Small Business Finances: Start Up Costs, Estimating Costs, And Breakeven Analysis

Intimate knowledge for your business finances is essential to success. Know the various and ongoing processes and tools in managing your money, including estimating costs, financial statements, grants, funding, equity capital, contract surety bonds, and more. http://www.business.gov/topics/finances/

Estimating Costs

Estimating the cost of your business before you start is always a good idea. This page offers information on startup costs, basic guides, and breakeven analysis. http://www.business.gov/topics/finances/estimating_costs/index.html

Financing a StartUp

All businesses require some form of financing. An integral component of starting a successful business is raising sufficient capital. There are many challenges here, but numerous resources are available to help you. http://www.business.gov/phases/launching/finance_startup/index.html

Start Up Costs

Learn basic tools that will help you estimate your startup costs. Every business is different and has its own specific cash needs at different stages of development; therefore there is no generic method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vital to know whether you will have enough money to launch your business venture. To determine your startup costs, you must identify all the expenses your business will incur during its startup phase. Some of these expenses will be one-time costs, such as the fee for incorporating your business and the price of a sign for your building. Some expenses will be ongoing, such as the cost of utilities, inventory, insurance, etc. While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those elements that are necessary to start the business. These essential expenses can then be divided into two separate categories: fixed (overhead) expenses and variable (related to business sales) expenses. Fixed expenses will include figures like the monthly rent, utilities, and administrative and insurance costs. Variable expenses will include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service. The most effective way to calculate your startup costs is to use a worksheet that lists the various categories of costs (both one-time and ongoing) that you will need to estimate prior to starting your business. http://www.business.gov/phases/launching/finance_startup/startup_costs.html

The following tools will assist you in performing that task:

PaloAlto Startup Cost Estimator: http://www.bplans.com/common/calculators/startingcosts.cfm?affiliate

Business Know-How Startup Calculator: http://www.businessknowhow.net/bkh/startup.htm

Estimating Costs

It is important to estimate your business' costs for the first few months. This page also contains a link to the Startup Cost Estimate Calculator. In order to determine how much seed money you will need, you must estimate the costs of your business for at least the first several months. Every business is different and has its own specific cash needs at various stages of development, so there is no universal method for estimating your startup costs. Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory or equipment. It is vitally important to know whether you will have enough money to launch your business venture. To determine your startup costs, you must identify all the expenses that your business will incur during its startup phase. Some of these expenses will be one-time costs, such as the fee for incorporating your business and the price of a sign for your building. Some expenses will be ongoing, such as the cost of utilities, inventory, insurance, etc.

While identifying these costs, decide whether they are essential or optional. A realistic startup budget should only include those elements that are necessary to start the business. These essential expenses can then be divided into two separate categories: fixed and variable. Fixed expenses include rent, utilities, and administrative and insurance costs. Variable expenses include inventory, shipping and packaging costs, sales commissions, and other costs associated with the direct sale of a product or service. The most effective way to calculate your startup costs is to use a worksheet that lists the various categories of expenses (both one-time and ongoing) that you will need to estimate prior to starting your business. The following tool will assist you in performing that task:

Startup Cost Estimate Calculator: http://www.bplans.com/common/calculators/startingcosts.cfm

Breakeven Analysis

Learn to calculate your breakeven point, visit: http://www.business.gov/phases/launching/finance_startup/breakeven_analysis.html. Breakeven analysis is a tool used to determine when a business will be able to cover all its expenses and begin to make a profit. For the startup business, it is extremely important to know your startup costs, which provide you with the information you need to generate enough sales revenue to pay the ongoing expenses related to running your business. A startup business owner must understand that $5,000 of product sales will not cover $5,000 in monthly overhead expenses. The cost of selling $5,000 in retail goods could easily be $3,000 at the wholesale price, so the $5,000 in sales revenue only provides $2,000 in gross profit. The breakeven point is reached when revenue equals all business costs. To calculate your breakeven point, you will need to identify your fixed and variable costs. Fixed costs are expenses that do not vary with sales volume, such as rent and administrative salaries. These expenses must be paid regardless of sales, and are often referred to as overhead costs. Variable costs fluctuate directly with sales volume, such as purchasing inventory, shipping, and manufacturing a product.

