Small Business Loans Key Issues

Small business loans involve special issues that might not be relevant in the case of bigger business loans, or even personal loans.

Bigger businesses might be able to provide "collateral" and are also likely to have a past performance record. These factors help them get loans easily. Lenders are primarily concerned that the loans would be repaid. Collateral security in the form of, say, a factory building, would make them feel confident. And past performance gives the lenders an idea about the business capabilities of the borrower.

Even in the case of personal loans, lenders can look at current earnings and past credit record of the individual. In most cases, lenders can proceed on the assumption that these are not likely to change drastically.

On the other hand, small business loans are far more riskier. Small businesses might not have the resources to withstand heavy competition. In the case of new enterprises, there would be no past record of performance to rely upon.

The small business might also not have any collateral security to offer. If the lenders insist on the business owner's personal residence as a collateral security, the entrepreneur might think twice about starting the business. Many entrepreneurs might decide not to go ahead with the business idea.

Governments recognize the importance of small business to the economy of the country. Small businesses provide far more employment than big business. They are also the source of much innovation. Hence, governments want to encourage small businesspersons.

With this objective, governments typically provide help to facilitate small business loans. Typically, they provide guarantees to the lenders. The guarantee is that the government would meet the lender's loss (in part or full) if the borrower fails to repay the loan. The borrower is likely to be asked to pay a guarantee commission.

However, even the government would want to ensure that there is a sound business proposal involved. They would look at the borrower. Is this person likely to honor her or his commitments. (Borrowers with good character would repay the loan somehow even if their business fails.)

The business proposal would also be reviewed. Has it been worked out paying attention to all success factors - like marketability, marketing arrangements, cost-effective technology, realistic financial estimates and good location?

Government counselors might help new entrepreneurs look at all these aspects and prepare a sound small business loan proposal. It is this kind of training and support that could prove more valuable to the entrepreneurs. Money alone does not lead to success.

Governments often bundle very small loans with managerial and technical assistance, on the assumption that the small borrowers are likely to need guidance to succeed in their small business. The intermediaries providing the loans would have to organize such mentoring support also.

Another area where the government gets involved more directly is disaster relief and backward area development. Special development agencies might be set up to provide or facilitate small business loans to enterprises in disaster and backward areas.

You should ideally start working on your loan proposal by looking at the marketing aspects of your business. What is the competition in the market and how are you going to market your offer? What would be the marketing costs?

Next, assess the physical requirements involved in running the business.

Finally. work out realistic estimates for all the above, particularly the promotional aspects, before you apply for a small business loan.

Funding is typically needed for:

* Acquiring business premises, * Buying and installing plant and machinery, * For ancillary facilities like vehicles and water supply arrangements, and * Working capital to stock raw materials and meet MARKETING and operating expenses till the business begins to generate cash surpluses.

Your small business loan proposal should indicate how much money you would bring in and what outside funding you need. Include a Cash Flow Statement showing the needs, and also how the loan would be repaid. This statement would portray the estimated pattern of increase in sales and consequent cash generation enabling loan repayment.

-----------1About the Author: Gopinathan, T. is the webmaster of Small Business Start website that discusses two topics: Factors that influence small business success and Small business support in US, Canada, UK, Australia and New Zealand

Small Business Loans Key Issues - To learn more about this author, visit Gopinathan Thachappilly's Website.

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