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Last fall’s Small Business Jobs Act extended the U.S. Small Business Administration’s (SBA) small-business lending program that eliminated the fees normally charged for loans through the SBA 7(a) and 504 loan programs, and increased the government guarantees on 7(a) loans from 75% to 90%. Fortunately, few spas need to wait for these laws to become a reality or for new lending programs to emerge because of the following alternative financial options.
For many spa and wellness professionals, borrowing often means a loan from the operation’s owner or shareholder. U.S. tax laws create a number of obstacles that must be overcome in order to avoid the penalties and corresponding higher tax bills that can result when Internal Revenue Service (IRS) auditors restructure loans that don’t meet their criteria.
Whenever a loan is made between related entities, or when shareholders make loans to their incorporated spas, U.S. tax laws require a fair-market interest to be included. If not, the IRS will step in and make adjustments to the below-market interest rate transaction in order to properly reflect interest. How large the tax impact depends on the effect of added interest income to the lender, and the bite of an offsetting interest expense deduction felt by the borrower.
In addition to those loans that a business often receives from its owner, there are a number of other types of funding available from a variety of lending sources. One method of raising capital involves selling the assets of your spa business. A sale-leaseback can not only generate needed funds, but it can also help improve cash flow by negotiating favorable terms when leasing equipment or other business assets. Also frequently ignored are the tax benefits of sale-leaseback transactions, both for the spas and its owners or executives.
Sale-leasebacks are usually structured to unlock the equity a business has in its buildings, machinery and equipment. Generally, the spa sells its assets at their fair market value to a financial institution—or to the business’s owner or executives—for a lump-sum payment. The new owner then leases the equipment back to the business.