Out of the adversity of the credit union crisis nearly a decade ago evolved a small business loan program that has helped thousands of entrepreneurs and small businesses develop and grow.
The program actually was not signed into law until mid-1994, but evolved because of a tight financing environment that followed the collapse of many of Rhode Island’s credit unions in 1991. The Rhode Island Small Business Administration’s (SBA) Guarantee Fee Tax Credit has been helping small businesses ever since.
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“At that point, we had just come off the banking crisis, and a lot of small businesses were finding it difficult to access capital for a variety of reasons,” said Christine Lynch, vice president and treasurer of Horton Construction Company, Inc., in East Providence. Lynch served as chair of the Rhode Island SBA Advisory Council at the time this legislation was passed.
The bill proposed “any small business, Sole Proprietor, C-Corp. or individual who paid a guarantee fee to the United States Small Business Administration for the purposes of financing a small business would be eligible to take that fee as a dollar for dollar tax credit against their Rhode Island state taxes.”
This meant that if a business paid a guarantee to SBA fee in the amount of $5,000 and they owed $6,000 to the state, their actual obligation to the state would be $1,000. However, the credit was applicable only for the tax year in which the guarantee fee was paid to SBA.
“[Loan recipients are] required to pay a guarantee fee, and what the guarantee fee covers is if the loan is not paid back to the bank, the SBA will pay up to 85 percent of the loan back,” said Grafton (Cap) Willey, IV. Willey is the managing partner at Rooney, Plotkin and Willey, LLP, a CPA and managing and consulting firm with offices in Providence and Newport.
The fee is a percentage of the loan.
“Rhode Island was the first to pass legislation to state that if you have a USBA loan, that can be credited toward corporate taxes,” Lynch said. “The state legislature was receptive to the idea because this was going to be a job creator. Approximately 95 percent of business in Rhode Island is small business – we’re a very large family-owned business state.”
Similar bills have since been introduced in other states; the same legislation was passed by the Oklahoma Legislature in 1998.
Anyone who receives an SBA loan in Rhode Island is eligible for the tax credit; one out of every 10 Rhode Island businesses has an SBA guaranteed loan – at a total of $750,000,000 million during the past eleven years – according to the RISBA web site.
The number of SBA loans in the Ocean State is “higher in Rhode Island than almost any other state,” according to Willey. “The banks in Rhode Island like to work with the SBA, and the SBA does such a great job.”
Since the passage of the original tax credit legislation in 1994, the Rhode Island SBA Advisory Council has drafted – and passed – legislation to provide for a five year “carry forward” of the State Tax Credit.
The carry forward means that a business can take up to five years to meet the guarantee fee on a loan.
“Very often a business will have a loss or break even in the first couple of years,” said Lynch.
This second round of legislation was passed into law unanimously in 1998. By then, “giving this tax incentive was being more than offset with job creation,” said Lynch.
Obtaining a SBA loan might be one of the first steps toward opening a business, but according to Willey, of equal importance is the development of a business plan.
“It should cover background: the market you’re trying to attract, your management team, outside consultants,” Willey said. “The most important thing is the budget for cash flows. You don’t want to default on a loan.”
Willey said that a common mistake is underestimating expenses and overestimating sales.
“Oftentimes, when people come to me, the first thing I’ll do is double their expenses and cut their sales in half,” he said. “Things come up you don’t realize.”
If you are interested in starting your own business, or would like more information about Rhode Island’s guarantee fee tax credit, the following organizations will be able to help answer your questions:
* Rhode Island Small Business Administration (401) 528-4561
* Rhode Island Department of Economic Development (401) 222-2601
* Center for Women in Enterprise (401) 528-4595
