Figures from the Federal Deposit Insurance Corporation show that the number and value of small-business loans declined by 27% between June 2008 and June 2013.1 Many small firms found it more difficult to borrow money in the wake of the financial crisis. And even though the credit market has loosened recently, it has yet to fully recover.2
According to one survey, 25% of small-business owners thought it was difficult to obtain credit in 2013, whereas 22% said it was easy.3 Here are some common financing options that small businesses often rely on to run 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 several years of stable profits. Many owners still can’t rely on real estate equity to help secure business loans, cashout mortgage refinances, or equity lines.4
SBA loans. The U.S. Small Business Administration guaranteed about $30 billion in loans made by private banks in fiscal year 2013.5 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.
Credit cards. Four-fifths of business owners use a personal or business credit card for business purposes.6 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 newer business could help establish the positive credit history it might need to obtain business loans in the future.
Alternative sources. Some specialty lenders 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.7
Many small businesses are coping with today’s challenging credit environment. If you are thinking about borrowing funds to strengthen or grow your business, be sure to weigh your options carefully.
1, 3, 6) Bloomberg Businessweek, September 13, 2013
2, 4) The Wall Street Journal, December 30, 2013
5, 7) Bloomberg Businessweek, December 10, 2013
The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2015 Emerald Connect, LLC