If you own a small company you have probably heard about the small business administration and their small business loans program. But what are they referring to when they speak of this and what differentiates these from loans designed for large companies? We will answer this question and more in today’s article.
As large financial institutions have consolidated over the past few years it has been much more difficult for small companies to obtain loans from traditional lending institutions. This is especially problematic as smaller financial institutions tend to charge higher interest rates. The solution to this problem was created in 1953 in the form of the small business administration area this federally run institution was designed to strengthen America’s economy by assisting small businesses in obtaining the funding which they require to operate.
So what qualifies your company has a small business? The rules for this vary somewhat over time and between lenders but in general you are considered to be a small business and fewer company generates less than $100,000 per year in revenue for if you have fewer than 500 employees. This distinction is important so that funding from the program is funneled into the right companies.
What makes these small business loans distinct is that they take into consideration the specific needs of small companies. Most major bank loans require you to have revenue well over $100,000 before considering you for a loan. This is obvious to not possible if you’re running a small company. Furthermore they typically preferred your company to have been in business for at least 10 years so that they can evaluate the long term viability of your company. Once again this is not a realistic expectation if your company has only been around for a short time. The way this is resolved by the small business administration is by offering lenders a loan guarantee.
What the loan guarantee does for lenders and borrowers alike is increase the safety and security of the loan. In the event that your new company is not able to successfully launch and it must go insolvent the lending institution which funded your venture will still have their loan repaid by the small business administration. This guarantee means that they can offer new small companies loans at much lower rates than could normally be obtained. Through doing this the small business administration is able to achieve their goal of strengthening America’s economy by strengthening American small business.