Simply Junior

Small Business Lenders are certified by the U.S. Small Business Administration to provide guaranteed funding to small business owners. Due to the diversity of applicants and the different business types, the SBA partners with their lending partners to make it easier for small businesses to obtain funding for new start-ups. Their involvement has allowed small business owners to obtain loans for a longer term and thus reduce the monthly repayments incurred. This provides businesses with a longer period of time to mature and stabilize without having to bear the heavy burden of a large loan repayment amount.

With this, the SBA has appointed a list of a few thousand lending partners in every state to extend this facility to the general public. Of course, borrowers are still required to submit full-fledge loan application proposals to the lender with the difference being that the SBA is the guarantor for such loans. This typically means that if the borrower defaults than the risk of non-repayment will fall upon the SBA, as they will then be responsible for repaying the loan.

Additionally, the criteria set forth for small business loans make 90% of all businesses qualified applicants for these loans. Apart from that, businesses are not burdened with balloon payments and high interest rates, which would otherwise be offered by any other commercial lender. Furthermore, fixed rate loans and variable loans are available to business owners. Therefore, business owners have more options in deciding the type of loan that would be suited for their business.

The purposes of acquiring a small business loan are varied according to the situation of the business. Small business owners may obtain loans to purchase real estate for business expansion purposes, to provide cash flow to support a large project, to lease machinery to operate a business, to utilize as working capital or to purchase inventory. Whatever the reason may be, business loans are evaluated an approved by these micro lenders after thorough evaluation of the business background, viability and purpose. The only difference is that through the support of the SBA, they are more willing to give out loans, as their risk is minimal with repayments guaranteed by a government agency.

After determining the level of working capital, a firm has to decide how it is to be financed. The need for financing arises mainly because the investment in working capital/current assets – that is, raw materials, work/stock-in-process, finished goods and receivables – typically fluctuates during the year.

Although long-term loans partly finance current assets and provide the margin money for working capital, such assets/working capital is virtually exclusively supported by short-term sources. When talking about small business loans, it is necessary to understand the term “trade credit”.

Trade credit refers to the credit extended by the supplier of goods and services in the normal course of transaction/business of the firm. According to trade practices, cash is not paid immediately for purchases but after an agreed period of time. Thus, trade credit represents a source of finance for credit purchases. There are no legal instruments or acknowledgements of debt, which are granted on an open account basis.

A variant of accounts payable is bills/notes payable. Unlike the open account nature of accounts payable, bills/notes payable represent documentary evidence of credit purchases and a formal acknowledgement of obligation to pay for credit purchases on a maturity date, failing which legal action for recovery will follow. A notable feature of bills/notes payable is that they can be rediscounted and the seller does not necessarily have to hold it until maturity to receive payment.

However, it creates a legally enforceable obligation on the buyer of goods to pay on maturity whereas the accounts payable have more flexible payment obligations. Although most trade credit is on open account as accounts payable, the suppliers of goods do not extend credit indiscriminately. Their decision as well as the quantum is based on a consideration of factors such as earnings record over a period of time, liquidity position of the firm and past record of payment.