2Winter 2011/2012FDIC Consumer News
Loans to Start and Grow a Small Business:
Finding What’s Right for You
Small business owners typically need
to borrow money to buy equipment,
pay suppliers and employees, and
otherwise finance their operations. To
help you get a loan that fits your needs,
here are some basics to consider:
Comparison shop for government-
guaranteed loans that may be
offered by your bank and a few
other financial institutions serving
your community. The U.S. Small
Business Administration backs a certain
portion of loans to help borrowers
qualify for attractive financing terms.
If you need a loan for less than the
lender’s minimum amount, ask
your bank for a referral to a lender
participating in the SBA’s microloan
program, which combines business
coaching and technical assistance with
access to loans up to $50,000 (although
the average loan amount is about
$13,000). Also be aware that certain
borrowers, such as veterans or victims
of disasters, may be eligible for special
loan programs.
Understand the different types of
financing. For most small businesses,
there are three key ways to finance
operations (not including investments
or loans from family and friends):
• Personal lines of credit, such as credit
cards (either an owner’s personal card
or a business card guaranteed by the
owner) or home equity lines of credit
(the small business owner’s home
serves as the collateral) are commonly
used, but there are risks.
“Small business owners willing to put
their personal credit record on the
line may find a credit card convenient,
but it can be an expensive financing
tool,” said Luke W. Reynolds, Chief
of the FDIC’s Outreach and Program
Development Section. “Owners using
a credit card also can quickly find
themselves taking on debt that cannot
reasonably be supported by projected
revenues from the business.”
He added that one problem with home
equity lines is “the potential to lose
your home if you are unable to repay
funds as agreed.” (Also see concerns
about “frozen” or reduced home equity
lines on Page 5.)
• Business lines of credit, which provide
a convenient way for a business to
borrow up to a certain dollar amount
and repay it in installments with
interest over several years, also present
risks. “Business owners should think
carefully before borrowing on a line
of credit,” said Mary Bass, a Senior
Community Affairs Specialist with the
FDIC. “Consider how and when the
business will generate revenue to repay
the loan, and make sure you aren’t
using a short-term financing tool to
finance costly, long-term investments.”
• Business term loans, which establish
a set dollar amount to be repaid
in installments over three or more
years, are commonly recommended
for purposes such as financing the
purchase of equipment or a vehicle.
These loans often are secured by
the asset that is purchased. “Term
loans mean predictable payments for
businesses, but unlike lines of credit,
a business may have to make a new
application if it needs to borrow
additional funds,” explained Emerson
Hall, an FDIC Community Affairs
Specialist.
You can improve your chances of
getting a good loan. Start by having
a well-prepared business plan showing
how money will be earned, which can
reassure lenders that a loan will be
repaid.
For more tips, see the Winter
2010/2011 FDIC Consumer News
(online at www.fdic.gov/consumers/
consumer/news/cnwin1011/
smallbusiness.html). Also check out
additional resources from the SBA, the
FDIC and other organizations in the
box on Page 5. Q
BANKING TIPS FOR SMA L L B U S I N E S S E S
Paying for Everyday Expenses: Understand the Rules
Business credit, debit cards carry fewer protections than those for consumers
Small businesses face many everyday
expenses, from office supplies to
travel. To determine how to pay these
expenses, you should understand
that the rules governing each form
of payment differ and can affect your
liability for unauthorized use. Business
owners also should be aware that some
consumer protections they have come
to expect do not necessarily apply to
businesses. Here are a few things to
consider when choosing a payment
method:
Credit Cards
Credit cards are a convenient option
because they allow you to defer
payment — that is, you will be using
the card issuer’s money, not your own,
until you pay off the balance.
Choose a credit card after carefully
evaluating the interest rate, fees and
terms. Depending on the card, it may
also offer rewards. Then you should
pay your card bill on time to build your
company’s credit record.
You should also be aware of the
potential differences between credit
cards issued primarily for consumer
use (for personal, family or household
purposes, even if you occasionally use
them for business purchases) and credit
cards issued primarily for corporate,
small business or other professional use
(even if occasionally used for personal
purchases).
