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Seeking business financing

Business financing for small businesses in Minnesota comes from many sources and is governed by many laws. Government programs, banks, commercial finance companies and savings and loans are the usual debt financing sources. Banks are usually the primary source for small business financing. They often act as a short-term lender, offering lines of credit, demand loans and single purpose loans to finance equipment and operations.

Lenders usually require that borrowers provide personal guarantees against default to ensure that the borrower has a serious personal stake in the success of the commercial venture. Lenders traditionally have preference for financing manufacturing or industrial operations where the funds purchase fixed assets that can be used as collateral for securing the loan.

Because banks hesitate to offer long-term loans to small firms, the U.S. Small Business Administration guaranteed lending program induces banks to provide this financing by reducing the risks to banks and leveraging available funds.

Private lenders and government programs normally require that the owner have a substantial equity stake in the business. However, the required percent of equity depends on the project, the owners' financial resources and the lender's general policies.

Regardless of the financing source, debt financing instruments contain rules governing how the borrower can use the funds and conduct business until the loan is repaid. These covenants allow the lender to monitor the loan and assure its repayment. These rules also assure that there is statutory and regulatory compliance from the lenders.

Compliance with lending covenants and applicable laws helps assure successful business expansion and start-ups.

Source: Minnesota Department of Employment and Economic Development, "Business Loans Basics," Accessed on Feb. 7, 2015

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