Business loan

How to Get a Small Business Loan and Navigate the Tax Implications

If you’re hoping to figure out how to get a small business loan, loans from the federal government’s Small Business Administration (SBA) are a great option. But how can you benefit from these loans and how will they affect your taxes?

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About SBA 7(a) Loans

The SBA is a federal agency that advocates for the needs and interests of small businesses and advises business owners as they navigate their organizations through new ventures. The agency’s main aid program is called the 7(a) Loan Program. This program offers a variety of loan options, including:

  • Standard
  • Small loans
  • SBA-express
  • Export Express
  • Export working capital
  • International exchange

If you’re wondering how to get a small business loan, you’ll probably start with the standard loan or the small loan. Even though the most common iteration is the standard 7(a) loan, most loans under the program operate under which the SBA:

  • Sets a maximum loan amount
  • Guarantees a percentage of the loan
  • Set maximum interest rates
  • Works with approved lenders to administer loans

The maximum assistance for the Standard 7(a) loan is $5 million and is guaranteed by the SBA up to 75%. Most loans mature in 10 years but can extend up to 25 years for property purchases. Businesses can use this program for a variety of business needs, but some of the most common are:

  • Renovate or expand a business
  • Property purchase
  • Fund start-up costs
  • Boost working capital
  • Purchase inventory
  • Establishment of a seasonal line of credit
  • Refinancing of existing debt

The bottom line for business owners is that every loan is unique. Even though the SBA backs and supports these loans, many details are ironed out during negotiations with the lender. Businesses should only apply for these loans if they are prepared to defend their needs and compromise when needed.

Eligibility and Application for SBA 7(a) Loans

Many businesses are eligible for an SBA 7(a) loan. Sole proprietorships, corporations, partnerships, limited liability companies and cooperatives are all eligible. At a minimum, they must:

  • Operate for profit
  • Doing business (or planning to do business) in the United States or its territories
  • Have owners with equity to invest in the business
  • Obtain financial assistance through other sources, including personal assets, before applying for an SBA loan

The goal of the SBA is to support business growth and promote a company’s stability in the marketplace. Its purpose is not to help individuals finance their business purchases. Loan applications will be declined for individual applicants hoping to use SBA loan proceeds to purchase property from a business with which they are not currently affiliated. The only exception is for individuals operating sole proprietorships. Sole proprietors may be eligible for SBA loans, but only if they are looking for support for their business.

This makes not This means that the SBA will immediately deny all loan applications to purchase stock. The SBA would likely approve an application when:

  • A partial business owner buys out his co-owners entirely, resulting in a complete change of ownership, or
  • A small business acquires 100% ownership in another business, either through the purchase of shares or assets

The SBA describes other specific exclusions and limitations on its website.

All SBA 7(a) loans are administered by pre-approved lenders. Business owners looking for SBA assistance can contact their local lender and learn about the application process, or they can find an approved lender using the SBA’s Lender Match tool. Like most loan applications, the lender will ask for historical financial data, ownership information, business licenses, previous tax returns, legal documents such as leases and mortgages, and other pertinent information.

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Tax implications of an SBA 7(a) loan

SBA 7(a) loans will be taxed like any other term loan the business has. The tax laws for reporting term loans are simpler than you might think.

The IRS does not consider loan proceeds as income. Because SBA 7(a) loans must be repaid within a certain time frame, loan proceeds have no impact on the borrower’s tax return.

The interest payments associated with the loan are a bit different. The IRS considers financing costs ordinary and necessary expenses and allows businesses to take deductions for interest payments. Most loan payments are structured so that the monthly payments serve as both principal and interest. Only the portion of the payment that represents interest is deductible.

Only in rare circumstances would interest payments on an SBA 7(a) loan not be deductible. Typical deductibility requirements include:

  • The company is legally responsible for the debt
  • The company and the lender intend to repay this debt
  • The loan was made at arm’s length

In these cases, the interest should be deductible for both federal and state tax purposes.

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SBA 7(a) loans are different from Paycheck Protection Program (PPP) Economic Disaster Loans and Loans (EIDL). Although these loans are also guaranteed by the SBA, they have their own eligibility rules and the tax consequences may differ. For example, when PPP loans are forgiven, businesses do not need to include that forgiveness of debt in their income for federal tax purposes. There is no similar general exception for SBA 7(a) loans that are canceled or waived.

Small Business Loan Alternatives

SBA 7(a) loans — and small business loans in general — aren’t the right path for every business. There are other ways for business owners to inject capital into their business.

Sell ​​shares

Sole proprietors cannot sell shares in their business, but most other entities can sell an interest in their business. This task will be easier for companies that can easily sell shares, but even partnerships can take on additional partners if their partnership agreement allows it.

Establish a line of credit

Lines of credit generally don’t offer as much support as an SBA 7(a) loan, but having a line of credit with a bank may be just the right amount of support a small business needs. And as a bonus: interest payments on lines of credit are deductible provided the loan proceeds are used for business purposes.

Claim tax credits

There are a host of business tax credits that can help boost a company’s access to cash. Businesses can rely on their tax software to help them identify tax credits that are new for the current tax year or just new to them and their situation, but a few to be aware of for the tax year 2021 are:

  • Work Opportunity Tax Credit
  • Credit for employer-provided child care facilities and services
  • Small business health care tax credit
  • Research and Development Tax Credit
  • Tax credit for start-up costs of a pension plan
  • Plug-in Electric Vehicle Credit

Call on the state for help

Some jurisdictions provide financial assistance to small businesses through tax credits, incentive programs, and state-specific grants.

Businesses wondering how to get a small business loan have many options available to them, and SBA 7(a) loans may be the perfect solution. If you are considering getting a small business loan – SBA 7(a) loans or otherwise – you may want to speak with a trusted lender and consider the tax implications of this loan before moving forward.

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