The formula for determining your breakeven point requires no more than simple arithmetic. Additional information on determining your breakeven point:

Will Your Business Make Money: http://www.nolopress.com/lawcenter/ency/article.cfm/objectID/73FBAC1E-B3B2-432A-B186FE6E090326F5/catID/EE205B1A-B6B2-4C52-B2F4D19070C5C7B7

On-line Breakeven Calculator: http://www.dinkytown.net/java/BreakEven.html

Financing Basics

How do you plan to finance your business? This is especially important for new enterprises. While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you're starting a business or expanding one, sufficient ready capital is essential. It is not, however, enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money. http://www.business.gov/phases/launching/finance_startup/financing_basics.html

Before inquiring about financing, ask yourself the following:

Do you need more capital or can you manage existing cash flow more effectively?
How do you define your need? Do you need money to expand or as a cushion against risk?
How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.
How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.
In what state of development is the business? Needs are most critical during transitional stages.
For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.
What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.
How strong is your management team? Management is the most important element assessed by money sources.
Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your for the startup and growth of your business.

Not All Money Is the Same

There are two types of financing: equity and debt. When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing. If your firm has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.

Equity Financing

Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. The high-tech industry of California's Silicon Valley is a well-known example of capitalist investing. Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.

Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are the main disadvantages of equity financing. You may contact these investors directly, although they typically make their investments through referrals. The SBA also licenses Small Business Investment Companies (SBICs) and Minority Enterprise Small Business Investment companies (MSBIs), which offer equity financing. Apple Computer, Federal Express, and Nike Shoes received financing from SBICs at critical stages of their growth.

Debt Financing

There are many sources for debt financing: banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller. Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA's programs have been an integral part of the success stories of thousands of firms nationally. In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity.

SBA's Role

What the SBA offers to help your small business grow and profit. http://www.business.gov/phases/launching/finance_startup/sba_role.html

The U.S. Small Business Administration (SBA) is an independent agency of the Executive Branch of the federal government. It is charged with the responsibility of providing four primary areas of assistance to American small business. These are: advocacy, management, procurement, and financial assistance. Financial assistance is delivered primarily through SBAs Investment Programs, Business Loan Programs, Disaster Loan Programs, and Bonding for Contractors.

SBAs Business Loan Programs

The SBA administers three separate but equally important loan programs. SBA sets the guidelines for the loans while SBAs partners (lenders, Community Development Organizations, and Microlending Institutions) make the loans. The SBA backs those loans with a guarantee that will eliminate some of the risk to the lending partners. The agency's loan guarantee requirements and practices can change, however, as the government alters its fiscal policy and priorities to meet current economic conditions. Therefore, past policy cannot always be relied upon when seeking assistance in today's market.

Federal appropriations are available to the SBA to provide guarantees on loans structured under the agency's requirements. With a loan guarantee, the actual funds are provided by independent lenders who receive the full faith and credit backing of the federal government on a portion of the loan. The loan guarantee which the SBA provides transfers the risk of borrower non-payment up to the amount of the guarantee from the lender to the SBA. Therefore, when a business applies for an SBA loan, they are actually applying for a commercial loan, structured according to SBA requirements, and receive an SBA guarantee. In a variation of this concept, community development organizations can get the government's full backing on their loan to finance a portion of the overall financing needs of an applicant small business. http://www.business.gov/phases/launching/finance_startup/sba_loan_programs.html

SBA Loan Programs

The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions. http://www.business.gov/phases/launching/finance_startup/sba_loan_programs.html

Program: Basic 7(a) Loan Guarantee

Function: Serves as the SBAs primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agencys most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. Loan proceeds can be used for most sound business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation, and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. SBA offers multiple variations of the basic 7(a) loan program to accommodate targeted needs. http://www.business.gov/phases/launching/finance_startup/7a_loan_program.html

Customer: Startup and existing small businesses, commercial lending institutions

Delivered Through: Commercial lending institutions

Program: Certified Development Company (CDC), a 504 Loan Program

Function: Provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery, or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private sector lender with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower. The maximum SBA debenture generally is $1 million (up to $1.3 million in some cases). http://www.business.gov/phases/launching/finance_startup/cdc504_loan_program.html

Customer: Small businesses requiring brick and mortar financing

Delivered Through: Certified development companies (private, nonprofit corporations set up to contribute to the economic development of their communities or regions)

