Explore what are business loan purposes in fields of growth and stability. Learn practical tips to maximize your investment wisely. Read more now!
What is a Business Loan?
A business loan is money that a business borrows from a lender, such as a bank or other financial institution, to help it grow or cover costs. When a company needs money but doesn’t want to sell part of its ownership, it can choose a business loan. This means the company keeps control of its own and other business loans too.
When taking a business loan, it’s important to understand how much the loan will cost, how long it will take to pay back, and if there are any specific rules or conditions. Business loans often require the company to provide information about its business finances beforehand, like bank statements or a business plan. Some loans may also require the business owner to promise to pay back the loan personally if the business can’t.
- Fastest funding 1 business day
- Min. time in business 6 months
- Term lengths Up to 60 months
4.8
- Loan amount Up to $500,000
- Min. time in business 6 months
- Min. annual revenue $250,000
4.8
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
Types of Small Business Loans
There are many different types of business loans. Small business loans are designed to meet the specific funding needs of small businesses, offering various options based on the business’s requirements. Here are some popular ones:
Term Loans: This is a common type of loan where a business borrows a fixed amount and pays it back over time, usually with monthly payments. It’s good for both new businesses and companies that have been around for a while.
Lines of Credit: A line of credit allows the business to take out money as needed, up to a certain limit, and pay it back with interest only on the amount borrowed. This is similar to a credit card but is usually used for bigger purchases than a regular credit card can handle.
Merchant Cash Advances: This is a short-term loan that online lenders often provide. It is generally fast to get but can have higher costs. It’s mainly used by businesses that need cash quickly and have a lot of credit card sales.
Invoice Factoring and Invoice Financing: These are loans based on a business’s unpaid invoices. This means that the business can get a loan amount of money by using the amount customers owe it as a guarantee for a loan.
SBA Loans: SBA loans are loans backed by the U.S. Small Business Administration. Because the SBA guarantees part of the loan, it’s easier for small businesses to qualify for these loans, and they are known for having favorable terms.
Microloans: These loans are for new or smaller businesses that might not be able to get other types of loans. Microloans have relaxed requirements, meaning they’re easier to qualify for if the business is just starting out.
Equipment Financing: This is a loan specifically for buying equipment a business needs. It can be used for many types of equipment, like computers, cash registers, or even big machinery.
Commercial Real Estate Loans: If a business wants to buy property, like a store or office, it can use a a commercial mortgage or real estate loan. This is similar to a mortgage but specifically for business properties.
How Business Loans Work
A business loan provides money that a business can use for many purposes, like covering daily costs, expanding the existing business itself, or buying new equipment. A business line of credit is another financing option that provides flexibility, allowing businesses to borrow, repay, and borrow again as needed, which is useful for managing cash flow and covering expenses. The amount a business can borrow, the interest rate (the extra money they pay to the lender), and the time to pay it back all depend on the type of loan and the lender’s rules.
Business loans can either be secured or unsecured:
- Secured Loans: These require collateral, something valuable (like property or equipment) that the lender can take if the loan isn’t repaid.
- Unsecured Loans: These do not require collateral, but they may have higher interest rates since they’re riskier for lenders.
Each lender will have different, loan terms though, and it’s essential for businesses to pick the loan that best fits their needs and repayment abilities.
- Fastest funding 1 business day
- Min. time in business 6 months
- Term lengths Up to 60 months
4.8
- Loan amount Up to $500,000
- Min. time in business 6 months
- Min. annual revenue $250,000
4.8
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
Business Loan Application and Approval Process
To apply for a business loan, the business must provide certain documents and information, like:
- Financial Statements: These show the business’s income and expenses to help the lender understand its financial health.
- Business Plan: This document explains the business’s goals and how it plans to make money.
- Personal Credit Score: This score reflects the credit history of the person running the business. Some lenders use this to see if the business owner is trustworthy with money.
Other documents, like bank statements and business licenses, may also be required. Sometimes, the lender will ask for a personal guarantee, meaning a personal guarantees that the business owner will be personally responsible for the loan if the business can’t pay it back.
Common Uses for Business Loans
Businesses use loans for financial resources for many reasons, including:
Buying Equipment: Businesses often get equipment loans or need tools or machines to do their work, and a loan can help buy these items.
Stocking Inventory: Businesses might need extra cash to buy goods to sell, especially if they expect a busy season.
Managing Cash Flow: Cash flow is the money coming in and going out of a business. Loans help businesses cover business expenses during slow periods when less money is coming in.
These loans are particularly crucial for small business owners, providing the necessary working capital used to navigate cash flow challenges and support business growth.
It’s important to note that a business loan must only be used for business needs, not for personal loans for items like a family car or home.
