While bank lending to large businesses (loans over $1 million) rose to record levels in 2014, loans outstanding were more than 24% higher than before the recession; small-business loans (under $1 million) in 2014 were still 17% below pre-recession highs.
Even though the credit market is becoming friendlier, small firms are still having difficulty tapping into today’s low interest rates. Here are the pros and cons of some common types of financing that small businesses may need in order to upgrade their operations or finance expansion.
Bank loans. Many financial institutions restrict lending to the most creditworthy businesses, and even qualified owners may need to contact many banks before finding one willing to offer financing. New or fast growing small businesses — even healthy ones with good prospects — are often rejected. Banks often require significant collateral and documentation of stable profits. Because of lower property values in some places, owners may not be able to rely on real estate equity to help secure business loans, cash-out mortgage refinances, or equity lines.
SBA loans. The U.S. Small Business Administration guaranteed more than $19 billion in loans made by private banks in fiscal year 2014.2 The program often makes it easier to obtain financing and may offer more competitive terms and longer repayment periods. However, SBA loans also require “worthwhile” collateral, and it can take several months for qualified applicants to complete the process and receive the funds.
Alternative sources. Specialty lenders may extend short-term loans that are backed by business assets such as securities, equipment, inventory, and accounts receivable. These loans are usually more expensive but can sometimes be used to access capital quickly.
Credit cards. About 36% of small businesses used credit cards to meet their capital needs in 2014. Business accounts often charge higher interest rates and offer fewer financial protections than personal accounts. Using a business credit card responsibly, however, is one way that a new business could help establish the positive credit history it might need to obtain business loans in the future. If you are thinking about borrowing funds to strengthen or grow your business, be sure to do plenty of research and weigh your options carefully.
1) Federal Reserve Bank of Cleveland, 2015
2) U.S. Small Business Administration, 2014
3) Inc., May 2014
4) National Small Business Association, 2014
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