Small Business Lending

Anne Miller

Anne Miller

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Small business lending is a multi-billion-dollar business in the United States – it encapsulates all the money that is given to business owners by commercial banks and various other lenders. The amount of money given to small business owners often depends on the economy at the time of lending. The United States government sets interest rates in order to dictate whether lending will be prevalent or not. If the economy is sluggish, the United States government will lower interest rates and increase government lending programs to help supply capital to small business owners. On the other hand, if the economy is expanding too quickly, the government will increase interest rates to prevent too much capital from being spent – which will increase savings.

This article has been written to give business owners a better understanding of small business lending and the various options available to them. It provides in-depth explanations of various lending avenues and government initiatives that will help provide funding for companies.

Small Business Lending Statistics

The exact size of the small business lending industry is hard to quantify – there are thousands of different lenders offering different products that aren’t always traceable by a monitoring body. But it is safe to say that the entire industry is worth at least hundreds of billions, if not trillions.

Despite not having 100% of the needed information, there is a lot of publicly available small business lending data. PayNet provides monthly reports on small business lending in the form of a chart and index – it is called the small business lending index. It assesses how much money is being given to small businesses by large institutions and various other lending bodies around the country. It is one of the best indicators of how much money is passing from creditors to debtors within the small business market.

If you head to the small business lending index you will find that the past few years have seen consistent data pointing to over one hundred billion dollars being given to small businesses every month – a very impressive figure.

Types of Small Business Lending

There are two major types categories when it comes to small business lending. The first is private lending for small business, which tends to be banks lending to small businesses throughout the country. On the other hand, there are also government initiatives to provide capital for small businesses. This is either done directly, or by insuring loans that are issued by commercial lenders, which in turn makes these commercial lenders more likely to lend money to small businesses.

This portion of our guide will be dedicated to explaining the various ways that you can receive lending for your small business.

Government Initiatives in Small Business Lending

The United States Government has a vested interest in small businesses succeeding. For this reason, they provide various initiatives to help small businesses attain finance. The government does this through two primary initiatives: the small business lending fund and SBA insured small business loans.

Small Business Lending Fund

The small business lending fund is a government initiative to help finance various community lenders who then in turn use the funding for lending money to small businesses. These community lenders typically have a set ethos that dictates who they lend money to. For example, a community lender may try and promote ownership amongst local minorities – in this case you would need to be a minority to borrow from this fund. The small business lending fund has provided over $18b in capital since its inception 2010. It often provides this finance at very low rates in order to make it accessible to small business owners. You can find local community lenders to see if you are eligible for the financing they offer.

SBA Insured Small Business Loans

A SBA insured small business loan is a mixture of government initiative and private lending for small business. The Small Business Administration (SBA) provides insurance on SBA insured loans. These loans are issued by commercial lenders, but have the backing of the national government. You can find this type of finance at a commercial bank or even at a small business lending company. Because they are backed by the government, the requirements for these types of loans are traditionally lower than normal loans.

Traditional Financing

Traditional financing is the second form of financial lending that many small business owners use to either start businesses or invest in their current companies. These types of lending are not backed by the U.S. Government, which means that they typically have higher requirements than normal loans. Many of these loans will require you to have some borrowing history, which can be a problem if you are a first-time business owner. This being said, many commercial lenders will take into account your personal credit history when deciding if they are will to lend you money to start a business. This is another reason it is advantageous to maintain a good personal credit score throughout your life. Below are three types of finance that business owners often use to finance businesses.

Small Business Loan

A small business loan is the most common form of business loan on the market. It is a loan that provides borrowers with a set amount of capital upfront. The amount of capital you can borrow will depend on various factors. Having a strong lending history and a solid business plan are the best ways to ensure you can borrow more money through this avenue. In addition, having existing assets that will be used by the business, and that can secure the loan, will also help if you are attempting this route of lending.

Commercial lenders will provide you with a schedule to pay off the loan over a preset period of time. This schedule must be abided by strictly – you need to pay off the loan when payments are due to avoid fees or reporting on your credit report. Many lenders will allow you to customize this payment schedule depending on the industry that you are operating in. Some will require payments monthly, while other may even require daily payments to offset the cash flow burden of large payments. Because this form of lending normally requires collateral to secure the loan, interest rates are significantly lower than other forms of credit.

