The Small Business Administration (SBA) plays a significant role in helping small businesses get the capital need to grow their business. In effect, they provide stimulus cash for the nation’s small business loans.
Although the SBA does not provide direct loans to a small business, it works with banks and other lending institutions to offer a guarantee if the loan fails or defaults. This makes it easier for a business to get a loan from a bank. In return for this business loan support, business owners pay a small fee to participate in the SBA’s lending program. Additionally, this program is also subsidized with taxpayer’s money.
Although the SBA received a federal subsidy totaling $351 million from the new national budget, which is 67% more than they asked for in 2012, when they received $211 million, not much of this money will be available for most small businesses in 2014.
This is because the agency is planning on dropping two of its most popular small-business loan programs. In fact, the SBA will have to spend more to secure fewer loans. This is happening for two reasons. The first reason is that the cost of subsidizing loans has increased due to a higher unemployment rate and a depressed real estate market, and the second reason is that the SBA is still trying to pay the cost of poor performing loans made in the past.
How SBA’s New Policies Affect Small Businesses
What this news basically means is that small businesses are primarily on their own when it comes to getting high level financing for the next step in growing their business. While some small businesses may still be able to get SBA support, only the most promising small businesses will be considered eligible.
Financing a Small Business
When seeking a business loan from a private lender, small businesses have to decide between getting a loan or a line of credit. There are some major differences between the two forms of financing, and the best option depends on the goals of a business.
When applying for a loan, a small business must be very specific about the purpose for the loan and the amount needed for their project. Moreover, each application is a one-time event. Getting a loan once does not guarantee that a new loan will be approved for the next stage in the business cycle.
A business cannot receive a partial loan or get the money in increments; instead, it must receive the full amount of the money, whether or not it can use all the money right away.
Lines of Credit
Lines of credit work in a completely different way. In essence, they are much more flexible. While loans serve the interest of big projects, lines of credit help with cash flow needs.
With an approved line of credit, a business can ask for the money it needs when it needs it. It can also continue to ask for money for as long as it keeps up with its repayment schedule.
Choosing The Best Option
With a loan, a specific amount has to be asked for at the beginning, with no guarantee that more money will be available at a later date. Meanwhile, with a line of credit, continuous cash infusion is possible as long as a small percentage of the balance is paid each month.
So, the best option depends on the needs of a business.
Loans are best for long-term financing, but they can be expensive with interest rates as high as 7%. A business should only ask for a loan if it has a very specific purpose for the money and a clear idea on how it will be able to pay it back in time. Loans are useful for making large purchases, establishing the interest rate, and paying back a fixed amount over a long stretch of time.
Alternatively, getting a full line of credit is more viable for short term financing. A business will be able to access funds as it needs, without worrying about receiving too much money in one lump sum. Lines of credit are useful for financing multiple projects, for filling in short term cash flow gaps, and for requiring small amounts of money, which vary from one month to the next.
Get Expert Financial Advice
The financial experts at Advance Funds Network have worked with a large number of small business owners and can recommend the best ways for them to get the financing they need to grow their business and take it to the next level. You can call them at 3110 to find out more about how they can help your business get the financing it needs to grow.