Entrepreneurship, Second Edition

11.10. Traditional Bank Lending: Short-Term Bank Loans

After an entrepreneur has fully used her trade credit and collected her receivables as quickly as competitively possible, she may turn to a bank for a short-term loan. The most common bank loan is a short-term, unsecured loan made for 90 days. Standard variations include loans made for periods of 30 days to a year and loans requiring collateral. Interest charges on these loans typically vary from the prime rate (the amount a bank charges its largest and financially strongest customers) to about 3% above prime.

Commercial banks are the most important suppliers of debt capital to small firms, supplying more than 80% of lending in the credit line market and more than 50% in other markets, such as commercial mortgages and vehicle, equipment, and other loans.

In July 2008, the Federal Financial Institutions Examination Council (FFIEC) released 2007 data regarding the loan originations by 998 commercial banks and savings institutions to over 13.5 million small businesses. According to these data (which are estimated to represent approximately 96% of all small business loan transactions and 94% of all business loans by dollar amount), outstanding small business loans owed to commercial banks and other savings institutions amounted to approximately $329 billion.^[] As of June 2007, very large banks with assets of at least $10 billion dominated the micro business loan (under $100,000) market. These banks wrote 66% of the loans and accounted ...