Small Business Finance

Business finance is also known as corporate finance. Business finance is basically providing funds to the different activities of a corporation. Business finance is of two types:
Long term: A corporation depends on ownership equity or bonds for its long-term finance. These decisions are determined by the company’s capital structure.
Short term: Short-term funds are provided by the banks. This is also known as the company’s working capital.

Small business finance is used to satisfy the different financial needs of small and growing business enterprises.

Small business finance is provided by different financial institutions and even by the government.

To understand the working of small business finance let us consider the example of CDC Small Business Finance. The CDC Small Business finance helps its borrowers in the following ways:

1. Helping to assemble loan packages, pre-qualify, perform credit assessment
2. Presenting and locating the lenders who are interested in making the loan foe the small business administration (SBA).

To facilitate small business finance different loan programs are available which are discussed under the following heads:

SBA 504 LoanIf an entrepreneur is interested in obtaining loans for purchasing industrial or commercial building at rates of interest that are below the market rate coupled by a minimum down payment of 10% or equity injection, then he must opt for the SBA 504 Loan scheme.

Loan LimitThe entrepreneur opting for the Small Business Finance can get a maximum loan of 90% of the total project cost.

50-40-10-Loan StructureIn this scheme the bank portion of the loan is amortized over 25 years whose minimum term is 10 years or a maximum of 25 years. The rate of interest and the fees can be easily negotiated between the lenders and the borrowers. For the part of the loan that is offered by CDC, two term options are available with 10 or 20 years fully amortized. The interest rate for the 504 loan scheme is settled at a level which exceeds the current market rate for five year and ten year U.S. Treasury Issues.

There are certain criteria that the businessman has to fulfill to qualify for this loan and they are:

1. Net worth should not exceed $7.5 million
2. The business Net Profit after taxes should not exceed $2.5 million for 2 consecutive years.
3. 51% of owner occupancy for the existing building purchase
4. 60% owner occupancy for new construction
5. 10 years economic life for new equipment.

SBA 7A LoanThe SBA 7A Loan is obtained on a guarantee basis although full guarantee is not obtained on this loan program. This is basically risk sharing by the SBA and the Lender assuming that the borrower would not be able to repay the full volume of the loan. Hence the guarantee is nothing but security against loan default. The maturity of the loan rests on the ability to repay, the purpose, which the loan serves, and the useful life of the assets financed. This small business finance scheme can be used for a variety of purposes, viz buying an existing business, as working or short term capital, to refinance existing debt, to purchase new or used equipment, to purchase real assets for business purposes. The loan is also used to finance accounts receivable.

Community Loan ProgramsSmall Business finance is not affordable to the lower rungs of the society since they do not qualify for the conventional loan programs. For them the community loan programs are tailored. This loan program supports the emerging businesses, helps them to grow and provides them technical assistance in their business.

California State Guarantee Loan ProgramThis scheme provides Guarantee to the lender. This encourages the lender to approve the credit request, which he would not have considered otherwise.

For more details on small business Finance websites like businessfinance.com, businesstown.com, cdcloans.com etc may be viewed.