What Is Credit in Economics?: Definition, Role & SBA Loans

wallet cash and credit card image by Warren Millar from <a href='http://www.fotolia.com'>Fotolia.com</a>

If you believe that "neither a borrower nor a lender be" is a good maxim, then you're probably underestimating your role in your local economy. Borrowing and lending money is a fundamental part of the economy. At a local level, it increases spending, which increases sales, which increases income levels. At a national level, this all increases productivity and the gross domestic product.

TL;DR (Too Long; Didn't Read)

The credit definition in economics is any agreement where one party borrows money from a second party with the promise to pay the amount back with interest. Credit ranges from consumer loans and credit cards to corporate bonds.

Credit and Its Role in the Economy

Imagine for a moment how the world would change if credit was suddenly illegal. If you wanted to go to college or even buy some groceries, you would be limited to what's currently in your savings account (which, by the way, no longer pays interest). Depending on what you earn, it could take you a year to save for a new television and several years to afford a good car.

Without credit, fewer people would be buying new products, and manufacturers would have to scale back production. Workers would be unemployed, and stores would have to close their doors. Without mass production, costs would rise, putting prices even farther from consumers' reach.

With reduced income levels, tax revenue would plummet, infrastructure would collapse and hospitals would close. Without student loans, there would be few health professionals to staff those hospitals anyway. Society would become agrarian-based, and life would be much like it was in the Middle Ages.

Business Credit and the Economy

If you have a great business idea or see an opportunity to expand your existing business, you have an opportunity to have a tremendous impact on your local economy and to a lesser extent the national economy as well. For most growing businesses, this will involve credit.

Not only will the money you borrow help your future customers with better products and services but it will likely create jobs, thereby raising the standard of living for local families. In fact, if you do see an opportunity to grow your business with a loan, one could say it's your duty to seize that opportunity not just for yourself but for everyone else it will benefit as well.

Loans for Small Businesses

When a large corporation wants to raise money, it has a range of options, like borrowing from a lender, issuing bonds or issuing shares in the company. With small businesses, the choices aren't as numerous.

The internet is crowded with stories about entrepreneurs who funded their businesses by maxing out their credit card. As heroic as this may sound, credit card interest rates are always high, making this far from the wisest course of action if you have other options.

Aside from loans from friends and family, bank loans are usually the best option for small businesses requiring capital. The U.S. Small Business Administration will even sweeten the deal for both you and the bank by guaranteeing up to 85% of the amount you borrow for loans up to $150,000 and 75% for small business loans above $150,000.

SBA Loan Rates

SBA 7(a) loans can be for any amount up to $5 million. In 2015, the average loan was about $374,000. In addition to its government-backed guarantee to the banks that most of the loan will always be repaid, SBA 7(a) loans guarantee small business owners low interest rates. Interest rates have a threshold based on the prime interest rate.

In 2019, SBA 7(a) loan interest rates with a prime rate of 5.25% were:

  • $25,000 or less: 9.50% to 10.00%
  • $25,001 to $50,000: 8.50% to 9.00%
  • $50,000 and higher: 7.50% to 8.00%

Interest rates will be slightly higher if you don't plan to repay it within seven years. To apply for an SBA loan, contact one of the approved lenders on the SBA website and fill out an SBA 7(a) loan application.

References

About the Author

A published author, David Weedmark has advised businesses on technology, media and marketing for more than 20 years and used to teach computer science at Algonquin College. He is currently the owner of Mad Hat Labs, a web design and media consultancy business. David has written hundreds of articles for newspapers, magazines and websites including American Express, Samsung, Re/Max and the New York Times' About.com.

Photo Credits

  • wallet cash and credit card image by Warren Millar from Fotolia.com