October 2005    Vol. 14, No. 9  REAP HOME PAGE  A publication of the Center for Rural Affairs    
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REAP Rural Business Roundtable

Topic: Small Business Financing

REAP is just now launching a new online lending system. This system should be of benefit for REAP members and borrowers in expediting the loan process due to less paperwork. Will it be for everyone?

Of course it won’t be. This may be a good time to review some basics of financing and some considerations before borrowing. Here’s an article on this topic from the Small Business Administration’s website, http://www.sba.gov . The points made here may also help generate some roundtable discussion.

Financing Basics 
While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you’re starting a business or expanding one, sufficient ready capital is essential. But it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money. 

Before inquiring about financing, ask yourself the following:

  • Do you need more capital or can you manage existing cash flow more effectively?

  • How do you define your need? Do you need money to expand or as a cushion against risk?

  • How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.

  • How great are your risks? All businesses carry risks, and the degree of risk will affect cost and available financing alternatives.

  • In what state of development is the business? Needs are most critical during transitional stages.

  • For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.

  • What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.

  • Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.

  • How strong is your management team? Management is the most important element assessed by money sources.

  • Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your for the start-up and growth of your business.

There are many sources for debt financing: REAP loans, banks, savings and loans, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller. 

Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. The SBA’s programs have been an integral part of the success stories of thousands of firms nationally. 

In addition to equity considerations, lenders commonly require the borrower’s personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity. 


Roundtable Discussion Questions

1. Review the questions discussed above regarding business financing. Do you have experience with any of these considerations that you can share with your group?







2. As a group, take time to review the new REAP Online Lending System, including the online forms and loan policy information. Share observations, questions, and comments with REAP staff.







3. Discuss how a small business might utilize a small business loan, such as a REAP Rapid Loan.








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