Small businesses are the backbone of the economy. They provide jobs and essential products and services. For small businesses to survive and grow, capital inputs are necessary. Small business lending can provide the funding for expansion, capital investment in IT or equipment, or to grow inventory. But it’s not always easy for small businesses to get loans. In fact the U.S. Small Business Administration (SBA) has found that after lack of experience, lack of capital is the most important reason why small businesses fail.
The backbone of the economy
Even though the talk is all about the big corporations, 54% of all U.S. sales are accounted for by the 28 million small businesses in the country. As well as sales, small businesses account for more than half of all jobs in the U.S., or 55% of all jobs. And small businesses occupy an estimated 20 to 34 billion square feet of commercial space, or 30 to 50% of the total.
From jobs to the products and services people use everyday, small businesses keep the economy ticking. If small businesses are essential to the economy, small business lending is essential to their success or failure.
Working capital loans for small businesses
There are many reasons why small businesses need capital. A florist shop may need a van for deliveries as the business expands. An insurance agent may need to invest in IT services and cybersecurity. An ambitious newcomer may want to invest in advertising and customer acquisition. Working capital loans for small businesses can play an important part in their success or failure.
What are some of the major expenses small businesses face?
Small business expenses include rents, wages and benefits, equipment and infrastructure, and advertising and expansion.
- Replacing old equipment or maintaining existing equipment and IT infrastructure is a routine expense and one that more than half or 51% of all small businesses faced in 2014.
- About one fifth or 19.4% a business’s expenses go to employee wages.
- The second and third largest business expenses for small businesses are inventory and rent, with 7.7% and 4.6% of total spending.
- Advertising and new customer acquisition are essential to expansion and 44.6% of small businesses planned to invest in these areas.
Small business loans: banks or direct lenders?
As everyone knows, banks set the bar very high when it comes to making loans. What many people may not know is that banks are not happy if borrowers try to repay loans ahead of term, because it means that they miss out on interest payments. In fact, some banks will penalize early repayment.
Direct lenders simplify the process of small business lending, with unsecured business loans. They will make loans to new businesses and even businesses recovering from bankruptcy. Loans are approved quickly and can go as high as $1 million. Further, direct lenders are more invested in the success of the business. The downside is that terms are short and loans usually need to be repaid within 12 months. Interest payments are typically high.
The SBA website has a “Loans and Grants Search Tool” with help for sources of small business lending.