Being a small business owner is not easy. Apart from the
problems that the small business owners have to face in operating business, the
severest of problems is in raising capital. It is not easy to raise capital for
business use particularly in an environment in which small business owners are
accorded a status similar to borrowers with bad credit. Self employment is
considered a bad credit case because of the unstable income generation through
small business. It is said how a small business owner will pay fixed
installments on a loan if he has not made much income (profits) in a particular
month. Banks and financial institutions are thus not receptive to the demands
of the small business owners.
However, a loan can be designed particularly suited to the
small business owners. Few lenders, who did not want to lose on the opportunity
of lending to the rising group of small business owners, devised such loan. It
is known as small business loan. Small business loans are advanced to small
entrepreneurs who invest it in a series of purposes like expansion of their
facility, buying technology, purchasing new tools and equipment, and also to
buy raw materials and pay wages to workers.
Lenders advance small business loans on the principle of
moderate risk, which is no different from lending any other loan. The principle
of moderate risk implies lending by keeping sufficient cover against risks.
Therefore, while designing the terms of the small business loans, lenders are
often seen to be using this principle. Take for instance, the rate of interest.
The rate of interest charged on small business loans is higher than the normal.
Similarly, lenders will only lend a limited sum on small business loans. These
are sufficient proof of the manner in which lenders prepare for any risk that
may emerge in the future.
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