Small Business Financing in Rhode Island can be confusing for many small business owners. Small Business financing refers to third party equity that a company can obtain in order to finance operations and growth. The equity is used as a means of raising funds. Equity is also often used as a way to reduce the financial risk of lending to a company. This type of funding is typically referred to as venture capital or private equity. Here are several sources of small business financing in Rhode Island.
Most local banks in Rhode Island have both community and credit unions in their lending programs. A common practice among these banks is to offer referral fees to these non-bank lenders. Referral fees are charged for cash loans based on the referral fee paid to the community capital bank. The terms and conditions of these loans are generally more restrictive than those of a traditional loan. This is due to the fact that these small business lending programs are not available through standard banks. Referral fees are collected from borrowers to help defray the cost of providing this type of financing to small businesses.
A start-up loan is provided to a company that is undergoing operations. This type of financing is considered a high risk venture by financial institutions and therefore most lenders will not provide start-up loans to new companies. The start-up loan amount is relatively low compared to the cost of doing business and therefore this option is not usually available to long term companies. Usually the start-up loan amount is around $100,000 or less.
Commercial loans are usually required for start-ups. Interest rates and terms for these types of loans are often very competitive. Commercial loans are available from commercial banks and many of the lenders also offer financing through the Internet. Typically, commercial loans are for start-ups of two to ten years’ duration and a repayment schedule of around five to eight years.
There are several different types of financing options for small businesses including fixed-rate and variable-rate term loans. Fixed-rate term loans are made based on a specific rate throughout the life of the loan. The term length is typically one to five years. These types of financing have higher borrowing limits than shorter-term loans.
Variable-rate term loans are available from commercial banks and many lending companies. These loans have flexible borrowing limits and the rate can vary over time. During the initial period of time, these loans carry a lower rate of interest than other financing sources but after this period, the rates begin to increase. This type of financing is good for small businesses that need additional funds to stay in business.
Private investors and venture capitalists are another source of funding for small businesses. In some cases, venture capitalists require a certain level of collateral before providing any capital to a company. Collateral may be a percentage of the equity of the business or an actual tangible asset such as a home. Depending upon the type of financing received, the repayment terms are generally long-term and allow time for a company to generate cash flow.
Receiving a small business loan program through a traditional bank may not be an option for some business owners due to the high cost of obtaining a business loan. Business owners may qualify for small business financing programs from alternative lenders. These lenders specialize in providing cash advance and credit card financing programs. For small business owners that are unable to obtain traditional financing from traditional banks, there are alternative financing programs from private lenders that may be a better fit.