Little Loans Mean a Lot:
Where to Find Them
“Small” is a relative term – a small loan to a Fortune 500 company may be a big one to you. A little cash may be all that is needed to get you over the cash-flow hump, let you acquire some needed equipment or enter into strategic partnerships. You can find the money you need through both usual and unusual sources.
SBA micro-loans
About half of all small businesses use some traditional loans to finance their activities. The Small Business Administration’s Micro-Loan program offers funds up to $35,000. The typical loan size is about $10,500, more than enough to buy a computer and get a modest business off the ground. You usually have up to six years to repay the loan.
The SBA doesn’t make these loans directly. Instead, you must go to an SBA-approved intermediary, which is a nonprofit, community-based lender. You submit the application to the intermediary, which then decides whether to grant the loan. For a list of participating micro-loan intermediaries, go to www.sba.gov/financing/microparticipants.html.
Note: Micro-loan borrowers must be willing to give their personal guarantee for the loan. They must also demonstrate business ability or complete training and planning requirements set by the intermediary – activities that can help increase the borrower’s ability to repay the loan.
Family and friends Seventy-one percent of small businesses use nontraditional loan sources, including loans from family and friends and credit card borrowing. When borrowing from people you know, don’t forget to keep things formal. Put the terms of the borrowing in writing, including interest and repayment dates. This will help you stay in track with paying off the loan and the lender is protected in case you fail to repay (the lender may be able to write of the amount you fail to repay as a bad debt).
Instead of borrowing money you’ll have to repay, consider giving equity in your business in exchange for cash. You don’t have to give away a sizable share of your business to obtain needed cash you won’t have to repay; negotiate with the lender for a small, but realistic share.
Credit card borrowing
Forty-six percent of small businesses use the owner’s personal credit card to obtain cash or goods and services. Director Spike Lee is reputed to have financed his first film primarily through credit card borrowing.
The upside to credit card borrowing is the ease of obtaining the money – there are no forms to complete and there is no waiting time funds.
But the downside is high interest charges, even in this low-interest environment. Thus, it’s wise to limit credit card borrowing to purchasing specific items when you are confident the gusiness can repay the funds promptly so that interest doesn’t pile up.
If you must use credit cards for financing purchases, use the ones that entitle you to benefits. For example, the American Express OPEN Network (www114.americanexpress.com/homepage/smallbusiness.shtml), with its business credit cards, lets you join the Membership Rewards® program, accruing points for purchases that can be used in the future.
