Access to capital for small business

The one main problem that small businesses generally face is the access to capital by way of loans and tax incentives. Considering the time taken for loans to be processed and released, many start-up businesses utilize credit cards as capital which can get quite expensive and impractical in the long run.

As a general rule banks have played a very vital role in arranging access to capital for small business. Legislative policies and regulatory rules like SBA loans and other tax credits have also helped small businesses to break even and invest in diverse markets for expansion. Through the Small Business Administration (SBA) banks have been able to provide their small business customers’ intermediate as well as long term funding that is government guaranteed and cost-effective. Thanks to the SBA program, small business owners have received timely and targeted loans to help them in disaster relief especially in the current economic crisis. However considering the inherent risk involved in investing this capital in working and fixed asset requirements of small businesses, banks also need to share the risk.

Banks provide capital to small business under the SBA auspices under two sections – 7(a) and 504 loan programs. The 7(a) program is targeted at start-up or growing small business enterprises that require capital funding, but generally face a lack of it. The capital amount thus availed can be used as working capital for buying machinery, equipment, land or building, furniture and fixtures and even debt refinancing. The 504 program, which in a way complements the 7(a) program provides long term financing with fixed-rate interest and can be availed for expansion and modernization plans like acquiring real estate or modern equipment. Loans under the 504 program are acquired from private-sector lenders and require a minimum of ten percent equity from the small business borrower.

Hit by the recent economic crisis and recession, the federal government has annihilated subsidies on these programs thereby increasing the cost to the borrowers. Additionally nearly half of the banks have been merged or taken acquisition of by other banks and the range of banks lending out loans to small businesses has considerably decreased. But considering the fact that small businesses are vital for generating employment, there exist many state level programs that small business owner can avail in their respective state.

Despite the economic upheavals, banks still receive numerous applications for intermediate or long term loans for small businesses and continuation of SBA programs and tax incentives can go a long way in helping these small enterprises obtain the requisite capital.

We invite you to attend the “Access to capital” discussion that will take place at the Hispanic Business Showcase on September 10 at 2:30 p.m. To see the full schedule please click here.