If you are looking to start an enterprise, you will need start-up money. Oftentimes people get this initial money from a financial institution. In recent times, due to the economic crisis of 2008, lenders have been more stringent about who they give monetary assistance to. The Small Business Administration (SBA) has been trying to ease the requirements that enterprising individuals must submit to in order to secure small business loans, but despite help from the SBA you might still find it difficult to get a decent advance. Let’s explore the options available to the entrepreneur and look at some facets of the traditional lending model.
Traditional Financial Institutions
Obtaining these loans from banks is still a challenge, even with assistance and incentives offered by the SBA. A lot of institutions are looking for safe places to put their cash. If you want assistance from a bank with an interest rate of six to eight percent and a term of 10 years, which is what the SBA works to ensure, then you have to meet some pretty high standards in most cases. Typically, a bank is looking for an enterprise that has been operating for at least two years and brings in about 250,000 dollars annually. On top of this requirement, they also like to see good personal and business credit, as well as positive cash flow from your operation. Even if you manage to meet all of these requirements, you may still find yourself getting rejected because you lack a certain amount of collateral. Oftentimes the collateral they want to see is personal property. Financial institutions are wary of taking risks ever since the economic crisis of 2008, so if you want to secure small business loans, you need to assure them that their money is safe with you. This is easier said than done, but easing the mind of your lender is a good step to take.
As a result of the difficulty that individuals experienced with traditional financial lenders, a lot of enterprising people have turned to alternative lenders for the cash that they need. You should be warned that these lenders will charge you three to five times the amount of interest and the term will be less than half of what a traditional lender would be able to give you. These deals are also not subsidized like SBA deals are; this is why you see higher rates and shorter terms. It is always preferred to take a guaranteed offer from a bank or credit union rather than an offer from an alternative lender, but you may not have that luxury. Small business loans are not very easy to obtain right now. If you have a rock solid idea that you are confident in, go ahead with an alternative lender, but you should always know what you are getting into, and keep in mind that 80 percent of businesses fail within five years.