The Risky Business
Small business loans are considered high risk because they are typically used as seed money to start or run a business that has yet to take off. There are typically no guarantees and no history of credit to use as a basis for the loan, and often resemble personal loans in interest rates and loan terms. Even with a well-prepared business projection study and collateral, lending institutions are justifiably reluctant to provide funds for start-up businesses.
There are four kinds of financial assistance that may be availed by small businesses from lending institutions. These include working capital lines of credit, credit cards, equipment leasing and letters of credit. Only the first two are appropriate for start-up businesses. These are all short-term, with a maximum of one year in most cases.
In the off-chance that a longer-term small business loan is granted, the amount of the loan will depend on the applicant’s personal ability to pay and requires the written personal guarantee of the applicant to pay off the loan even if the business fails or tanks for unsecured loans . In this instance, it is more a personal loan rather than a business loan. For true business loans, lending institutions cannot compel the business owner to pay off the loan if the business itself fails and closes down.
Some loans sets out conditions in the contract that allows the seizure of personal property of a borrower or the borrower’s spouse in the event of default on the loan. This means the bank has the right to attempt to recoup its loss by taking possession of a person’s house or car. Before getting into an agreement with a bank or financial outfit, ensure that conditions such as these are clearly set out and discussed.
Research For Best Option
The interest rates for small business loans are normally higher with shorter loan terms, a maximum of five years. It may be a good idea to do comparisons of various small business loan packages being offered to determine which institution will fulfill the needs of the business more.
It is inevitable in start-ups that missed payments will occur, especially in the first two years when income is low and costs are high. This may affect the business owner’s credit ratings and jeopardize future applications for bigger loans. The best way to handle this is to inform the bank official handling the loan that loan payments may be missed and request for advice on how to manage this.
Some good news is that most tax consequences for small business have been reduced by the government to encourage its growth. However, the income from small businesses is usually associated with personal income tax and may increase taxes overall. The interest from business loans can be used to mitigate this in some degree.
Small business loans are somewhat akin to payday loans and cash advance loans which are necessary for survival but should be kept to a minimum. They are ideal only if they are paid off in full in a timely manner.