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

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



If you want to learn how to get a small business loan, a loan through the federal government’s Small Business Administration (SBA) is a good option. But how can you qualify for 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 guide their organizations through new businesses. The agency’s main assistance program is called the 7(a) loan program. The program offers a variety of loan options, including:

Standard Microloans SBA ExpressExport ExpressExport Working CapitalInternational Trade

If you’re wondering how to get a small business loan, chances are you’ll start with a standard loan or a small loan. Although the most common iteration is the Standard 7(a) loan, most of the loans offered under this program run in the SBA:

Determine the maximum loan amount Guaranteed a percentage of the loan Set the maximum interest rate Work with an approved lender to manage the loan

Standard 7(a) loans have a maximum assistance of $5 million and are guaranteed up to 75% by the SBA. Most loans mature within 10 years, but purchases of real estate may extend up to 25 years. Businesses can use this program for a variety of business needs, but some common ones are:

Renovating or expanding a business Buying real estate Financing start-up costs Increasing working capital Buying inventory Building a seasonal credit line Refinancing existing debt

The key thing for businesses to keep in mind is that every loan is unique. While the SBA supports and supports these loans, many details have been resolved in negotiations with lenders. Businesses should seek these loans only if they are ready to support their needs and compromise when needed.

Eligible and applying for an SBA 7(a) loan

Many businesses are eligible for SBA 7(a) loans. Sole proprietorships, corporations, partnerships, LLCs, and cooperatives are eligible. They must at least:

Doing business (or planning to do so) in the U.S. or its territories for profit Investing in the business by an owner who owns equity in the business Receive financial assistance from other sources, including personal assets, before applying for an SBA loan

The goal of SBA is to support business growth and promote business stability in the marketplace. Its goal is not to help individuals finance business purchases. Loan requests will be denied for individual applicants who wish to use SBA loan proceeds to purchase ownership of a company they are not currently affiliated with. One exception includes individuals who operate a sole proprietorship. Sole proprietors may be eligible for an SBA loan, but only if they are seeking support for their business.

This does not mean that the SBA will immediately deny all loan requests to purchase equity. The SBA may approve the following applications:

Partial business owners buy out their co-owners outright, resulting in a complete change of ownership, or a small business acquires a 100% interest in another business through stock or asset purchases

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

All SBA 7(a) loans are administered by pre-approved lenders. Business owners seeking SBA support can contact a local lender and ask about the application process, or they can use the SBA’s Lender Matching Tool to find an approved lender. As with most loan applications, lenders will ask for historical financial data, ownership information, business licenses, previous tax returns, legal documents such as leases and mortgages, and other relevant information.

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Tax Consequences of SBA 7(a) Loans

SBA 7(a) loans will be taxed like any other term loan owned by the business. The tax code for reporting term loans is 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 period, the loan proceeds have no impact on the borrower’s tax return.

The associated interest payments on the loan are slightly different. The IRS treats financing costs as ordinary and necessary and allows businesses to deduct interest payments. Most loan payments are structured with monthly principal and interest payments. Only the portion of the payment that represents interest is deductible.

Interest payments on SBA 7(a) loans are not deductible only in rare circumstances. Typical requirements for deductions include:

The business is legally responsible for the debt, both the business and the lender intend to repay the debt

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

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PPP and EIDL

SBA 7(a) loans are different from Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loans (EIDL). While these loans are also backed by the SBA, they have their own eligibility rules and tax consequences may vary. For example, when a PPP loan is forgiven, a business is not required to include debt cancellation as income for federal tax purposes. There are no similar exceptions for loans where SBA 7(a) loans are forgiven or discharged.

Alternatives to Small Business Loans

SBA 7(a) loans – and small business loans in general – are not the right path for every business. There are other ways business owners can inject money into their business.

sell equity

Sole proprietors cannot sell equity in their business, but most other entities can. This task will be easiest for companies that can easily sell stock, but even partnerships can hire additional partners if their partnership agreement allows it.

Establish a line of credit

Lines of credit typically don’t provide as much help as SBA 7(a) loans, but getting a line of credit at a bank may be just the right amount of support a small business needs. And bonuses: Interest payments on lines of credit are deductible if the loan proceeds are used for business purposes.

claim tax credit

There are many business tax credits that can help improve a business’s chances of getting cash. Businesses can rely on their tax software to help them identify new tax credits for the current tax year, or just new tax credits for them and their situation, but some things to look out for for the 2021 tax year are:

Job Opportunity Tax Credits Employers Credit for Child Care Facilities and Services Small Business Healthcare Tax Credits Research and Development Tax Credits Retirement Programs Start-Up Costs Tax Credits Plug-In Electric Vehicle Credits

ask the state for help

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

Businesses asking how to get a small business loan have many options, and an SBA 7(a) loan may be the perfect solution. If you’re considering a small business loan — an SBA 7(a) loan or other loan — you may want to speak with a trusted lender and consider the tax consequences of the loan before proceeding.

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