Small business loans are funds given to a small business owner who has to repay over time with interest. This sets them apart from donations, which do not require repayment.
Small businesses create 65 percent of all new jobs. For this reason, loans to these entrepreneurs maintain the function of the economy.
Nearly three-quarters of all small businesses needed funding in the previous 12 months.
The amount owed was USD 1 trillion in 2013, the latest available statistic. Of that, USD 585 billion in loans, USD 422 billion from debt finance companies. The rest was redemption and venture capital.
Most new companies need USD 10,000 each in startup capital. Hi-tech companies need eight times the amount. When they are established, small businesses need loans to buy inventory, expand or strengthen their business.
Here are the pros and cons of many sources of small business loans.
This is the best source if you qualify. This is the second most popular source of small business loans, after retained earnings. They have the lowest interest rate because they use depositors’ funds to make loans. Your local bank or credit union offers the best rates.
But banks require work to show signs of success before lending money. This makes sense because the bank wants to return the investment.
This makes it difficult for small businesses just starting out. Banks also want to see that you put your own money into the business.
In addition, they require some hard collateral, such as real estate, equipment, or inventory. You need to provide a detailed business plan to show that you have considered your idea.
If you cannot obtain a bank loan, you may qualify for a small bank loan guarantee. There are many different types of loan loans. The smallest is microcredit, which loans are less than USD 50,000. Bigger work should apply to Program 7a for loans up to USD 2 million. See SBA Loan Programs for more information.
SBA loans are very paper-intensive and time-consuming. It can take a long time to get credit. That path could be better spent simply improving your business.
Microloans range from USD 1,000 to USD 50,000 with a wide range of terms. They are designed for start-ups, so they do not require a proven profitability history.
The Small Business Micrology Program works through local nonprofit organizations. It funds institutions for the establishment, expansion, and protection of children. Collateral and personal loans are required.
SME Connect is a website that connects small businesses with lenders from around the world. Owns USD 200- USD 300,000.
Good Credit allows lenders to contribute only a portion of the loan to borrowers. It is a non-profit organization designed to help entrepreneurs in missing parts of the world, but SMEs can and can apply. Good Finance offers interest-free credits if you are a social welfare business such as organic food, urban mushroom or gluten-free vegan granola.
Most common source of funds because of loan applications
Joint loans are the most common source of funds because loan applications are difficult and time-consuming. Most businesses are just starting to use their own funds, loans from friends and family or credit card debt. The advantage is that you can get any of these loans quickly.
The downside is that credits from friends and family are emotionally risky. This is because they can permanently ruin your relationship with them.
Once friends and family become lenders, they can interfere with their business and cause distractions. If your business fails, they may take it personally or think you have taken it for granted. You may be forced to give them your car, house or whatever else you have pledged. There could be hard feelings on all sides.
Seven percent of all small businesses use short-term credit cards. This is because credit card credit could be a waste of a small fortune, thanks to high-interest rates.
A home equity loan has the advantage that you can write off the interest. However, you may lose your home.
Here are some other small business financing ideas.