In today’s financial climate banks have cash reserves available for lending to small businesses. But that does not necessarily mean a bank is willing to take 100 percent of the risk in a loan to a business. Regulatory agencies would not approve. Therefore, banks have tools available to reduce their risk when lending to businesses. Here are a few of the most popular examples:
The U.S. Small Business Administration 7(a) Loan Program is one of the most popular with banks. Depending on the size of the loan, the SBA will guarantee a portion of the loan that the bank makes to eligible borrowers. For example, if the bank loan is less than $150,000, the SBA may guarantee up to 85 percent of the loan amount. If the loan is over $150,000, then the SBA may guarantee up to 75 percent of the loan amount. The maximum bank loan amount for a SBA 7(a) loan guaranty is $5 million ($3.75 million SBA loan guaranty).
The SBA 7(a) Loan Program reduces a bank’s risk in lending to an eligible borrower. For example, if a bank commits to lend $300,000 to a business, the SBA may guarantee up to $225,000 of this loan amount. This leaves $75,000 in lending “risk” to the bank. I say “risk” because the bank will typically have collateral in the form of real estate, machinery and equipment and inventory, among other items, to secure its loan. [Read more...]