Financial Case

Selective Sources of Debt Financing for Small Business with special reference to Real Estate Financing for purchase of properties for renting

Small Business Administration

The Small Business Administration is a government agency designed to support small businesses and assist entrepreneurs in getting their ideas off the ground. Working with banks and other lenders, the SBA provides loans which are government backed to people with new ideas. There is at least one SBA office in every state, as well as just under 1000 Small Business Development Centers around the nation. There are also over 100 Women’s Business Centers across the country, in addition to Service Corps of Retired Executives outposts. These centers provide mentoring as well as financial assistance and counseling to business owners.

Debt financing involves borrowing money from a lender through a contract that stipulates the full repayment of the amount in the future, typically adding on interest. Private sources of financing include financial institutions like banks, as well as private venture capital firms and individual investors. While banks are the most traditional and popular source of debt financing, there are different types of banks that specialize in specific types of debt financing. Commercial banks are fairly risk averse and are quite careful when entering into loan agreements, while Credit unions usually can offer more favorable interest rates and terms than commercial banks can.

In a special report to the President on the Small Business Economy, the economic conditions in 2009 that presented themselves to small businesses were highlighted, as well as the actions taken by the government to aid these businesses. The equity market was highlighted as showing improvements, but the IPO market for smaller businesses stayed stagnant. Interest in companies with under $25 million in assets waned, nearly causing these companies to disappear from IPO markets entirely.

Peer to Peer Lending

Peer to Peer lending has generated hundreds of billions of dollars in loans over the last few years, and has linked together countless businesses and borrowers. Prosper, a peer to peer platform for loans, boasts nearly 800,000 members and is responsible for almost $170 million in loans since 2006. Using a style akin to an auction, borrowers put up applications containing the terms and conditions of a loan and members of Prosper place bids on the contract until it is fully funded or expires. Through this type of bidding, Prosper allows their members to distribute their funds across a diverse swathe of loans, and high risk takers can earn over 30% interest on loans up to $5000. Due to the risk of these loans, however, there stands to be a large loss on their investments.

LendingClub is another peer to peer group. While similar