ask the experts
GREAT QUESTIONS, ANSWERED

Money Matters
These days, everything about the economy—and the fiscal landscape for small businesses—is in flux. We asked Marc Bernstein, executive vice president of Wells Fargo & Co. (www.wells fargo.com) to tackle some of your financial questions.

Q. I’m looking for money to open a new office. Using real estate I own as collateral, I can borrow money. But the land is worth more on the open market than it is as collateral. I’ve also heard that you can get Small Business Administration (SBA) loans fairly easily. What are the pros and cons of each?

Larry W.
Boca Raton, Fla

A. Financing your new office property can be done with either an SBA loan or a conventional loan.
Commercial real estate loans offer more flexibility—in term lengths, rates and loan structure—but require a more established credit history. With this type of loan, real estate is almost always worth more than the amount the lender will allow you to borrow when using it as collateral. Commercial lenders know that real estate prices fluctuate; therefore, they apply a term called Loan to Value (LTV) when determining how much money they will lend you. Depending on the type of collateral, LTV percentages vary. For the typical real estate loan, the LTV is 50 percent to 80 percent of the commercial property. Thus, if your property is worth $100,000 and lenders want to keep the LTV under 75 percent, they will lend you a maximum of $75,000.

If you can provide additional collateral, SBA loans may offer more capital with less down payment. SBA loans typically offer higher LTVs than conventional commercial loans. The SBA also may require additional collateral via Uniform Commercial Code filings against any equipment, office furniture or assets that you own. SBA loans that you use to purchase commercial real estate typically require a 10 percent down payment (versus 20 percent to 25 percent for conventional loans).

Both conventional and SBA loans require personal guarantees. While not every commercial loan has a prepayment penalty, an SBA loan with a term longer than 15 years will have a prepayment penalty through the third year. The SBA requires that your business occupy a minimum of 51 percent of the building to qualify for a loan.

*If the client has gone into bankruptcy, consult an attorney. The bankruptcy code protects the debtor from certain collection efforts.

SEP vs. Simple IRA
Q. When it comes to retirement savings plans, I currently have a SEP account established for my business. However, I keep reading about a SIMPLE IRA. What are the differences and benefits of each?

Debra M. Cohen
Home Remedies of NY, Inc.™
Hewlett, N.Y.

A. Each of these retirement accounts supports retirement planning effectively for small businesses. Both are easy to administer and offer a cost-effective way to plan for your own and/or your employees’ retirement. Determine which type of plan will work best for your business. Also, take into account your goals and, if you have employees, how you want them to benefit from the plan.

A Simplified Employee Pension Plan-Individual Retirement Arrangement (SEP-IRA) account allows small-business owners and self-employed people to make substantial contributions ($40,000 or up to 25 percent of compensation—whichever is less) that can vary from year to year for him- and herself and employees. The contributions are then placed in IRAs established by each employee. SEP-IRAs are funded solely by employer contributions, which are deductible as a business expense.

A Savings Incentive Match Plan for Employees (SIMPLE) IRA works more like a 401(k): funding comes from both employee salary deferrals and employer contributions. Employees can defer to the plan up to $8,000 in 2003. Employers are required to contribute to the plan—either as a matching contribution for employees who defer part of their salary, or as a profit-sharing contribution that goes to all eligible employees. The employer contributions are capped at low levels so that the employee makes the majority of the contributions. A SIMPLE IRA provides current tax savings and tax-deferred growth of earnings and does not require nondiscrimination testing or government reporting.

Credit-Rating Blues
Q. As a new small-business owner, I’m not sure what’s required to get our company a good credit rating. We have a Dun and Bradstreet number. Am I supposed to give them updated financial information? We have given them the names of companies where we’ve purchased on credit, and we have an excellent payment history. Our source of income is government contracts and grants. That income is more than 350 percent greater than last year’s. Recently, we were contacted by a couple of credit card businesses offering us a line of credit, but both ultimately declined to extend us credit. What do I need to do to address our creditworthiness?

Anonymous
Santa Fe, N.M.

A. Dun and Bradstreet (D&B) collects business information. When you registered your business with the county or state, D&B likely obtained the information and then called to verify it and assign your business a D&B number. Dun and Bradstreet’s information is similar to that held by a consumer credit bureau such as Equifax. It is not self-reported credit data but rather is a compilation of credit information from a variety of third-party sources—typically, larger vendors.
For example, a large express-mail-service company would report credit activity to D&B. If a small business has an account with that mail company and its credit relationship (versus COD) is good, that account history should be positively reflected in D&B’s credit rating. D&B is likely to have payment information on companies that have credit relationships with a variety of vendors.
You should contact D&B and confirm updated information, including your company’s name, most recent annual sales, SIC and your creditor information. Ask D&B how you can improve your credit rating. Call its customer service department at 800-234-3867, or reach the company via www.dnb.com