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Small Business Loan Update – Is Anyone Out There Making Loans? Will the Federal Bailout Help Us?

As Americans, we are glued to the latest CNN, Fox, or local news reporting the developments in Washington as to bail-out programs. If you are a small business owner, you are waiting for your bailout–some good news about freeing up capital markets so you can apply for a modest small business loan. Amidst this dismal news, you might be tempted to ask: “Can you hear me? Is there anyone out there still making business loans? There are such lenders, but they are getting fewer by the day.

To understand the problem, you have to get a grasp on how SBA lenders operate. In the days of our parents and grandparents, banks would make a loan based upon their liquidity stemming from bank deposits. They kept the loans in house and collected the interest. You did not have to stay awake in accounting class to figure out one can only make a limited number of loans–the amount of interest you are collecting is small in relationship to the total principal loaned. You might make a $100,000 loan, but only get $10,000 back during the year on interest. At a certain point you simply run out of money to loan.

But that all changed in the last several decades when banks were able to immediately sell their loans on the secondary market and get cash. So the same $100,000 loan could immediately be sold for, hypothetically, $110,000 (the increased value or premium comes from the fact that the purchaser would receive interest over the term of loan well in excess of the principal loaned) and the bank would get fresh monies back into their coffers. So they re-tooled, fired up the machines, and started cranking out more and more loans. The more they sold on the secondary market, the more profit and further loans could be made.

SBA loans were particularly attractive. Investors drooled over those babies. The Federal government guarantees them from default at the rate of between 50% and 90%, depending upon the program utilized. So the banks would pool together and package their loans, selling on the secondary market. Whoopee! In turn, investors would buy them almost like a security. It was a win–win situation for everyone. For this reason, the secondary market was very robust for such loans.

But there was a downside. SBA loans are based upon a floor percentage (4.5% for Community Express loans with ten year terms) plus the Wall Street Journal prime rate. So, for example, the current prime rate is 3.25% and when added to the floor percentage yields a total percentage of 7.5%. But the prime rate keeps going down. As such, interest becomes lower and lower and therefore less attractive to investors (“less spread”).

And worse yet, the number of SBA loans is decreasing. For example, in August and September of 2008, SBA loans were down approximately 50% from the year before.

As a result, the secondary market has dried up. According to James Hughes, President and CEO of Unity Bancorp, there’s virtually no market left for SBA loans. See Pullback in Secondary Market Hits SBA Lenders (October 30, 2008). This means that the larger banks are using exclusively depositor’s monies and corporate debt to process their loans.

So what is a small business to do? Here are some suggestions:

o Choose a SBA licensed lender that is not a large bank. Remember, banks are the traditional institutions that have checking and savings accounts, credit cards, CD’s and the like. In this market, few if any of them are making small business loans. On the other hand, non-depository SBA lenders are much more likely to loan.

o Find a lender that has had many years of experience with small business loans. They are much more likely to be small business friendly.

o Choose a lender that does nothing but SBA small business loans. Since this is their only way of making money, they have no choice but to continue loaning, even in a bad market.

The good news is that Congress will hopefully renew the discussion of invigorating the secondary market to encourage small business loans. I’m not saying this as a wide eyed idealist, but from the simple reason that capital channels cannot be plugged up indefinitely in our country. Even our politicians can’t mess up that simple fact of capitalism. When this happens, the money will again flow. I firmly believe this will happen, it is only a question of when. In the next article I will discuss what financial institutions might still be making business loans.

Secured Business Loans – Sorting Out Financial Woes

Capital is an undeniable necessity for every business venture. Secured business loans provide finance to assist the needy business owners by making use of equity of their own property. The primary requirement of these loans is the collateral. It can be machinery, property or any other thing.

Secured business loans can be utilized to pay earlier debts, initiate a new business, to purchase a new business and to expand your business. Hence, these loans help your business achieve the zenith of success in no time, as the interest rate that is charged is also very low. The only risk involved is that the lender may repossess the collateral if you are not able to pay back the loan in the stipulated time period. The lender does this in order to recover the loan amount that was extended to you.

