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Utilizing The Different Types Of Loans Available For Small Businesses

Aug 17, 2007
Many dream of having their own business, which msy deliver them from the shackles of working for others and give them the independence that they've always been craving. However, most give up when it comes to finding the money needed to start the business. This article supplies the necessary information, regarding the various types of loans available for small businesses.

Although investing personally held money eliminates all the hassles of seeking and fulfilling the stringent conditions for obtaining loans, it is not advisable to do so. It is also not a very good idea to get friends and relatives to invest in the business. Various types of loans are available, for someone to start a company, provided that person has a concrete business plan and can convince the lenders that their investment will be safe.

Debt Financing
Banks and other financial institutions are the prime lenders giving out such small business loans. There are two types of loans offered.

1.Secured Loan: This is suitably guaranteed with collateral from the receiver of the loan so that the lender's investment is safe. The interest rate on such a loan is low and it is not difficult to get this loan if the business owner provides the security.

2.Unsecured Loan: This type of loan does not involve any security and has a high interest rate due to the high risk involved.

It is not easy to get either of these loans, especially the unsecured loan, since the debtor must convince the lender that their business can generate enough money to make repayments on time. Both of these loans fall under the category of debt financing.

Equity Financing
Some companies arrange for equity financing. These companies invite investors to participate in the business with their money, but investors demand a share in the profits and a say in the management of the venture.

Other Types of Loans
Loans can either be short-term or long-term depending on the need of the business. Companies can use lines of credit to generate funds. The other option is personal credit cards for small business ventures, but these are uneconomical due to the high interest rates involved. Some use the equity of a home to takeout a home equity loan for starting the business. This option is more economical, but the risk of losing your home is high.

Small Business Loans
Those unable to get a loan for a small business, can approach the Small Business Administration (SBA.) This is a government organization gives loans directly, but guarantees the loans given by other lenders. The lender doesn't hesitate to give the loan if the SBA covers the loan. For getting such a loan, the company must fulfill many formalities.

Additional Help
There are online resources to help you people with the documentation and other related formalities. This software keeps the small business owner in mind and is affordable for those on a budget.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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