Loans For Small Businesses

Small businesses require loans like any other business. Even if everything is going on as per plan a reliable source of extra cash is always welcome, as it makes tiding over difficulties a lot easier.

Difficulties such as machinery or vehicle breakdown, or delay on part of the debtors to pay monies in time can lead to cash crunch in small businesses. Availability of loans can also mean ability to purchase stocks available at discount, or expanding existing operations. Depending upon cash flows, a small business owner may even contemplate buying an office or manufacturing unit.

Luckily, there are many types of loans for small businesses. The problem is that it is difficult to decide which one is the most appropriate. An analysis of some of these business finance options is done here from the perspective of small business.

1. Working capital finance lines of credit for business

Profitability is not synonymous with liquidity. Therefore, even if the small business is doing extremely well on paper, it may find itself strapped for cash. This is particularly true when there are credit sales, and they seasonal. For tiding over such anomalous requirement, obtaining working capital finance of the type known as line of credit for the business would be the correct type of finance to look for.

This type of finance is ideal for day-to-day requirements of the business, as it is cleared as soon as the business receives payments from debtors. Interest is calculated on day-to-day balances, making it effectively cheaper, even if the rate of interest in the sanction letter seems prohibitive. Interest is calculated only on outstanding amounts, and not the total sanctioned limit. Therefore, if the business doesnt use the line of credit for businesses, it will not incur any interest.

Lines of credit may be secured with stock, or accounts receivable. Even unsecured lines of credit are available for businesses. Again there may be different varieties of lines of credit for businesses, based on repayment choices, and interest rates.

Usually, interest rate applicable on these lines of credit is between nine and fifteen percent per annum. The lender finalizes the rate of interest applicable on these loans, based on the credit profiles of the business, and the business owner.

Since interest rates are quite high here, using monies obtained with lines of credit for acquisition of larger assets is not advisable.

2. Business loans

These may start anywhere from $25,000 onwards. Both medium sized as well as large sized loans come under this category. Monies availed as business loans are used for buying some assets, or for expanding the business. Funds granted to businesses for acquiring another business also come under this classification.

There is difference in repayment of these loans when compared to repayment of lines of credit. Here the loans are larger, so a schedule for amortization is also mentioned in the contract. Another difference with the line of credit is that business loans are not availed in piecemeal.

Vehicle loans, equipment purchase loans, agricultural loans, and real estate loans, are some of the commonly used business loans. These loans are secured on the assets that are being bought with them. Loans like agricultural loans can also be used for purchasing additional land, equipment, or livestock.

A part of working capital finance that is more or less perpetual in nature can be financed through business loans. Such working capital is used for purchasing materials, and keeping the business running even when debts are being recovered slowly. Interest rates applicable on business loans are much lower because these loans are secured loans. Interest rates charged on business loans may vary from four to eleven percent per annum. Factors affecting these variations are the security provided, the quantum of business loan being availed, overall gearing, the repayment term, and Credit Score. However, since amortization entails calculating interest on reducing balance, the effective interest rate on these loans is much lower than what is mentioned in sanction letter.

3. Loans sponsored by Small Business Association (SBA) 

Banks may not be willing to lend monies to small businesses that have been facing difficulties in repaying their borrowings. However, subject to other conditions, the small business may be eligible for loans sponsored by the Small Business Administration (SBA). SBA has instituted a program, which encourages lenders to grant loans to small businesses. The government guarantees these loans. Because of this guarantee through SBA, lenders are more agreeable to lend monies to small businesses under this category. Even the terms and conditions of such loans are better than similar loans granted to other businesses. Note that SBA only guarantees such loans from financial institutions, and commercial banks. Therefore, the small business owner has to approach the private banks for SBA loans. Further details on SBA loans can be obtained from the banker, or SBAs website, i.e., http//www.sba.gov.

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