Program: Microloan, a 7(m) Loan Program

Function: Provides short-term loans of up to $35,000 to small businesses and not-for-profit childcare centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery, and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn makes the microloan to the applicant. These organizations also provide management and technical assistance; these loans are not guaranteed by the SBA. The microloan program is available in selected locations in most states. http://www.business.gov/phases/launching/finance_startup/microloans.html

Customer: Small businesses and not-for-profit childcare centers needing small-scale financing and technical assistance for startup or expansion

Delivered Through: Specially designated intermediary lenders (nonprofit organizations with experience in lending and in technical assistance)

Program: Loan Prequalification

Function: Allows business applicants to have their loan applications for $250,000 or less analyzed and potentially sanctioned by the SBA before they are taken to lenders for consideration. The program focuses on the applicants character, credit, experience, and reliability rather than assets. An SBA-designated intermediary works with the business owner to review and strengthen the loan application. The review is based on key financial ratios, credit and business history, and the loan request terms. The program is administered by the SBAs Office of Field Operations and SBA district offices. http://www.business.gov/phases/launching/finance_startup/prequalificaiton_programs.html

Customer: Designated small businesses

Delivered Through: Nonprofit intermediaries such as small business development centers and certified development companies operating in specific geographic areas

SBAs Investment Programs

In 1958 Congress created The Small Business Investment Company (SBIC) program. SBICs, licensed by the Small Business Administration, are privately owned and managed investment firms. They are vital participants in a partnership between the government and the private sector economy. With their own capital and funds borrowed at favorable rates through the federal government, SBICs provide venture capital to both new and established small independent businesses. All SBICs are profit-motivated businesses. A major incentive for SBICs to invest in small businesses is the chance to share in the success of the small business if it grows and prospers. http://www.business.gov/phases/launching/finance_startup/equity_capital.html

Equity Capital

Equity capital, or financing, is money raised by a business in exchange for a share of ownership in the company. Ownership is represented by owning shares of stock outright or having the right to convert other financial instruments into stock of that private company. Two key sources of equity capital for new and emerging businesses are angel investors and venture capital firms. Typically, angel and venture capital investors provide capital unsecured by assets to young, private companies with the potential for rapid growth. Such investing covers most industries and is appropriate for businesses throughout the range of developmental stages. Investing in new or very early companies inherently carries a high degree of risk, but venture capital is long-term, or patient, capital that allows companies the time to mature into profitable organizations. Angel and venture capital are also active rather than passive forms of financing. These investors seek to add value, in addition to capital, to the companies in which they invest in an effort to help them grow and achieve a greater return. This requires active involvement, and almost all venture capitalists will, at a minimum, want a seat on the board of directors. Although investors are committed to a company for the long haul, that does not mean indefinitely. The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments. A good investor will consider potential exit strategies from the time the investment is first presented and investigated.

Differences Between Debt and Equity Capital

Debt Capital: Debt capital is represented by funds borrowed by a business that must be repaid over a period of time, usually with interest. Debt financing can be either short-term, with full repayment due in less than one year, or long-term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest. Loans are often secured by some or all of the assets in the company.

Equity Capital: Equity capital is represented by funds that are raised by a business in exchange for a share of ownership in the company. Equity financing allows a business to obtain funds without incurring debt or having to repay a specific amount of money at a particular time.

Angel Investors

Business angels are high net-worth individual investors who seek high returns through private investments in startup companies. Private investors generally are a diverse and dispersed population who make their wealth through a variety of sources. The typical business angels, however, are often former entrepreneurs or executives who cashed out and retired early from ventures they started and helped grow into successful businesses. These self-made investors share many common characteristics:

They seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the companys value. (Many seeds or startups may not have a fully developed management team, but have identified key positions.)
They typically invest in ventures involved in industries or technologies with which they are personally familiar.
They often co-invest with trusted friends and business associates. In these situations, there is usually one influential lead investor (archangel) whose judgment is trusted by the rest of the group of angels.
Because of their business experience, many angels invest more than their money; they also seek active involvement in the business, such as consulting and mentoring the entrepreneur.
They often take bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneurs proposal.

