What you should consider if you’re looking at a business loan

The recent economy has been hard on small businesses – there’s no surprise there, right? And entrepreneurs who have been seeking working capital are being faced time and again with being turned down by bank officers.

(photo courtesy flickr.com)

Recently, though, the chasm between banks and small businesses appears to be lessening, according to a report issued by the Federal Reserve. The survey of senior loan officers showed that banks have eased lending standards for small businesses for the first time in nearly four years. The Fed said, “This is the first survey that has shown an easing of standards on commercial loans to small firms since late 2006.”

“Making credit accessible to sound small businesses is crucial to our economic recovery,” Federal Reserve Chairman Ben Bernanke said at a news conference.

Nearly all of the respondents that reported having eased loan standards cited more aggressive competition from other banks or nonbank lenders as an important reason for doing so, and about one-half pointed to a more favorable or less uncertain economic outlook. However, the survey did find that the easing in credit restrictions has been seen mostly in the large domestic banks.

Among the banks that appear to be more open to small businesses is JP Morgan Chase that is offering a new loan program that rewards businesses for each new employee they hire this year. Under the program, Chase will lower its interest rate on a new Chase Business Line of Credit by 0.5 percentage point for each new hire, up to three, for the life of the loan. “We encourage businesses to take advantage of the lowest interest rates in years and to create more jobs for the economy,” said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase. “We know how important it is to help small businesses because they are core to the U.S. economy.”

The offer is available to business owners who are approved for a new Chase Business Line of Credit up to $250,000 or existing business customers who increase their line of credit by $10,000 or more. Chase business checking customers will receive an additional half percent discount on their loan rate.

Goldman Sachs Group announced the launch of a new program called “10,000 Small Businesses,” a $500 million initiative to stimulate growth and job creation potential of 10,000 small businesses across the United States through greater access to business education, mentors and networks, and financial capital. The program is based on the broadly held view of leading experts that a combination of education, capital and support services best addresses the barriers to growth for small businesses.

Should you look at taking out a loan for your start-up or existing (but struggling) business? Borrowing money has both advantages and disadvantages.  The main advantage is that while the lender will charge interest, they won’t have a say in how you run or manage the business and the lender isn’t entitled to any of the profits that you make. Your commitment to the lender is to pay the loan back in a timely fashion and you can also deduct the interest you pay on the loan.

The disadvantage of borrowing money is that you could be committing your business to a large business expense. You may have to make loan payments when your need for cash is greatest (usually during your business’s start-up or expansion). If you have problems paying the loan back or keeping up with the payments, you can ruin your relationship with family or friends and if you borrow from a commercial lender, the lender may require you to pledge property as security for the loan. (If you don’t repay the loan, the lender can take the property and sell it to recoup the money.)

If you use your business as collateral for the loan, you may lose these assets just when you need them the most. If you pledge personal assets you could run the risk of losing your home, stock portfolio or other personal assets that you put up as collateral.

If you look at inviting an investor in, instead of them lending you money, they could become involved in the day to day running of your business – you’d need to weight the advantages and disadvantages of that relationship before you sign on the dotted line.

Before you make any decisions on whether to take out a loan to keep your business afloat, or for expansion purposes, make certain you take the time to talk with a trusted financial advisor.

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