Financing a Small Business: 4 Items to Remember

In December I had the honor of serving as a panelist for a discussion about small business financing, how to deal with bankers, sources of funding, etc.

In preparing for the panel discussion, I wrote down 4 key points that I wanted to make about financing, and I wanted to share them here:

One: There’s going to be paperwork. Learn to deal with it.

Some of my small business clients like to rant and rave to me about the fact that there’s paperwork and bureaucracy and laws and regulations at every step of everything they want to do.

My response is always “yep, there sure is.”

I’ve seen business owners, who had nothing to hide from the bank, throw their hands up and walk away from bank loans because the bank was asking questions and wanted to see financials and tax returns.

Guess what: there’s going to be paperwork and questions when you’re asking a bank for money. Deal with it.

Two: Work with your accountant.

Your accountant probably knows several good bankers (I know I do). Use your accountant as a resource for getting introduced to bankers who can help you with financing.

Three: Tell your accountant about major expenditures BEFORE you spend the money.

This is important so your accountant can advise you of the tax consequences and help you plan.

One example: I once had a client spend tens of thousands of dollars constructing a building, thinking that all of the money they were investing would be fully deductible that year. They were disappointed to learn that tax law considers a building to be commercial property, and most of their costs needed to be depreciated over 39 years rather than being fully deductible in the first year.

If they had consulted with me ahead of time, they may have made a different decision with their money.

Talk to your accountant before you spend the money. Once the transaction is completed, there’s not much I can do to change the tax consequence.

Four: Don’t spend money just to get tax deductions.

You’re wasting money if you make purchases just to get tax deductions. Make business purchases based on need, rather than solely the fact that you might get a tax deduction. Tax deductions save you cents on the dollar. So if your tax rate is 30%, you’re saving 30 cents on every dollar you spend on business expenses.

Or to put it another way: you’re not really “saving” 30 cents, you’re losing/spending 70 cents.

The tax deduction is great if you need the things your purchasing. But you’re wasting money if you’re just spending money to try to get deductions.