Venture Capital

Successful long-term growth for most businesses is dependent upon the availability of equity capital. Lenders generally require some equity cushion or security (collateral) before they will lend to a small business. A lack of equity limits the debt financing available to businesses. Additionally, debt financing requires the ability to service the debt through current interest payments. These funds are then not available to improve the business. Venture capital provides businesses with a financial cushion; however, equity providers have the last call against the companys assets. In view of this lower priority and the usual lack of a current pay requirement, equity providers require a higher rate of return/Return On Investment (ROI) than lenders receive.

SBAs Bonding Programs

The Surety Bond Guarantee (SBG) Program was developed to provide small and minority contractors with contracting opportunities they would not normally have. The U.S. Small Business Administration can guarantee bonds for contracts up to $2 million, covering bid, performance, and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee and an agreement between a surety and the SBA provides that the SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract. http://www.business.gov/phases/launching/finance_startup/surety_bond.html

A surety bond is a three-party instrument between a surety, the contractor, and the project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform, the surety assumes the contractor's responsibilities and ensures that the project is completed. Below are the four types of contract bonds that may be covered by an SBA guarantee:

Bid - Bond which guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds.
Payment - Bond which guarantees payment from the contractor of money to persons who furnish labor, materials, equipment, and supplies for use in the performance of the contract.
Performance - Bond which guarantees that the contractor will perform the contract in accordance with its terms.
Ancillary - Bonds which are incidental and essential to the performance of the contract.

Learn About the SBA's Surety Bond Program

http://www.business.gov/phases/launching/finance_startup/learn_sba_surety_bond.html. Visit SBA's Office of Surety Guarantees: http://www.sba.gov/osg/.

The Program

The U.S. Small Business Administration (SBA) can guarantee bonds for contracts up to $2 million, covering bid, performance, and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to opportunities. A surety guarantee - an agreement between a surety and the SBA - provides that SBA' will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract .

Definition of a Surety Bond

Bid - Bond which guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds.
Payment - Bond which guarantees payment from the contractor to persons who furnish labor, materials, equipment, and supplies for use in the performance of the project.
Performance - Bond which guarantees that the contractor will perform the contract in accordance with its terms.
Ancillary - Bonds which are incidental and essential to the performance of the contract.

Eligibility

A contractor applying for an SBA bond guarantee must qualify as a small business in addition to meeting the surety's bonding qualifications. Businesses in the construction and service industries, including their affiliates, can meet SBA's size eligibility standards if their average annual receipts for the last three fiscal years do not exceed $6 million. Local SBA' offices can answer questions dealing with size standard eligibility.

Types of Eligible Bonds

Bid bonds and final bonds are eligible for an SBA guarantee if they are executed in connection with an eligible contract and are of a type listed in the "Contract Bonds" section of the current Manual of Rules, Procedures, and Classifications of the Surety Association of America (SAA). Ancillary bonds may also by eligible for SBA's guarantee. (For further information and clarification, please contact our nearest field office.)

Size of Eligible Contracts

The SBA can guarantee bonds for contracts up to $2 million.

SBA Guarantee

The SBA reimburses a participating surety (within specified limits) for the losses incurred as a result of a contractor's default on a guaranteed bid bond, payment bond, performance bond, or any bond that is ancillary. Activity is accomplished through the Prior Approval Program or the Preferred Surety Bond (PSB) Program. Under the Prior Approval Program, the agent reviews the application package and recommends it to the surety company for approval. If the surety company agrees to issue a bond with the SBA guarantee, the package is forwarded to the appropriate SBA/SBG Area Office and evaluated by SBG personnel. If the applicant is determined to be qualified and approval is reasonable in light of the risk, the SBA may issue a guarantee to the surety company. The surety then issues the bond to the contractor. SBA's guarantee agreement is with the surety company not with the small business contractor. Any surety company certified by the U.S. Treasury to issue bonds may apply for participation in the Prior Approval Program, but its bonds are subject to SBA's prior review and approval. Contractors bonded under this program are generally smaller and less experienced than those bonded under the Preferred Surety Bond (PSB) Program. To compensate surety companies for the risk associated with bonding Prior Approval contractors, SBA guarantees 90 percent of the losses incurred on bonds up to $100,000 and to bonds to socially and economically disadvantaged contractors; it also guarantees 80 percent of the losses incurred on all other bonds under this program.

