed above have already been implemented. If you’d like to learn more, visit: www.sba.gov.
Tax Benefits and Incentives
The American Recovery and Reinvestment Act of 2009 also provides for various tax incentives that could help small businesses stay afloat in these turbulent waters. One of the incentives is intended to help small businesses with net operating losses. Under the new stimulus legislation, qualifying small businesses that had a net operating loss in 2008 can offset that loss against income earned in the previous five years. In other words, this provision allows small businesses to potentially recoup their losses by getting a refund of taxes paid in the previous years. The idea of a loss carryback is not new; instead, it is an expansion of the existing provision (which allowed businesses to carryback losses no more than two years). A nice summary of this new tax provision can be found at: http://www.irs.gov/newsroom/article/0,,id=205329,00.html. If you have additional questions, be sure to contact your tax professional.
Other incentives for small businesses relate to the extension of “bonus depreciation,” as well as the enhanced expensing provisions enacted in 2008. Bonus depreciation refers to a business’s ability to immediately write off 50 percent of the cost of eligible depreciable property (including solar panels, computers and other equipment) purchased in 2008 or 2009. In effect, this incentive accelerates the depreciation schedule applicable to these capital expenditures and allows businesses to recover their costs rapidly. Enhanced expensing, which the Act extended into 2009, permits a business to write off the costs of eligible Section 179 expenditures (subject to certain limitations), as opposed to depreciating the assets over time. When these two tax incentives are combined, a small business can realize significant tax savings. Again, be sure to discuss these matters with your tax professional.
Time will tell whether these programs and incentives actually help their intended beneficiaries. In the meantime, however, I hope this column provides you with some useful information regarding how to put the Act to work for your small business.