State benefits of a SBA guaranteed loan are a longer maturity at better repayment terms and interest rates, thereby reducing monthly payments and the initial loan burden
Finding a Source of Finance for Used Book Store
The partners of the Used Book store are looking into other logical sources of funding for their business. Currently they are receiving funding from a rich relative. For independence, longevity, and success, they feel they need to research other avenues of funding. There are several different types of funding available to them, but they must decide which source would best suit their needs, whether it is remaining with the rich relative or some other source.
Trade credit (open-book credit), credit cards, and SBA guaranteed loans are all types of funding available for small businesses (Ebert & Griffin, 2005). They will need to compare other sources of funding with the benefits and risks involved with remaining with the rich relative.
Trade credit is the credit extended to businesses by suppliers who let them buy now and pay later. The advantage of trade credit is the ability to take delivery of materials, equipment or other valuables without paying cash on the spot. The practice of trade credit can also help to establish a good working environment between suppliers and the business.
Most suppliers unfortunately will not offer trade credit to a new business that they have not established a working relationship. They will demand payment by cash or check on delivery, or payment by credit card in advance until the business has established that they can pay their bills on time (Entrepreneur, 2008, ¶ 2).
Credit cards are a convenient and easy way to pay for supplies, material and equipment necessary to start a business. There are several banks that offer business credit cards with different benefits such as reward points, no annual fee, low introductory annual percentage rates, and cash back rewards on purchases (Bankrate, Inc, 2008).
Credit cards may be too convenient to some business owners who do not manage their
finances well. “Many business owners borrow heavily on their credit card only to find
themselves up to their ears in debt. Credit cards are one of the most expensive sources of cash
and have paved the road to bankruptcy court more than once” (Pinson, 2006, p. 143).
What really makes credit cards attractive is that they are not hard to acquire. The two main things that credit card companies look at when issuing credit is personal credit score and established credit of the business owner or owners (Wade, 2006).
SBA Guaranteed Loans
The Small Business Administration guaranteed loan program is usually a secondary source of financing. A business may seek a SBA guaranteed loan after being denied a loan from conventional lenders. The SBA offers a variety of loan programs, depending on the amount of guaranty determines the amount of hassle. In other words, the higher the guaranty, the more paperwork, and longer the delay. Most of the SBA’s business loans are made by private lenders and then guaranteed by the agency (Pinson, 2006, p. 137).
The benefits of a SBA guaranteed loan are a longer maturity at better repayment terms and interest rates, thereby reducing monthly payments and the initial loan burden (Pinson, 2006).
One of the risks of a SBA guaranteed loan is the application itself. The key requirements for some SBA loan programs are: the business must have been turned down by a bank or other lender to qualify for most SBA Business loan programs, required to submit a guaranty (personal and business), must operate for profit; be engaged in, or propose to do business in, the United States or its possessions; have reasonable owner equity to invest; and use alternative financial resources first including personal assets, must meet eligibility criteria including size, type of business; operating in the United States or its possessions, use of available funds from other sources, use of proceeds; and repayment (D & B, 2008).
The repayment term of an SBA guaranteed loan is between five and twenty five years depending on the lift of the assets being financed and the cash needs of the business. Working capital loans repayment is usually five to ten years. Some SBA short-term loan programs have shorter repayment terms (D & B, 2008).