Guide to Business Loans for Small Business Owner

Business loans are a great source of financing for small business owners who require additional capital to launch, grow or manage their business. A business loan is money that you borrow and then agree to pay back over time, generally with interest. There are several categories of business loans, and they all serve a different purpose. For example, term loans provide a lump sum that you gradually pay back, and SBA loans have the backing of the U.S. Small Business Administration and generally come with lower interest rates.

Like a credit card, a business line of credit enables you to borrow money when you need it, and you pay interest only on what you use. Invoice financing involves getting paid in advance for outstanding invoices, which can also be useful if you’re waiting for a customer to pay you. It is using an equipment loan to purchase the equipment, which is collateralized by the equipment.

What is a Business Loan?

A business loan is a loan borrowed from a lender like a bank, credit union, or online lender that can be used for various aspects of your business operations. Like personal loans, only personal loans are tied to your individual creditworthiness, and business loans are for business purposes at the same time as built to be secured against the success and your credit profile of the business itself.

Interest for business loans are commonly fixed, or variable, with a fixed repayment period that may be anywhere from a few months to several years. The terms and approval processes for business loans can vary greatly depending on when you establish business credit, the amount you’re borrowing and the purpose of the loan.

Why Do Small Businesses Need Loans?

There are many reasons why small businesses require loans. One explanation is cash flow management. Businesses sometimes have cash flow challenges caused by slow payments or unexpected expenses. A loan can help fill in these gaps. Businesses require loans for expansion as well. With the growth of the business, the need for further space, equipment, or additional staff arises. These loans can materialize the money that you need for growth. Loans are also used when purchasing equipment or inventory.

Most businesses require new tools or products to operate efficiently. This can be covered with a loan and doesn’t consume all your cash. Marketing and advertising attract customers to businesses. Marketing can cost a lot of money though. Ads and promotions can be paid with a loan. Loans for Debt Consolidation Some businesses use loans for debt consolidation. If a business is in a lot of debt, loan can consolidate them under one simple payment. Which saves money and reduces stress. So, essentially, small businesses borrow money for cash flow, growth, equipment purchases, business marketing, and debt management. Loans help them succeed.

Types of Business Loans

Business loans come in various types, depending on what you need. Let’s look at the most popular options:

Term Loans

A term loan is the most traditional kind of business loan. When you take out a term loan, you receive a lump sum right away and agree to pay it back with interest over a set amount of time. Loans can be for the short-term (less than one year) or long-term (one year or more). They can be applied to nearly any business costs, from equipment purchases to expansion plans.

SBA Loans

The U.S. Small Business Administration (SBA) specializes in government-backed loans for small businesses. These loans generally have more favorable interest rates and repayment terms than other loan types. Applying for a credit card might be time-consuming but it is relatively easier, and the approval criteria are more relaxed. SBA loans are commonly used for long-term investments, working capital, or real estate acquisitions.

Lines of Credit

A business line of credit functions like a credit card. You’re assigned a credit limit, and you can withdraw up to that limit when necessary. The only amount you are charged interest on is the amount you borrow and funds are generally available on a revolving basis. This choice works well for companies needing flexibility for short-term financing, such as buying inventor funding cash flow.

Invoice Financing

Invoice financing is a way for businesses to get advance payments against unpaid invoices. If your company is waiting for customers to pay invoices but needs cash today, invoice financing can come to the rescue. The lender gives a fraction of the invoice amount and collects the amount from the customer. This option is especially helpful for companies that are waiting on clients to pay.

Equipment Financing

Equipment financing can help, especially if you need your business to buy equipment, machinery, or vehicles. The equipment serves as collateral for the loan with this type. The lender retains the equipment’s title until the debt is settled. You can apply for a loan; it is indeed easier to qualify for equipment financing compared to other kinds of loans since the equipment works as security.

Merchant Cash Advances

A merchant cash advance (MCA) can be an easy way to get your business the capital it needs, and especially well-suited if your business has steady credit card sales. With an MCA, a financial institution gives you a lump sum of cash upfront while taking a portion of your daily credit card sales. MCAs provide quick access to cash, but they are more expensive than other options due to higher interest rates and fees.

Microloans

Microloans are small loans made to either startups or businesses that require small amounts of capital. Such loans are typically given by nonprofit organizations or government programs. They work best for small businesses that require a relatively small amount of money to cover startup expenses like marketing, supplies or equipment.

How to Qualify for a Business Loan

It can be difficult to qualify for a business loan. Lenders want to make sure your business is left to a strong start. They evaluate various factors before granting a loan. Your credit score matters. A higher score translates to better loan terms and lower interest rates. Some lenders review both your personal and business credit scores.

Lenders take your time in business into account as well. Many are more comfortable with businesses that have 1-2 years of experience. If your company is a start-up, you may want different types of loans, such as microloans or SBA loans. They also do a revenue check on you. They want to know that your business is generating enough revenue. They have their own minimum revenue requirements.

Conclusion

Small business owners who require additional financing to expand their business or cover operations may benefit from using a business loan. There are a variety of different reasons you might need to apply for a business loan, such as for an expansion, to purchase inventory, or to help manage the cash flow of your business, a business loan can provide you with the required capital in order to do so. But remember, borrowing money comes with responsibilities. The right type of loan, along with responsible borrowing and smart usage of the funds, means you can achieve your business objectives without compromising your financial security.

Learn about the different types of business loans so you can pick which is best for you. For instance, a term loan is ideal for long-term investments whereas you can use a line of credit for short-term cash flow challenges. And each type of loan has its own terms, like interest rates, repayment schedules and fees, so you want to shop around before you commit.