The Preferred Surety Bond (PSB) Program was established by P.L. 100-590 in November of 1988. The PSB Program provides a 70 percent guarantee to participating sureties, but in exchange, prior SBA approval for each bond is not required. Under this program, the SBA gives selected sureties the authority to issue, monitor, and service bonds without prior approval. Each participating company has a guarantee limit with the SBA. The PSB Program was created to encourage larger surety companies to expand their efforts to help small businesses obtain bonds. Sureties participating in this program cannot participate in the Prior Approval Program. Fourteen major sureties have become participants in the PSB Program. PSB surety companies serve more experienced contractors that demonstrate the potential for growth and have consistently performed more active work programs. PSB sureties expect the contractors to graduate from the program in approximately three years. This program is managed by SBA's Office of Surety Guarantees in Washington, DC. Current authority for the program will expire on September 30, 2003.

The following major factors guide, but do not limit, SBA's selection process of sureties to participate in the PSB Program:

A PSB surety must have an underwriting limitation of at least $2,000,000, as determined by the U.S. Treasury Department Circular 570, or "T-list," of acceptable sureties.
Rates charged by a PSB surety are to be no greater then the Surety Association of America's (SAA) advisory premium rates in effect on August 1, 1987.
The premium income from contract bonds guaranteed by the SBA and any other government agency shall not exceed one-quarter of its total contract bond premium income.
Underwriting authority for SBA guaranteed bonds is vested only in employees of the surety.
Final settlement authority for claims and recovery under PSB is vested only in employees of the surety's permanent claims department.
The rating or ranking assigned to the surety by a recognized authority .
The PSB surety shall execute a Preferred Surety Bond Guarantee Agreement with the SBA .

Interested surety companies should send a letter formally requesting participation in the program to Robert J. Moffitt, Associate Administrator, Office of Surety Guarantees, U.S. Small Business Administration, Suite 8600, 409 Third Street, SW, Washington, D.C., 20416.

Duties of Contractor

Contractors should apply for a specific bond with an agent or surety company of their choice, providing background, credit, and financial information required by the surety and the SBA. The contractor must complete the following forms, which are available from participating agents (a list of agents is available from your local SBA district office):

SBA Form 994: Application for Surety Bond Guarantee Assistance

SBA Form 912: Statement of Personal History (on first application and once every two calendar years thereafter)

SBA Form 994F: Schedule of Uncompleted Work on Hand (required initially and then at least quarterly)

SBA Form 1624: Certification Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion Lower Tier Covered Transactions

SBA Form 1261: Statement of Laws and Executive Orders

Duties of Surety Company

After the contractor completes the forms and furnishes the surety company with sufficient underwriting information, the surety processes and underwrites the application in the same manner as any other contract bond application. The company decides whether to:

Execute the bond without the SBA's guarantee
Execute the bond only with the SBA's guarantee
Decline the bond even with the SBA's guarantee

If the surety company determines an SBA guarantee is required in order to provide the bond, it completes the SBA Form 994B: Underwriting Review and the SBA Form 990: Guarantee Agreement. If the guarantee is given under the Prior Approval Program, these forms - and supporting documents - are submitted along with the Forms 994, 912, 994F, 1624, and 1261 to the appropriate SBA/SBG Area Office. If the guarantee is given under the PSB program, the forms are collected by the surety.

Duties of the SBA

Under the Prior Approval Program, the SBA determines an applicant's ability to complete the contract based on the information, documentation, and underwriting rationale provided by the surety company. If the review establishes performance capacity, and all other aspects of the application are approved, an authorized SBA official signs a guarantee agreement and returns it to the surety company. If the review fails to establish performance capacity, the SBA seeks clarification from the surety underwriter. If performance capacity cannot be reasonably assured, the SBA rejects the application.

Cost of an SBA Guaranteed Bond

The SBA charges fees to both the contractor and the surety company, as described in the most recent edition of 13 CFR 115: SBA does not charge contractors an application or bid bond guarantee fee. If SBA guarantees a final bond, the contractor must pay a guarantee fee equal to a certain percentage of the contract amount. The percentage is determined by SBA and is published in notices in the Federal Register from time to time. When the bond is issued, the small business pays the surety company's bond premium. This charge cannot exceed the level approved by the appropriate state regulatory body. The surety pays the SBA a guarantee fee on each guaranteed bond (other than a bid bond) in the ordinary course of business. The fee is a certain percentage of the bond premium, determined by SBA and published in notices in the Federal Register from time to time.

