Rise in Small Business Loans Shine Spotlight on Need for Financial Education

With an uptick in entrepreneurism and healthy activity at local banks and credit unions for small business loans, a resurgence of lending to this segment is bringing back memories of the great problems caused by robust lending to financially illiterate corporate and individual borrowers. With banks and credit unions working with the U.S. Small Business Administration to secure loans at a vigorous pace, financial literacy proponents are sounding the alarms to ensure that financial literacy will not be a shortcoming among the borrowers.

Exacerbating the problem is the rapid growth of other alternative financing options for borrowers, such as peer-to-peer lending and credit from non-traditional lenders, since these sources of financing do not always provide sufficient disclosures and, when they do, those disclosures are not always well understood by less financially educated borrowers.

To underscore the growing demand for small business loans, the SBA announced that it had reached its $18.75 billion cap last July. With the limit raised by the U.S. Congress last August, results nationwide for the SBA’s 7(a) flagship loan program showed gains well over the figures reported for fiscal year 2014, with 63,000 loans totaling $23.6 billion. This represented a rise of 22 percent in the number of loans and 23 percent for total dollars.

The advice to borrowers promulgated by financial literacy professionals is to be cautious, to be aware, and to rad the fine print. Prior to entering into a loan agreement, borrowers should understand the terms and the risks. There is a wide range of resources available to loan seekers. For example, the SBA has partnerships with regional offices that regularly offer training courses in accounting software, business consulting and financial literacy themes such as budgeting and financial planning. By pursuing these available resources, borrowers can avoid the problems of the past and land themselves on the road to securing financing with a foundation of financial literacy that will serve them very well in the months and years ahead.

Additional information on the SBA and other small business lending programs can be found here.