Starting and growing a small business can be very difficult. However, with proper planning and preparation, it can be done successfully. As a future or existing business owner, one of the keys to success is to use all the resources at your disposal. This includes loans and investments from family, friends and angel investors. It also includes loans and lines of credit from a bank, which are resources that many entrepreneurs do not see as a viable option to start or help grow their business.
If you listen to any media with an industry or financial orientation, you will certainly understand that the amount of capital available to entrepreneurs starting small businesses has decreased. It is true that following the last recession, credit institutions tightened the conditions for granting loans to business owners. However, funds are always available to help entrepreneurs achieve their financial goals. “In the United States alone, there are an estimated 27.5 million small businesses. And almost 80% of them get their money through bank loans, credit cards and lines of credit. (Julian Hills) The key is that as a business owner, you can’t be afraid to seek out the necessary financing for your business.
Several options are available to business owners to finance their business. However, we will focus on SBA loans, lines of credit, and guarantees. A term loan is often used as a way to pay for a major business investment or acquisition. Term loans often have fixed interest rates, with monthly or quarterly repayment schedules, a fixed maturity date, and usually require collateral to secure the loan. A term loan is best used to finance the acquisition of a business, equipment or real estate purchase.
“A line of credit is a simple financing product that allows you to withdraw funds up to a predetermined amount.” (Marco Terry) With a line of credit, you are only required to pay interest on the outstanding balance, usually on a monthly basis. However, major reductions should be done regularly, even monthly. Lines of credit are very flexible and, unlike term debt, can be used for many purposes, such as paying suppliers and covering operating expenses. Lines of credit can also be used to cover operating cash flow variances, which can be very beneficial to business owners, especially those who are in the start-up or growth stage of their business.
The challenge is that lines of credit are very risky for banks. If the line is not used properly, it may have to be canceled and repaid with principal and interest payments for a specified period. Therefore, most lines of credit, especially those for businesses still in the start-up phase, require physical guarantees. These are liquid collateral, such as CDs and brokerage accounts, equipment, or a lien on real estate. Banks prefer lines of credit to be fully backed by collateral. However, in the event of insufficient physical collateral, there are ways in which the bank can still provide financing to start-up businesses while protecting its investment. One of those ways is to get an SBA warranty.
SBA (Small Business Administration) is a government agency that provides a variety of services to small business owners. One of the services they are best known for is providing guarantees on small business loans. This is done in partnership with financial institutions that offer financing to small businesses. Although the SBA does not directly lend money, it sets guidelines for loans made by financial institutions. It is important to note that business owners must be able to qualify for loans from commercial banks subject to obtaining the SBA guarantee in order to qualify for an SBA loan. The main benefits of getting an SBA loan are structured loans with longer terms, lower down payments, lower interest rates, and less collateral than conventional loans. Some of the challenges with SBA guaranteed loans are that they require more paperwork and time than conventional loans.
The references:
Terry, Mark. (unknown). The facts about lines of credit for start-ups. Recovered from http://factor-this.com/startup-business-line-of-credit/
Hills, Julian. 2013, October 21. How to fund a startup today. Recovered from https://www.entrepreneur.com/article/229459
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