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Loans to Start and Grow a Small Business: Finding What's Right for You
Small business owners typically need to borrow money to buy equipment, pay suppliers and employees, and otherwise finance their operations. To help you get a loan that fits your needs, here are some basics to consider:
Comparison shop for government-guaranteed loans that may be offered by your bank and a few other financial institutions serving your community. The U.S. Small Business Administration backs a certain portion of loans to help borrowers qualify for attractive financing terms. If you need a loan for less than the lender’s minimum amount, ask your bank for a referral to a lender participating in the SBA’s microloan program, which combines business coaching and technical assistance with access to loans up to $50,000 (although the average loan amount is about $13,000). Also be aware that certain borrowers, such as veterans or victims of disasters, may be eligible for special loan programs.
Understand the different types of financing. For most small businesses, there are three key ways to finance operations (not including investments or loans from family and friends):
• Personal lines of credit, such as credit cards (either an owner’s personal card or a business card guaranteed by the owner) or home equity lines of credit (the small business owner’s home serves as the collateral) are commonly used, but there are risks.
“Small business owners willing to put their personal credit record on the line may find a credit card convenient, but it can be an expensive financing tool,” said Luke W. Reynolds, Chief of the FDIC’s Outreach and Program Development Section. “Owners using a credit card also can quickly find themselves taking on debt that cannot reasonably be supported by projected revenues from the business.”
He added that one problem with home equity lines is “the potential to lose your home if you are unable to repay funds as agreed.” (Also see concerns about “frozen” or reduced home equity lines in Common Questions to the FDIC from Small Businesses.)
• Business lines of credit, which provide a convenient way for a business to borrow up to a certain dollar amount and repay it in installments with interest over several years, also present risks. “Business owners should think carefully before borrowing on a line of credit,” said Mary Bass, a Senior Community Affairs Specialist with the FDIC. “Consider how and when the business will generate revenue to repay the loan, and make sure you aren’t using a short-term financing tool to finance costly, long-term investments.”
• Business term loans, which establish a set dollar amount to be repaid in installments over three or more years, are commonly recommended for purposes such as financing the purchase of equipment or a vehicle. These loans often are secured by the asset that is purchased. “Term loans mean predictable payments for businesses, but unlike lines of credit, a business may have to make a new application if it needs to borrow additional funds,” explained Emerson Hall, an FDIC Community Affairs Specialist.
You can improve your chances of getting a good loan. Start by having a well-prepared business plan showing how money will be earned, which can reassure lenders that a loan will be repaid.
For more tips, see the Winter 2010/2011 FDIC Consumer News (online at www.fdic.gov/consumers/consumer/news/cnwin1011/smallbusiness.html). Also check out additional resources from the SBA, the FDIC and other organizations in More Help for Small Businesses.
Last Updated 2/22/2012