Article by Roger Schlueter, MBA
You would think that the smaller the loan, the easier it would be to find financing. This is a major fallacy unless you have a CD to pledge or Equity in your house that is more than 20% to 25% of the Current Market Value. Loans of $25,00 to $100,000 are very hard to finance for three reasons:
1) Loan Officers do the same amount of work for small loans as they do for big loans
2) Banks can use SBA for loans of any size but have a reluctance for small loans because of the work involved in the SBA process.
3) Banks do not think of SBA for borrowers needing very small amounts of $5,000 to $50,000. The SBA can guarantee loans of $25,000 and less and SBA lets them receive 2% more in interest if they will do the smaller loan. (The rate on a SBA Loan is, Prime + SBA Rate = Max Rate of Interest) The SBA Max Interest Rate on a loan $25,000 or less is 3.25% + 4.75% = 8%. Most banks do not realize they can charge this much for a small loan. The SBA Max Rate on a Loan of $25,001 to $50,000 is 3.25% + 3.25% = 6.5% for loans less than 7 years and 3.25% + 3.75% = 7% for loans more than 7 years.
The Borrower will usually want to provide a Co-Signer to bolster the loan. Most Banks do not have Co-Signers anymore but they want Co-Makers. The difference is that a Co-Maker is actually on the Note and Loan, and the bank can make the Co-Maker uphold the Terms of the Loan just like they were the original Borrower because they are the Original Borrower. Banks can also get a Guarantee from another party but on the Co-Maker and the Guarantor they usually want some form of Collateral to Secure the Guarantee or to Secure the Note. People that sign on a Loan usually have a reluctance to Pledge Specific Collateral on the loan. Examples of Collateral that a Bank would want include their Home or Cash in an account or CD. Sometimes they will take an Automobile or Land or something else that has perceived value.
Banks Also look at people that can not come up with $5,000 to $25,000 as not as good a risk as people who have some wherewithal in their Income or Assets. I always find it funny that a Bank will tell the borrower to find someone else to finance the business for the first year or so, and then to come back to the bank for financing. Newsflash: Those Borrowers who have found, even part of the money on their own, are not coming back to the bank who turned them down! I have another Article on this blog on Non Bank Sources for Financing.
Please also see my Website at www.schlueterfinancial.com for additional information including contact information.