Types of Lenders

Just as there are many different types of loans for small businesses to build business credit, there are equally as many different types of lenders. One of the best parts about borrowing from a commercial lender is the limited say they will have in decisions you make about your business. This is a much different situation than when you are dealing with an investor, whose focus is to build the business. A lender's only real concern is that you meet the terms of the loan and repay them on time. They are not concerned with how you come up with the money to pay them or if the business is doing well; they just want their money back when you agreed to give it to them.

Lending to Your Own Business
As the owner of a business, if you have the financing available, you can loan the funds needed to your business. The best part about this type of loan is that you can be totally flexible with the terms that you set up, including the interest rate and payment schedule, so that the business won't be unnecessarily burdened and you still make money on the interest. A common type of arrangement is to set up a balloon payment, typically set for some time in the future when a business is expecting to receive a large amount of income based on the completion of a project). Having no actual payments until the payoff can relieve a heavy burden from the company. There are also tax benefits to this type of loan. In many situations, the business can deduct the interest paid on the loan. However, be sure to always put the loan terms in writing, including interest rate and repayment schedule, in order to protect the integrity of the transaction. Always consult a business professional before making these types of deductions.

Loans from Family and Friends
Another ideal source of financing can come from personal relationships with family members and friends. Often, it is more comfortable for a business to borrow from these kinds of sources since the company's business credit rating is not usually an issue and repayment arrangements can be made that are flexible than those typically offered by commercial financial institutions. There are even companies such as CircleLending (www.circlelending.com) that can help you set up the terms of an intra-family loan, and they will even report the loan terms and payment history to the business credit bureaus once the loan is repaid. While there are clearly many benefits to these types of loans, the down side is the potential to damage personal relationships if the terms of the loan are not kept. In order to avoid this, you should always make sure you have a written agreement or promissory note that includes all the terms that have been agreed upon. This way, if you default, the person you borrowed the money from can at least claim a bad debt deduction for the amount of the unpaid loan. Without a written agreement, the loan can be seen as a nondeductible gift which cannot be written off. Always consult a business professional before making these types of deductions (???)

Commercial Lending
There are many large financial institutions, such as Wells Fargo, Bank of America, and Chase, who regularly loan to large businesses and will consider lending to smaller businesses as well. In the past, this was not the case. Small businesses that needed to borrow less than $50,000 were often turned away by these types of lenders. However, with the growing interest in the small business market today, there are many more funding resources available.

Loans from the SBA
The Small Business Administration typically does not deal directly with small businesses. Instead, they encourage local community development organizations and smaller financial institutions to loan to small businesses by offering incentives through government guarantees and special financing.

Government Loans
Many local government agencies have developed special loan programs for small businesses, especially those located in economically underserved areas that will increase jobs in that area.

Angel Loans
On Broadway, the investors who back the theatrical shows are called angels. In the finance world, there are also the same types of individuals who agree to lend a small business money or invest in the equity of a company. Because they are willing to make loans that many formal financial institutions do not offer (i.e., loans of less than $5,000, etc.) they may charge higher interest rates than commercial lenders do. There are several websites that can help you to locate an angel, including vFinance Directory of Angel Investors (www.vfinance.com). You can also check to see if your angel is a member of the International Angel Investors Institute at http://angelinvestors.infopoint.com. There are also several groups of private investors including Investors' Circle (www.investorscircle.net) and Angel Capital (go to www.angelcapital.org and click on Angel Investor). These types of investors are typically more likely to lend to a small business than venture capital (VC) investors whose loans start at $500,000 or more.