Small Business Loan Financing

Ask a small business owner/manager what the single most difficult part of a business venture is. With almost no hesitation at all, the overwhelming response would likely be an inability to secure business loan financing. Most people would think there really is no business venture, without a well-thought-out business idea, and the necessary customers to buy into that idea. While employees and customers are a company’s greatest resource, often the most valuable resource is over looked. When a small or medium-sized business encounters cash flow difficulties, as many often do, banks are the first lending institution an owner/manager seeks out for capital financing.

The banking system is primarily focused on extending loans to consumers and many business owners are discouraged to learn that the banks are selective about extending business loan financing. Often banking institutions encourage businessmen to take on lines of credit or charge business expenses to a bank credit card. While the interest on a line of credit is usually lower, credit card interest is notoriously high, and the banks never force a business owner to pay the full monthly business debt. Cash flow difficulties make it almost impossible for an owner to pay off monthly business debt, so the high-interest debt keeps mounting month after month. Cash flow refers to the time delay between collecting accounts receivable resulting from sales and paying all expenses. This is usually a major concern for the vast majority of small/medium sized businesses. Most businesses resort to multiple bank credit cards in an effort to keep their heads above the water.

Business loan financing is sought out when a business requires financing for the purchase of inventory, equipment, real estate, and especially expansion and acquisition into other product/service areas. Lending institutions look scrupulously into all aspects of a business’ operations and weeks/months may go by before any loan financing can be secured.

A meticulously drafted small business plan is par for course, and an owner must be able to field a multitude of questions that may, in the end, wear him down. It is in the best interests of the owner/manager to be financially savvy and to have a keen sense of not only the product/service out of the market to which he is targeting the product/service. In many cases, the business loan financing is rejected by the banking institution.

Many small businesses resort to a form of financing using their company’s assets or personal assets as a form of collateral. The business owner pledges assets such as equipment, inventory, real estate and even accounts receivable as collateral on securing business loan financing. Control in the operation of the business venture is often transferred to the lender when this method of financing is sought.

Business owners/managers seek out other lenders when the banking community declines their business loan financing. Private lenders are often more than willing to finance a venture, however, loans may prove expensive and assets may be seized if the owner defaults on payment. In the end, it is the owner’s common sense and business acumen that will be the ultimate determinant of the enterprise’s success.