Where to Find a Small Business Loan

A Home Business Article Contributed by Elizabeth Fox-Wise

The Fact is - That Most Small Business Will Need a Loan at Some Point

Over 80 percent of the small business surveyed had a loan, used some form of credit and had outstanding debt on their books at the end of the year. Fifty five percent of small business had some kind of traditional loan, while 71 percent obtained credit through non-traditional sources, such as owners' loans and/or credit cards.

Cash is needed for business operations, but when a small business owner goes looking for a loan, he often finds that loan lenders are difficult to please.

So Where Can Small Business Look for a Loan?

Financing Patterns of Small Firms, a report published fall 1998 by the Office of Advocacy, took a look at that question.

The report featured well over 400 statistical tables which were drawn from the Federal Reserve's Survey of Small Business Finance comparing the borrowing patterns of various small business groups. The findings told us:

The most commonly used kinds of credit for small business were personal and business credit cards, lines of credit, and vehicle loans. Forty six percent of small business used personal credit cards, 34 percent used business credit cards, and 28 percent used lines of credit.

The most common suppliers of credit to small business were banks. Thirty Eight percent of small business had outstanding credit from commercial banks in 1998. Owners' loans were next in popularity, Fourteen percent of small business used them. Followed by finance companies with 13 percent.

Loans from owners are an important source of small business financing. This survey did not collect data on their use by sole proprietors, so the extent of their use is far understated. Sole Proprietors are probably the most likely of all small business loans to be owner financed.

While most small business used some financing, the majority of small business' reliance on credit in business operations is indeed limited. Forty Seven percent of small business had no outstanding debt, and another twenty five percent had only one loan outstanding.

The percentage of small business using credit normally increases with business size. The percentage of businesses using any credit increased from seventy percent to ninety nice percent as the number of employees rise from 0 to over 100.

So What Type of Loan is Best for Your Small Business?

Well, in this study, two distinct patterns between business size and the type of loan or credit used were observed.

The relationship between business size and the percentage of credit seems to reflect the availability of credit to larger small business - loans and credit becomes more available as your business size increases.

An inverse relationship between business size and the use of owners' loans and personal credit cards shows another fact. Very small business tends to use these alternative sources of financing because other sources, which are typically cheaper, may be unavailable to the small business.

Therefore, if you are running a start up small business which needs a loan - you may need to look at more nontraditional financing until your small business gets a little less small. If you can not front a loan to a business, consider taking a personal loan or using credit cards - but watch those interest rates!