Small Business Loans An Overview

loanA business can be large or small depending on factors like capital invested, the number of people, quantity produced and so on. A small business is generally one that is independently owned and operated by one or more individuals, is not one of the dominant players in that particular industry, and its size comes under the size limits defined by the regulatory authority of small businesses in the country.

In the U.S., the definition of a small business varies in every industry but according to the Small Business Administration, a small manufacturing business will have less than 500 employees, and non-manufacturing businesses will have less than $7 million in annual receipts.

Small business loans come at a price and also increase the element of risk involved. But loans become necessary to ensure cash flow, purchase assets like property, expansion of business, equipment or inventory purchase, or simply to have adequate working capital. A loan makes more sense than using all personal savings and resources.

Funding a small business can be either through self financing, taking loans from banks, financial institutions or even family and friends. A continuous flow of cash is crucial for the success of the business, but small business loans are not easy to come by, due to the stringent regulations for underwriting them. However, these are being relaxed by some banks gradually.

Small business loans can be taken from the following institutions or individuals:

  • Banks
  • Private financial institutions
  • Private foundations that give grants to specific businesses
  • Venture capitalists
  • Friends, family and associates.

There are various types of loans given these organizations, some of which are:

  • Franchise loan
  • Line of credit for business
  • Term Loan
  • Working Capital loan
  • Business equity loan
  • Equipment financing loan
  • Bridge loan
  • SBA loan
  • Inventory financing loan

These loans are not always substantial since small businesses have smaller cash requirements, and are typically low cost ventures. But getting a small business loan approved requires that the borrower is able to provide the following:

  • A sound business plan which also includes a detailed business description and projections of cash flow
  • Personal profile with qualifications and experience
  • Personal financial status statement
  • Credit rating of the business if already in operation, or credit history
  • Track record of taxes paid in previous years
  • Collateral that can be used to secure the loan

How the Government helps

A few government agencies help small business ventures by providing loans directly. In most instances government agencies do not give these loans directly to owners of businesses, but provide a guarantee to banks that in case of a default in payment due to the failure of the small business, it will pay a portion of the loan to the lending institution, be it a bank or any other organization.

Secondly, many government agencies provide expertise and advice to small businesses on how they can meet the required conditions to secure a loan, the kind of loan to take and the best institution to apply for a small business loan. All these contribute to the success of a small business.