Small Business Line of Credit

This is another form of small business lending that many business owners in the United States use. Unlike a normal small business loan, a line of credit is typically unsecured and therefore comes at a higher interest rate. You will also most likely need some lending history to attain a line of credit due to it being unsecured.

A line of credit is a form of revolving credit. This means that you are given a limit of what capital you can withdraw, but you only pay interest on the money that you use. For this reason, it is considered a flexible form of credit. Many business owners use it to help fund seasonal gaps in cash flow, or invest in short-term projects. Because of the nature of the loan, and the high interest rates associated with it, most business owners do not use this form of credit to start businesses. One major advantage of a small business line of credit is that it doesn’t require hefty fees or charges to withdraw cash, which is a great bonus for those who often use cash to pay for or fund aspects of their operations.

Small Business Credit Card

This is the last of the common traditional forms of financing that small businesses use. Small business credit cards are similar to lines of credit in that they are a revolving form of credit. You only pay back the capital that you use on the card. Since most vendors accept credit card as a form of payment, a small business credit card is a very useful tool to have in the modern world of business. You can also issue them to other employees in your company so that they can pay for business related expenses. Unlike other forms of lending, a small business credit card charges very high fees for accessing cash. For this reason, it is suggested that you attain a line of credit if you plan on needing cash for your business – although, having both forms of credit is very common for small businesses.

Advantages and Disadvantages of Small Business Lending for Your Business

Advantages of Lending

  • Retain Ownership – One of the biggest advantages in attaining finance for your business is the fact that you retain the ownership of the business. Many business owners hate the thought of selling equity to investors – it means that you will have less of the company’s profits and sales revenue in the future.
  • Retain Control – This is similar to the first post, it also revolves around retaining control of the company you have founded. If you sell equity, your investors will have influence over your operations which can mean they have power to take your business in a direction that you don’t want it to go.
  • Build Credit History – An often-overlooked advantage to using a lender is the fact that you are able to build a credit history with an accredited creditor. This means that you can work on establishing a good credit history which will allow you to attain finance easier and at much lower interest rates in the future. Getting your first loan is normally the hardest part about borrowing money.
  • Various Options – The modern world of lending offer borrowers a range of different options that include all different types of lending vehicles. You are able to borrow different amounts for different term times – many lenders provide customized finance for businesses in certain industries.

Disadvantages of Lending

  • Hard to Qualify – It can be hard to qualify for a lot of small business finance options. This is because many commercial lenders will require you to have a lending history or solid credit score before they grant you a loan. This is even true for some government backed loans as there are still requirements – the government doesn’t want to insure a loan that it knows will likely not be paid back.
  • Cost – Receiving money through finance is one of the more expensive ways to fund your business. You will find that if you break down the total cost of the finance you are receiving, it can be quite a hefty sum. There are additional fees and charges that should also be considered when applying for such loans.
  • Potential Repossession – If you fail to uphold your portion of your lending agreement, there is a good chance that the lender will be able to reclaim some of your assets or your entire business in order to satisfy the amount of money that you owe them. This is especially true with traditional forms of credit as they are normally secured against a form of collateral that you must sign over when you accept the loan agreement.


As a business owner, you should be fully aware of the latest trends in the lending industry and how they may impact your ability to attain capital. You should also ensure that you know about various government initiatives to help get small businesses the financing they need. This is the best way to make sure that you have as many options as possible when it comes to lending.

If you do decide to go through a lender to receive funding for your business, you should be ready to ask them various questions. Don’t walk out of a meeting with a lender assuming that you got the best deal you possibly could have. Often, there are many hidden fees and charges that you are not told about upfront. Therefore, it is vital that you ask your lender for a full break down of the amount of money you will be responsible for paying. You should also ask for a total cost of the loan, that way you can properly compare it to other forms of funding.

Keep an eye on the small business funding index – the most successful business owners are normally those who understand the lending market.

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