SBA financing sources
 

 

There are four things that any borrower needs to understand when seeking funding through an SBA loan, or any loan at all. You must understand the principal/interest terms, the collateral terms, how the prime rate affects the loan, and how your credit rating factors into the calculation.

'Principal' is a fancy term to describe the amount of money you borrow. This is the total amount that enters your pockets, and forms the basis of what you eventually have to pay off. Usually it is repaid on a month-to-month basis, although some loans require yearly repayments or even one single payment at the end. The interest rate can be thought of as the "cost" of borrowing. The higher this percentage, the more you will pay for a given period of time. This rate is multiplied against whatever amount of money you owe to create an interest payment.

Collateral is something that you offer the lender as security. They need collateral, because otherwise there would be no economic penalty for not repaying the loan. When you offer something as collateral, the bank will have the right to possess that asset if you can't repay them. It's very important to check and understand what a lender's collateral requirements are, to see if you can meet them and if they are acceptable to you.

The "Prime Rate" is a special rate of interest-it is an index of the rates of 30 of the nation's largest banks. These banks generally act in unison when raising or lowering rates. The prime rate forms the basis for Small Business Administration loans. For example, a particular type of SBA loan might have an interest rate of "prime plus 2.75%." If the prime rate is 3%, that loan's rate would be 5.75%.

Lastly, it's important to understand credit rating. The way you have handled money, loans, and debt in the past is thought to be an indicator of how you will do so in the future. Banks looks at your credit score to determine how safe of a borrower you will be. If you have a low credit score, you should focus on paying down your existing debt, by making your payments on time. You can get rid of the debt faster if you make more than the minimum payment.

Growthink recently released a report for entrepreneurs entitled "The Step-by-Step Guide to Raising Capital from Banks and SBA Lenders." For more information on how to get a small business loan, visit http://www.growthink.com/products/loanguide.

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