April is National Financial Capability Month

According to the findings of a 2014 Intuit study, more than 40 percent of U.S. small businesses consider themselves financially illiterate. Yet, 81 percent handle their business’ finances. April is National Financial Capability Month, so now is a great time for small businesses and aspiring entrepreneurs to brush up on their financial literacy skills.

Whether you are a seasoned small business owner, a new small business owner or have dreams to be a future small business owner, it is inevitable that you will at some point have to deal with securing the capital to fund and/or expand your business venture.

There are several financing options to explore when funding a small business such as loans, grants, venture capital, angel investors and crowd funding, but most small businesses rely on lenders to obtain the capital needed to open a business or to finance capital improvements.

In addition to traditional bank loans, SBA has a variety of business loan programs you may want to consider. Regardless of the type of small business loan, there are several key factorsthat impact a lender’s decision — one being collateral.

Financial institutions approve small business loans with one goal — ensuring the initial funds will be recovered. In order to ensure repayment, lenders typically require a guarantee in the form of collateral. Collateral includes personal and business assets that can be sold in the event of defaulting to repay the initial loan.

An SBA loan guarantee is the amount of the loan that SBA will repay if borrowers default on loan payments. To qualify for an SBA-backed loan, all owners with a 20 percent stake or more must personally guarantee up to the full amount of the loan. The approximate values of collateral types are not based on market prices, but rather a percentage of the market value.

Can you qualify for an SBA guaranteed loan without putting up personal collateral?

Yes. If the forms of business collateral are equal to 100 percent of the loan, as a borrower, you won’t have to pledge personal assets. But often, the principal borrowers will need to put up worthwhile personal assets such as real estate. Keep in mind though that approval for an SBA guaranteed loan is not denied solely due to a lack of collateral — you may be approved based on other qualifying credit factors.

While some potential borrowers may be reluctant to pledge personal assets as collateral ­— and there is always an element of risk in any business venture — with more financial knowledge and skills, you’ll improve your chances of making a financially sound decision.

Are you part of the 69 percent of small business owners who have never accepted a loan for their small business? Check out this brief introduction to SBA Loan Guaranty programs and the steps involved in preparing your loan package.

And don’t forget that you can reach out to SBA’s local resources to get in-person help. SCORE, Small Business Development Centers (SBDCs) and Women's Business Centers(WBCs), for example, provide financial packaging and lending assistance to entrepreneurs across the country. Find an office nearby by visiting SBA’s local resources page. 

Another resource is the Money Smart for Small Business curriculum. This curriculum is designed to provide the most essential information on running a small business from a financial standpoint.

 by Bryn Kline