Types of Small-Business Loans
- Basic small-business loans come in the following flavors: shorter-term loans from banks and credit unions, with typical maturities from 2 to 10 years, loans from non-bank business lenders, and private lender loans, typically having a higher interest rate than other sources. The best friend of entrepreneurs is typically the Small Business Administration (SBA), which makes some direct loans and guarantees the majority of many other small-business loans. Most loans have variable interest rates tied to the prime rate or another third-party published index. Entrepreneurs may sometimes seek fixed rate loans, although the qualifications are often strict and the higher interest rates may be prohibitive.
- Small-business loans almost always require collateral. These requirements sometimes pose a challenge to small-business owners whose companies are typically not "asset rich," leaving their collateral position a bit short. In many cases, to get the funds they need, small-business owners must pledge all company collateral and include one or more personal assets, including their homes. This requirement is almost always in effect for start-up ventures because of the risks involved.
- Seeking the right type of small-business loan is at the top of the consideration list. Tied for the top spot is the consideration of how much money to request. The amount of funding needed can affect the type of small-business loans available. For example, a local lender may be promoting a special small-business program with low interest rates and reasonable maturities, but also may have "capped" the maximum loan at $25,000. If a company owner needs $45,000, he cannot take advantage of the special program. The type and size of the loan can also be affected by the value of the collateral the business owner can pledge.
- Those small-business loans that require the pledging of literally all company and personal collateral, although common, create a potential future problem for the company owner. For example, assume the owner gets a small-business loan requiring all business and personal collateral to support the application. If the loan has a maturity of 10 years and the business owner needs additional funds during that period, there is little or no collateral to offer a lender. The entrepreneur may have unwittingly reduced borrowing power to zero.
- The national economies of North America and much of Western Europe are driven by small business. Therefore, the health of these economies parallels the health of smaller companies. From lenders' perspectives, the availability and types of small-business loans is a constant "balancing act." Most small businesses need loans, but they tend to have weaker balance sheets and limited assets. This is the reason that the SBA is the most significant force in the U.S. small-business community. By guaranteeing up to 85 percent of the amount of individual commercial loans, the SBA gives banks and non-bank lenders the confidence to offer a variety of types of small-business loans to the community.
