3 themselves. It is advisable to compare loan packages from
BUSINESS FINANCING DC DOING BUSINESS GUIDE 2018/2019 45
more than one lender before deciding. The SBA offers a
wealth of information to businesses, including various
financing options. For more information visit
sba.gov/funding-programs.
SHORT-TERM LOANS
Short-term loans must be repaid within a year and are
typically used to finance seasonal build-up of inventory or
accounts receivable.
LINE OF CREDIT—A line of credit is a specific amount of money
that has been approved and set aside by the bank for business
owners to draw upon as needed. Interest is charged only
on the amount of the line that is used. However, banks may
charge a commitment fee of 0.5–1 percent of the total line
for reserving these funds. Lines of credit are used mostly for
construction projects and working capital.
TIME LOANS—There are no installment payments with time
loans. Instead, the entire amount of the loan plus interest
is paid back at one time. This type of loan is often used to
finance a temporary increase in inventory.
LONG-TERM LOANS
With terms of one year and longer, these loans are typically
used to finance permanent assets such as core level of
inventory, the expansion of a business, machinery and
equipment or construction of a new building.
TERM LOANS—These loans are usually repaid within five
years in equal installments of principal plus interest on
the outstanding amount of the loan. As the outstanding
principal is reduced, the amount of the total installment
payments will go down over the life of the loan.
REVOLVING LINE OF CREDIT—A revolving line of credit
differs from other lines of credit because it does not require
an annual payoff. Reviewed and renewed by the bank on a
yearly basis, revolving lines are similar to credit cards with
pre-set spending limits. The amount of available funds
drops by the amount of money withdrawn and increases
as the funds are repaid in monthly installments of interest
plus principal.
ACCOUNTS RECEIVABLE—An accounts receivable loan is
based on the payment history of your customers. This
type of loan is often used for government contracts and
subcontracts. Banks will either write separate loans or set
aside funds for your use in an amount usually equal to
75–100 percent of all accounts receivable invoices that
are less than 90 days old (depending on the customer).
Typically, a government contract is more reliable than one
from the private sector, so the size and length of the loan
changes accordingly. Available money is drawn as needed
and paid as customers make payments. Interest is charged
only on the outstanding portion of the loan.
COMMERCIAL AND INDUSTRIAL MORTGAGES—These are
typically used to finance the purchase of real property
or a major expansion of the business. Depending on
the property, most banks will finance up to 75 percent
of the property’s appraised value or construction cost
in the form of a mortgage. However, commercial loans
are generally offered for 10 years or less. The monthly
installment payments may be reduced by basing the
payments on an amortization period that is longer than
the life of the loan. With this loan structure, when the
loan is due, the outstanding principal and interest is paid
off with a lump sum “balloon payment.”
PERSONAL LOANS—Owners of a startup or new business
can take out long-term personal loans from a bank. Because
there is no existing track record to evaluate, a banker may
base the loan on personal assets and borrowing record.
MICROLOANS—Microloans (from $500–$50,000) are also
a good source of financing. Nontraditional lenders with
less stringent financial guidelines than banks usually
offer microloans. They can be used for working capital,
machinery, inventory, and leasehold improvements.
U.S. SMALL BUSINESS
ADMINISTRATION (SBA)
LOAN PROGRAMS
The SBA offers a variety of loan programs that many small
businesses use for very specific purposes. While the SBA
does not make direct loans to small businesses, they do
set the guidelines for loans, which are then made by its
partners (lenders, community development organizations,
and microlending institutions). The SBA guarantees
that these loans will be repaid, thus eliminating some of
the risk to the lending partners. Consequently, when a
business applies for an SBA loan, it is actually applying
for a commercial loan, structured according to SBA
requirements with an SBA guaranty.
/funding-programs