Understanding the Small Business

Let us first understand what actually a small business. Most of the people think that the small business is that business which is carried on at a very small size. Though it is not altogether incorrect, but it is not the right concept also. The business is categorized as the small business on the basis of the need for finance and the total turnover that it gives at the end of year. As far as the turnover is considered, it varies from one country to another. The various

lending institutions in each country have their own criteria for deciding whether the business is small or not. Whatever the criteria are, it is sure that the small businesses also need finance for the different types of activities. Let us discuss it in our next part of discussion.

Need of Finance for the Small Business

The finance is known as the lifeline of any business activity and it is true in the case of small business also. Let us discuss the different needs and the availability of the type of business finance for the small business.

Working capital requirements: The finance is required for fulfilling the working capital needs of the small business. The working capital gap is arrived at by taking out the different between the current assets and the current liabilities. As we all know, the payments have to be made to different suppliers etc of the business and the payments are received from the different customers of the business. There is always a gap between these two and it is what is known as the working capital gap. The need for finance is felt for the purchase of inventory etc. The working capital finance is provided by almost all the financial institutions that provide the financial assistance to the business.The finance is known by different names like the cash credit facility, the revolving credit etc. In this type of financial assistance, the financial institution

like the banks etc provides its customers a limit up to which it can easily withdraw cash and deposit the proceeds also. The interest is charged on the outstanding balance in the account. This type of facility is provided against the hypothecation of the inventory as well as the receivables. It is to be noted here that this type of facility is indeed one of the most common form of finance that is available for the small businesses and sought by the maximum number of small business units.

Term loan: The next type of financial assistance that is available to the small business enterprises is the term loan. The term loan is given for the purpose of acquiring the fixed assets like the land, machinery etc. This type of loan is generally available at fixed rate of interest and is payable up to a maximum of 15 years generally, though some institutions also provide term loans for the period of 20 years. It is also to be noted here that this facility is secured one i.e. it is available the security that is provided by the customer.

If one wishes to compare the rate of interest of the two above-mentioned facilities, it can be easily said that the working capital finance is available at a higher rate of interest as compared to the term loans. The difference between the two lies in the fact that the tangible security is provided by the borrower in the case of term loans.