What role do commercial banks play in providing debt financing to small businesses?

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kapokkid | High School Teacher | (Level 1) Educator Emeritus

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One of the major, if not the major, way that commercial banks support small businesses is through financing as most small businesses rely on credit available to them in order to operate on a daily basis.  This functional capital is often provided as a line of credit that is unsecured, or not connected to a physical asset or particular collateral.

Another type of loan that commercial banks may extend to small businesses is one that is connected to collateral whether it is the actual physical plant connected to the business whether it is a building or a piece of equipment.  This type of loan is usually longer in term than the line of credit which can be very short term or simply something that is available and requiring minimum payments on any balance over a certain period of time.

A commercial bank will usually require very specific and exhaustive documentation to provide debt financing without collateral as they want to be sure they can count on the loan being repaid and so an adequate business plan or outline of future profit streams, etc., is vital in an application for this type of financing.