Nonetheless, this is hardly possible in some rare cases. This is because the repayment period for secured business loans extend from 3 to 25 years, according to the preference of the business owner on the basis of his financial situation. Usually the amount extended in these loans range from £ 50,000 to £ 1,000,000.

Another positive aspect of secured business loans is that they are also available to people with bad credit. Though the interest rate charged for bad credit secured loans may be a little higher as compared to the usual secured loan but people with bad credit can undoubtedly secure these loans easily. So, these loans can thereby also be helpful to improve the bad credit history of many previous defaulters.

You may take secured business loans for variable or fixed rate of interest. In variable rate of interest, the interest rate charged on the loan amount will keep on changing according to the market trends. On the other hand, when it comes to fixed rate of interest, the interest rate or the monthly payment remains the same for the entire repayment period of the loan.

The intense competition among the UK lenders might be of great help to you in getting a lucrative deal. It would be a great idea to do a thorough research beforehand if you are interested in taking secured business loans. Once you start applying over the Internet for the loan, various lenders may approach you to provide the loan. You may apply for these loans at financial websites. Start collecting the loan quotes of various lenders along with their terms and conditions and select the deal that best suits your requirements. The loan quote provided is based on the value of your property that you are willing to give as the collateral.

Business Loan Strategies to Buy a Business Opportunity

When buying a business opportunity that does not include commercial property, borrowers should realize that business loan options will be significantly different when compared to a business purchase that can be acquired with a commercial property loan. This problematic situation occurs because of the normal absence of commercial real estate as collateral for the business financing when buying a business opportunity. In terms of arranging the business loan, efforts to buy a business opportunity are almost always described by commercial borrowers as excessively confusing and difficult.

The comments and suggestions in this report reflect business financing conditions that are frequently offered by substantial lenders willing to provide a business loan to buy a business opportunity throughout most of the United States. There are likely to be circumstances in which a seller will privately fund the acquisition of a business opportunity, and it is not our intent to address those business loan possibilities in this report.


Buying a Business Opportunity – Length of Business Financing to Anticipate

Business financing conditions to buy a business opportunity will frequently involve a reduced amortization period compared to commercial mortgage financing. A maximum term of ten years is typical, and the business loan is likely to require a commercial lease equal to the length of the loan.


Expected Interest Rate Costs for Buying a Business Opportunity

The likely range to buy a business opportunity is 11 to 12 percent in the present commercial loan interest rate circumstances. This is a reasonable level for business opportunity borrowing since it is not unusual for a commercial real estate loan to be in the 10-11 percent area. Because of the lack of commercial property for lender collateral in a small business opportunity transaction, the cost of a business loan to acquire a business is routinely higher than the cost of a commercial property loan.


Down Payment Expectations to Buy a Business Opportunity

A typical down payment for business financing to buy a business opportunity is 20 to 25 percent depending on the type of business and other relevant issues. Some financing from the seller will be viewed as helpful by a commercial lender, and seller financing might also decrease the business opportunity down payment requirement.


Refinancing Alternatives After Buying a Business Opportunity

A critical commercial loan term to expect when acquiring a business opportunity is that refinancing business opportunity financing will routinely be more problematic than the acquisition business loan. There are presently a few business financing programs being developed that are likely to improve future business refinancing alternatives. It is of critical importance to arrange the best terms when buying the business and not rely upon business opportunity refinancing possibilities until these new commercial financing options are finalized.


Buying a Business Opportunity – Lenders to Avoid

The selection of a commercial lender might be the most important phase of the business financing process for buying a business. An equally important task is avoiding lenders that are unable to finalize a commercial loan for buying a business.

By eliminating such problem lenders, business borrowers will also be in a better position to avoid many other business loan problems typically experienced when buying a business. The proactive approach to avoid problem lenders can have dual benefits because it will contribute to both the long-term financial condition of the business being acquired and the ultimate success of the commercial loan process.