SBA Workshop On Finance

SBA's "Financing Options: All You Should Know Workbook." http://www.sba.gov/gopher/Business-Development/Business-Initiatives-Education-Training/Finance-Plan/

Handling Finances

It is essential for the business owner to know how to manage his/her finances. http://www.business.gov/phases/launching/finance_startup/handling_finances.html. Thanks to the enormous growth in personal wealth over the past two decades, there are now more funding opportunities than ever for entrepreneurs. The rapid growth of the Internet has made finding investors and lenders easy, but the legal issues involved in business financing are complex and should always be reviewed by a qualified attorney.

Know Your Options

Begin your search for financing by taking the SBAs online course on How to Raise Capital.

Lines of Credit

A line of credit loan is designed to provide short-term funds to a company in order to maintain a positive cash flow. Then, as funds are generated later in the business cycle, the loan is repaid. Most commercial banks offer a revolving line of credit, where a fixed amount is available.

Conventional Business Loans

Traditional loans, often called long-term debt, are often popular initial financing venues for businesses competing in a proven field. Lenders often include government-sponsored lending programs, commercial banks, and small business investment companies.

Business Alliances

A strategic alliance is an arrangement between two or more companies to pursue a common business objective, such as a joint venture, merger, or cost-sharing plan. Is it right for your business?

Angel Investors

Traditionally, angel investors have been business owners or independently wealthy individuals that finance businesses in exchange for equity. Increasingly, however, angels are banding together into local networks that closely resemble venture capital groups.

Asset-Based Financing

Popular with new companies that are growing faster than they can make money, asset-based financing is a system in which lenders accept the assets of a company as collateral in exchange for a loan. Most asset-based loans are financed against accounts receivable and less often against inventory, since receivables are among the most liquid of a company's assets, followed by inventory.

Venture Capital (VC)

While most banks use past performance as the primary criteria for deciding whether or not to lend money to businesses, VC firms make investments based on projected future potential. Investors generally expect a substantial portion of the business' equity and/or profits. Have a qualified lawyer negotiate any investment deal between VCs and your company.

Investing In Someone Else's Business

Investing in someone elses business can be a great opportunity. You may be interested in the business as a good investment, as a way of helping a family member, or a way to develop a potential customer.

Small Company Offering Registration (SCOR)

A SCOR is the sale of common stock to the public without the hassle of an Initial Public Offering (IPO) through a regulated board such as the NASDAQ or AMEX. Unlike formal IPOs, in which all or most stock is sold and monitored through third parties, most companies involved in a SCOR deal directly with shareholders.

Initial Public Offerings

All offerings of stock and other securities are subject to the federal securities laws as well as to the securities laws of any state where the securities are being offered or sold. Unless there is an exemption that applies to a given situation, these laws generally require that an offering go through a difficult securities registration process.

Personal vs. Business Finances

You must know your personal finances and credit before starting out on your own. http://www.business.gov/phases/launching/finance_startup/personal_business_finances.html. Starting a business can be a tremendous strain on your personal finances. It can take six months or more before your new venture is profitable and can provide financial support for you and your family. Before going into business, it is always wise to get your finances in order. Write a monthly household budget. Be as conservative as possible, because it is vital that you have the resources to maintain your household expenses while your business is growing. Any strain on your personal budget will put the financial success of your business at risk. It is also a good idea to check your personal credit situation. Too often, entrepreneurs think that their business credit and personal credit are separate. A business' credit is built upon the owner's personal credit. As you have not established a business credit history, lenders and suppliers will use your personal credit history to determine your terms. Your credit report determines how you will be perceived by potential lenders and suppliers. You should know what appears on your credit report, since you may find errors that you will want to have corrected. To get a copy of your credit report, refer to one of the three major credit bureaus:

Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
(800) 685-1111

Experian
P.O. Box 2104
Allen, TX 75013
(888) EXPERIAN (888-397-3742)

Trans Union
P.O. Box 1000
Chester, PA 19022
(800) 916-8800

Source: http://www.business.gov/topics/finances/