Business Loans vs. Alternative Financing Options
A business loan is one way for companies to borrow money, but there are other choices too:
- Crowdfunding: This is when a business raises money from a large number of people, usually online. Each person gives a small amount, which adds up to a big amount for the business.
- Invoice Financing: As mentioned, this lets businesses borrow money based on their unpaid invoices. It’s a way to get cash quickly without a traditional loan.
These options can be helpful, especially for small businesses that don’t qualify for a traditional business loan.
Factors Considered for a Business Loan
Lenders look at several things before approving a loan, such as:
- Credit History: Lenders check the business’s credit record to see if it has paid past loans on time.
- Financial Statements: These documents show the business’s income, debts, and how well it’s doing financially.
- Industry Type: Certain industries are riskier for lenders, so they may have different terms for businesses in those industries.
Some loans are backed by the SBA, which provides a guarantee to the lender. This reduces the risk for the lender and makes it easier for small businesses to get approved.
Managing Business Loan Debt
When a business takes out a loan, it’s essential to make payments on time. If payments are missed, there are usually fees, and the lender may take the collateral if it’s a secured loan. Managing loan debt responsibly is key to keeping the business running smoothly.
Businesses should make a repayment plan for conventional loans and stick to it. Paying interest adds to the cost of the loan, so businesses should calculate the total cost to make sure they can afford it.
Business Loan Fees and Regulations
Taking a business loan from online lender often involves several fees, such as:
- Origination Fees: A fee charged for setting up the loan.
- Late Payment Fees: A fee for missing a payment deadline.
- Interest Rates: The extra percentage paid on the loan over time.
Business loans also follow certain rules to protect both the lender and the borrower. For example, the Truth in Lending Act requires lenders to be clear about the cost of the loan so businesses understand what they’re agreeing to. The the SBA loan, also has specific guidelines for its loans to ensure they’re fair and accessible.
Business Loans vs. Alternative Financing Options
When it comes to financing a business, entrepreneurs have a variety of options to choose from. While business loans are a popular choice, they may not be the best fit for every business. In this section, we’ll explore the differences between business loans and alternative financing options.
Business loans are a type of debt financing that provides businesses with a lump sum of money that must be repaid with interest. They can be secured or an unsecured loan, and the interest rates and repayment terms vary depending on the lender and the borrower’s creditworthiness.
Alternative financing options, on the other hand, include crowdfunding, invoice financing, personal finance, and merchant cash advances. These options provide businesses with access to capital without the need for a traditional loan.
Crowdfunding platforms, such as Kickstarter and Indiegogo, allow businesses to raise funds from a large number of people, typically in exchange for rewards or equity. Invoice financing, also known as factoring, involves selling outstanding invoices to a third-party company, which then collects payment from the customers. Merchant cash advances provide businesses with a lump sum of money in exchange for a percentage of their daily credit card sales.
When deciding between a business loan and an alternative financing option, businesses should consider their financial situation, creditworthiness, and funding needs. Business loans may be a better option for businesses that need a large amount of capital and have a good credit history. Alternative financing options, on the other hand, may be more suitable for businesses that need quick access to capital and have a limited credit history.
Factors Considered for a Business Loan
When applying for a business loan, lenders consider a variety of factors to determine the borrower’s creditworthiness. These factors include:
- Credit Score: A good credit score indicates a business’s ability to repay debts on time. Lenders typically require a minimum credit score of 600 to 650.
- Cash Flow: A business’s cash flow is essential to repay loans. Lenders review bank statements and financial reports to assess a business’s cash flow.
- Collateral: Collateral, such as property or equipment, can be used to secure a loan. Lenders prefer collateral that can be easily sold or liquidated.
- Business Experience: Lenders prefer borrowers with experience in their industry. A business plan and financial projections can demonstrate a borrower’s expertise.
- Industry and Market Conditions: Lenders consider the industry and market conditions to assess the business’s potential for growth and repayment.
By understanding these factors, businesses can prepare themselves for the loan application process and increase their chances of approval.
Managing Business Loan Debt
Managing business loan debt is crucial to avoid default on loan repayment and maintain a good credit score. Here are some tips to help businesses manage their loan debt:
- Create a Budget: Businesses should create a budget that includes loan repayments, interest, and other expenses.
- Prioritize Loan Repayments: Loan repayments should be prioritized over other expenses to avoid late fees and penalties.
- Communicate with Lenders: Businesses should communicate with lenders if they’re experiencing financial difficulties. Lenders may offer temporary payment deferments or interest rate reductions.
- Consider Refinancing: Businesses can refinance their loans to lower their interest rates or extend their repayment terms.
- Monitor Credit Reports: Businesses should monitor their credit reports to ensure they’re accurate and up-to-date.
By following these tips, businesses can manage their loan debt effectively and maintain a good credit score.
