An important element to the economic recovery is improving small business loan start up because of their wonderful contributions to the increasing economy. In the society small businesses employ more than half of the private sector workers, there by generating more than half of net new jobs annually over the past decade. Let’s not forget they have created more than half of the non-farm gross domestic product in business. A reason why most country governments do see on the adjustment and assistance of small business loan start up. A lively small business growth strategy is usually an integral part of a larger community development strategy at a reach of low and moderate income communities. This is because of the existence of vital local jobs most of these firms create together with the essential services and products they produce and provide to their local communities. So as a matter of recognition of the advantages these small businesses bring in the local areas, many administrations recently increased guarantee and reduced fees of the small business loan start up programmes. This was done to increase access to loan for starter business loan, so as to encourage small business economic activity to easily start up. These measures are being observed on the recent improved funding to start a small business loan. Such programs have been set up to provide starter business loan. As for the month of August 2009, the SBA program loan approval rate which was of 1, 37 billion dollars is now is now very closer to FYO3 monthly average of 1, 5 billion dollars.
Even as this progress has been put in place, we still have the supply of starterbusinessloan being restricted, conferring to the 2009 Federal Reserve board’s advance loan officer survey. There has been a slight Banks still maintain their previous tightened lending standards without any change in funding to start a small business.
In an overall manner, knowing when and how the different small business owners use personal assets is a challenging task due to the very small limited sources of data available. Even though we have slightly dated research informative paper by Avery, Samolyk and Bostik, “Role of personal wealth in -business finance and starter business loan” as it provides one of the detailed study on this tittle using data from NSSBF and SCF. The studies conclude the use of personal wealth in small business finance is of great significance. It has also concluded that for firms that rely heavily on loan financing, the use of personal commitments appear to be very important. For keeping, maintaining healthy and funding to start a small business is often listed as an important element to the economic recovery due to their considerable contributions to the overall economy.
To better understand the relationship between small business loan and personal assets which make the business’s strength,Information is being provided on:
- How small business owners have relied over history on their personal assets for credit.Historically small business owners have always relied on their personal assets as a major important source of support for their enterprises. One can visualize an aspiring restaurant owner relying entirely on personal savings to the doll distributor using a line of credit secured by her home. Somehow the recent overflowing of the credit bubble has greatly led to a deep plunge in values across most asset categories in life.
The type of firm also influences the type of commitment for corporations are more likely than unincorporated firms to associate with guarantees. Unincorporated firms are left behind with recommendations for personal collateral, while sole proprietorship possess an implicit personal guarantee thanks to the way they are often organised. Thus explaining their greater use of personal collateral pledges. Regarding unincorporated firms, the reduction in the value of personal assets could have greater damaging effects on their ability to access credit. Small businesses or micro-businesses already have difficulties in accessing business loan due to difficulties involved in this process especially in economically distressed situations. This issue could be resolved by reducing the amount of extended lines of credits due to the lowered appraisal values on personal homes that secured these small business loans.
- How economic challenges may affect these borrowing patterns;
Up to date there exists some disagreement on whether there is indeed a gap in small business loan start up. Most banks say there is currently a lack of demand, further saying they cannot find qualified borrowers. All small business owners feel that despite the fact they are credit worthy, banks still remain entirely unwilling to lend to them.
The reality is that it is difficult to draw decisive conclusions regarding the fate of small business when faced by financial crisis. Banks’ lending to small businesses especially in the small dollar choice is risky and costly to bear.However, these lower dollar loan is the most important as starter business loan is concerned.
- Financial flows to small businesses weaken considerably due to financial crisis. The first section of our small business loan examination is ‘’ the state of small business economy’’ which describes the importance of small firms to job creation. The second section to business loan is ‘’ the credit less recovery ’’ which detail the sharp decline in bank lending to small business during financial crisis together with the relative slow recovery.
- Firstly, we notice on the supply side of the equation, lots of cyclical issues have caused a decrease in the supply of bank loans as banks are facing loses to their capital. They also face higher capital requirements showing significant risk adverse. On the demand side of the equation, it is observed that during recession small business do face a perfect storm of lower sales and a sharp decline in its values of commercial real estate together with collaterals in their homes.
- Technology does play an important role in changing the different ways through which small businesses do access capital both from new entrants into this market and banks for funding to start. Emerging market places for small business loan start up and the different ways in which technology can change the different ways in which small businesses can access starter business loan.
- The final section has to do with the appropriateness of regulatory activity for emerging markets. It also has to do with the search of new activities that can help all the segments of the small business marketplace traditionally underserved by banks in terms of access to credit.
