The Small Business Interest Rate Trap
By: Brent Finlay
[Nov 30, 2007] Many owners and managers struggle to get the small business financing necessary to operate and grow.
And while most people would universally agree that lower cost debt is better than higher cost debt, both end up having their place and purpose.
Low cost debt financing is reserved for low risk applications.
As the risk goes up, so does the cost of borrowing.
Pretty basic, right?
There is a twist however.
Most of the lower cost capital available for small business financing is based on personal net worth, personal credit, and income sources outside of the business.
So even though a business application of financing could be considered high risk, the business owner or manager may still be able to secure low interest rates based on their personal assets and income.
This creates the illusion that low interest rates are available for all small business applications, regardless of their size and relative risk.
Finance