Answers to Frequently Asked Questions
Q: How does a lender evaluate my loan proposal? Find out now!
A: When evaluating a loan proposal, a lender looks at the following items the five C's of Credit:
- Character - your personal character, credit history, and business and management experience.
- Capital - how much money you have to invest in the business or project. Most lenders look for at least 30% of the loan value to be contributed by the owner
- Credit - your personal and business credit history. Bad credit can impact your ability to get a loan.
- Collateral - what items of value you have to secure the loan. Examples of collateral include stocks, real estate, equipment, inventory, and accounts receivable.
- Conditions - the local, regional, and national economic conditions that can influence the success or failure of your business.
- Capacity - the ability of the owners/management to properly execute the business plan. In addition, it is the ability of the business to generate a sufficient cash flow and profit to pay back the debt.
Most lenders will also require a business to submit a comprehensive, written business plan with current and projected financial information.
Q: How should I organize my company?
A: The following are the most common forms of organization for small businesses:
- Sole Proprietorship - this is the easiest method of organizing your business. A sole proprietorship can be conducted by a single individual, or by an individual and his or her spouse. There are no specific filing requirements other than a business license and fictitious business name. The owner is taxed as an individual on the income or losses of the business. The major disadvantage of the sole proprietor is that the individual owner is personally responsible for all debts and liabilities of the business. This means that all of your personal assets, not just the assets of the business, are at risk.
- General Partnership - this is an association between two or more individuals to conduct business. The partners of a partnership can include individuals, corporations, limited liability companies, trusts, estates, and other partnerships. The partnership is not taxed as an entity, but each partner is taxed on his share of the profits or losses. Their are no unique filing requirements, although a written partnership agreement is recommended. The major disadvantage to a partnership is that each partner is personally liable for his share of the businesses debts and is liable for the other partner's actions.
- Limited Partnership - is a partnership formed by two or more persons which has one or more general partners and one or more limited partners. Limited partners are limited in their liability to the amount they have invested in the partnership, and are limited in their participation in the management of the business. Limited partnerships are taxed in the same manner as general partnerships.
- C Corporation - is an organization that is organized under specific provisions of the General Corporation Law. A corporation must have corporate officers and bylaws, and in California, must be registered with the State. As the owner, you will be an employee, and your earnings taxed. In addition, the corporation will be taxed at the State and Federal level on its earnings. A corporation can be expensive to start, but offers the protection from personal liability for the owners. This "corporate veil" of protection does not offer protection from liability in the case of fraud, failure to pay taxes, under-capitalization of the corporation, or commingling of personal and corporate funds.
- Subchapter S Corporation - Similar to the "C" Corporation, the "S" corporation offers all the benefits of a corporation, but with a different tax structure. S corporations pay no Federal income tax, but pay tax in the State of California. Like a partnership, the S corporation's shareholders report the company's income or losses on their personal tax returns. S corporations are limited to one class of stock and no more than 35 shareholders.
- Limited Liability Company (LLC) - combines the limited liability protection of a corporation with the flexibility and pass through taxation of a partnership. Like the shareholders of a corporation, the owners (members) of an LLC are not personally responsible for the debts or liabilities of the LLC. The LLC has no limitations on who may be involved. The LLC can be managed by its members or by managers, who are not required to be members.
Q: What is a Business Plan and why do I need one?
A: A business plan is considered to be the "road map" for your business operation. A well-written business plan will set forth the goals for your business and guide your current and future operations. Every plan should include information on the history and development of your business, the product or service you offer, your marketing strategy, the ownership structure, personnel requirements, and the financial plan of of the business. For the startup business, a business plan acts as a "feasibility study" to determine whether the potential business is viable.
A completed business plan can also be used as a tool to gain financing for the business, or to recruit employees. However, the greatest benefit of the plan is that you, the business owner, will have a clear understanding of your business, industry, and marketplace. This knowledge will lead to better decision-making, and ultimately, increased profitability.
Q: What is a fictitious business name statement?
A: A fictitious business name statement is filed with the County Clerk in the county where your business is located. If the business name is available, your filing will grant you the exclusive right to use the name in that county. The filing identifies you to potential creditors as the owner of the business you are starting, buying, or renaming.
Once you have filed, you will be required to advertise your filing in the newspaper for four weeks. Upon completion of the advertising, you will be granted use of the business name.
Q: What types of insurance do I need to have for my business?
A: By law, you are required to have Workers Compensation insurance if you hire employees. Other types of insurance you should consider having include:
- General Liability
- Business Owners Policy
- Automobile Coverage
- Errors and Omissions
- Natural Catastrophe
- Business Income Interruption
- Business Rider to Homeowners Policy (for home-based business)
Q: Where can I get money to start or expand my business?
A: Money to start your business can come from a variety of sources. The following are some of the possibilities:
- Personal Savings
- Family and Friends
- Banks Loans
- SBA Guaranteed Loans
- Venture Capital
- Small Business Investment Companies (SBIC)
- Angels (Wealthy Individuals)
- Local Community Redevelopment Loans
- Micro Loans
- Home Equity Loan
- Personal Line of Credit
- Credit Cards
There are two types of financing methods: debt and equity. Debt financing consists of a loan that must be repaid by a certain date, at an agreed upon interest rate and payment schedule. Equity financing consists of an investment made in your business by another individual or company, in return for a certain percentage of ownership. Equity investors expect a reasonable rate of return on their investment and a share of the company's profits in return for the use of their money.
Q: Where do I get a business license for my company?
A: You can obtain a business license from the city that you are located in. Typically, the City Clerk, Business Office, or Finance Department will issue the licenses for the city. If you are a home-based business, you may also be required to obtain a Home Occupational Permit in addition to a business license.
For businesses located in unincorporated county areas, you may still be required to obtain a business license. Contact the county in which you preside for further information.