Consumer credit cards carry
protections for the cardholder under
the federal Truth in Lending Act
Loans to Start and Grow a Small Business:
Finding What’s Right for You
Small business owners typically need
to borrow money to buy equipment,
pay suppliers and employees, and
otherwise finance their operations. To
help you get a loan that fits your needs,
here are some basics to consider:
Comparison shop for government-
guaranteed loans that may be
offered by your bank and a few
other financial institutions serving
your community. The U.S. Small
Business Administration backs a certain
portion of loans to help borrowers
qualify for attractive financing terms.
If you need a loan for less than the
lender’s minimum amount, ask
your bank for a referral to a lender
participating in the SBA’s microloan
program, which combines business
coaching and technical assistance with
access to loans up to $50,000 (although
the average loan amount is about
$13,000). Also be aware that certain
borrowers, such as veterans or victims
of disasters, may be eligible for special
loan programs.
Understand the different types of
financing. For most small businesses,
there are three key ways to finance
operations (not including investments
or loans from family and friends):
• Personal lines of credit, such as credit
cards (either an owner’s personal card
or a business card guaranteed by the
owner) or home equity lines of credit
(the small business owner’s home
serves as the collateral) are commonly
used, but there are risks.
“Small business owners willing to put
their personal credit record on the
line may find a credit card convenient,
but it can be an expensive financing
tool,” said Luke W. Reynolds, Chief
of the FDIC’s Outreach and Program
Development Section. “Owners using
a credit card also can quickly find
themselves taking on debt that cannot
reasonably be supported by projected
revenues from the business.”
He added that one problem with home
equity lines is “the potential to lose
your home if you are unable to repay
funds as agreed.” (Also see concerns
about “frozen” or reduced home equity
lines on Page 5.)
• Business lines of credit, which provide
a convenient way for a business to
borrow up to a certain dollar amount
and repay it in installments with
interest over several years, also present
risks. “Business owners should think
carefully before borrowing on a line
of credit,” said Mary Bass, a Senior
Community Affairs Specialist with the
FDIC. “Consider how and when the
business will generate revenue to repay
the loan, and make sure you aren’t
using a short-term financing tool to
finance costly, long-term investments.”
• Business term loans, which establish
a set dollar amount to be repaid
in installments over three or more
years, are commonly recommended
for purposes such as financing the
purchase of equipment or a vehicle.
These loans often are secured by
the asset that is purchased. “Term
loans mean predictable payments for
businesses, but unlike lines of credit,
a business may have to make a new
application if it needs to borrow
additional funds,” explained Emerson
Hall, an FDIC Community Affairs
Specialist.
You can improve your chances of
getting a good loan. Start by having
a well-prepared business plan showing
how money will be earned, which can
reassure lenders that a loan will be
repaid.
For more tips, see the Winter
2010/2011 FDIC Consumer News
(online at www.fdic.gov/consumers/
consumer/news/cnwin1011/
smallbusiness.html). Also check out
additional resources from the SBA, the
FDIC and other organizations in the
box on Page 5. Q
BANKING TIPS FOR SMA L L B U S I N E S S E S
Paying for Everyday Expenses: Understand the Rules
Business credit, debit cards carry fewer protections than those for consumers
Small businesses face many everyday
expenses, from office supplies to
travel. To determine how to pay these
expenses, you should understand
that the rules governing each form
of payment differ and can affect your
liability for unauthorized use. Business
owners also should be aware that some
consumer protections they have come
to expect do not necessarily apply to
businesses. Here are a few things to
consider when choosing a payment
method:
Credit Cards
Credit cards are a convenient option
because they allow you to defer
payment — that is, you will be using
the card issuer’s money, not your own,
until you pay off the balance.
Choose a credit card after carefully
evaluating the interest rate, fees and
terms. Depending on the card, it may
also offer rewards. Then you should
pay your card bill on time to build your
company’s credit record.
You should also be aware of the
potential differences between credit
cards issued primarily for consumer
use (for personal, family or household
purposes, even if you occasionally use
them for business purchases) and credit
cards issued primarily for corporate,
small business or other professional use
(even if occasionally used for personal
purchases).
Consumer credit cards carry
protections for the cardholder under
the federal Truth in Lending Act