- Implications of these borrowing patterns for business owners and credit providers. Conferring from the Case Schiller Index, there has been a drop on national housing values from about 32% from their peak in 2006 up to the first quarter of 2009. We also have the Dow Jones Index which has dropped in an amount of 29% in value from its peak of 14,093 points in the month of October 2007 precisely on the 8th day. Great loss of personal wealth has affected in a bad way small business owners who rely on their personal assets as starter business loan in supporting and protecting their enterprises. This takes place often at times when so many potentially viable businesses are in dire need of credit to keep their struggling businesses alive. These owners have just little assets to leverage.These are problems often compounded for business facing home foreclosures.
A huge number of small business owners report often using some type of credit to fund their firms as starter business loan. One of the methods used by small business owners seeking for starter business loan to fund their businesses in more difficult lending environments is by providing credit enhancements often namely in the form of personal commitments and engagements. These are obviously personal guarantees and pledges of personal collaterals as stocks or a number of real estates. Since this pledge provides the lenders great additional assurance against risk of loss in the event that the borrower is unable to pay back his/her loan.
Types of starter business loan
It is clear if one wishes to start a small business, he/she would obviously need to go for a starter business loan. All aiming to start a business should also be aware of what to show the investor so they can invest in their business without fear of failure. Nearly all businesses do need a starter business loan. Even after businesses have started and are running, the business owners still often seek for funding at different times. There exist two types of starter business loan being equity and debt financing. There exist so many ways of obtaining money to start a small business being friends, personal savings, family and financial institutions. Debt financing has to do with borrowing money that is to be repaid over a period of time usually with an interest. Equity financing has to do with an exchange of money so as to share in business ownership.
Problems experience by bank lending to small businesses
These problems in bank lending to small businesses may be divided in to cyclical barriers lingering from all financial crisis and the longer term structural barriers that existed before the crisis.
Recent cyclical barriers
Sales: The recession did battered small businesses, reporting weak sales together with income receipts as their biggest hurdle for up to four years, but still some are may be less qualified for bank credit.
Collateral: sources of collateral are hit in a hard way by financial crisis particularly real estate, further determining the ability of a small business owner to borrow.
Lenders at risk: In the crisis, banks were hit hard remarkably small banks which are most likely to lend to small firms and have become more risk hostile. Furthermore, retrenchment in loaning due to bank failures and problem institutions has been worsened by the lack of new bank starts.
Regulatory overhang: regulators and banking examiners have all responded to the crises by forcing all banks to conserve capitals, also making fewer risky loan.
Long term structural barriers
Banking consolidation: small banks are so often likely to lend to small firms, but in reality the number of community bank is in long term decline as all banking assetsconsolidate in to just fewer large institutions.
Search costs: lots of small firms face high search costs and as a result they often go to several lenders before securing capital, over significant time and lots of expense wasted.
Transaction costs: widespread heterogeneity, great increased in failure rates, variation use of borrowed funds by small firms do make it hard to develop general standards.
There exist so many starter loans given out by banks depending on different criteria and conditions which we shall be looking below;
Traditional bank loans
Banks do offer several types of commercial loans, including different lines of credit, term loans, and balloon notes to fund small businesses and large businesses. Several factors influence the terms of the large business loan, not excluding the amount of the loan, the fund’s intended use and the applicant’s credit.
Occasionally, the borrower may be able to obtain an unsecured loan if he/she has a credit together with a small amount of loan. When it comes to larger loans and borrowers with satisfactory credit, most banks will likely require some form of collateral for the loan.
Most lenders would use business assets for collateral to the extent to which they are available. Nevertheless, the collateral value of many business assets such as furniture or equipment is low. As a result the bank would then look for the business owner so as to use personal assets to serve as collateral for the loan.
Most lenders often require borrowers to offer the equity in their various homes as collateral for business loans. They are generally not interested in jewellery, personal vehicles and home furnishings.
Small business administration guaranteed loans are not directly loans for they are provided through participating financial institutions which could be bank or non-bank lenders. SBA guarantees portion of the loan to the lender. For SBA loan, both lender and the SBA consider the borrower’s collateral, equity, credit and experience.
Obtaining an SBA guaranteed loan can take longer times than that required to take a traditional bank load. Depending on the kind of SBA program used, once the lender has submitted a well finalize application to SBA, the turnaround time is often 10 days or around. Nevertheless the time taken to arrive this stage should be considered.
First thing to do by the borrower is to find a lender interested in the project. Then the lender quickly applies to SBA requesting for guarantee on behalf of the borrower. Specific documentation is highly required for an SBA loan thus gathering all the required documentations is time consuming and tedious. As a result well organised borrowers such as large businesses will eventually move more quickly through the process. The lender eventually sets the interest rate that s then charged on an SBA loan, SBA limits the interest rate that the lender can possibly be charged.