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Questions You Always Wanted to Know on Small Business Loans
You want your small business to thrive, but it takes money to make money. Instead of dipping into your personal savings to fund your business dream — or worse, asking friends and family for financial contributions — you should take advantage of readily available small business loans. If the prospect of taking on business debt is frightening to you, you might not know enough about small business loans to make a sound decision. Here is a guide to small business loan basics, so you can start making bigger and better business moves to drive success.
What is a Small Business Loan?
Despite being such a fundamental question, “What are small business loans” is a common concern amongst relatively new and inexperienced business leaders. Put simply, small business loans are financial tools that allow businesses to acquire specific types of funding if and when they need it. There are many different types of small business loans, and each loan functions in a slightly different way to give business owners and leaders acute control over their company finances.
There are more than a dozen different kinds of small business loans. They include:
Term loans, which are the typical business loan product, in which borrowers receive a certain amount to be repaid with interest over the coming years.
SBA loans, which are guaranteed by the U.S. Small Business Administration (SBA), making them accessible and affordable thought relatively slow to acquire.
Short-term loans, which are relatively small loans obtained quickly and repaid in under three years.
Microloans, which are term loans with small loan amounts. Often, microloans have other favorable terms, like low interest rates and long repayment terms because they are available specifically to business owners disadvantaged in some way.
Startup loans, which are available only to brand-new businesses with no credit rating.
Business lines of credit, which are flexible loans that allow borrowers to draw money as they need it and repay only what they owe. Usually, lines of credit have tight restrictions on use, unlike credit cards.
Invoice financing, which is using invoices as collateral for a cash advance. This is notably different from invoice factoring, which is selling outstanding invoices to a third party.
Working capital loans, which are short-term loans used specifically to cover the costs of day-to-day operations.
Merchant cash advances, which are loans backed by the promise of future revenue. Lenders take repayment for merchant cash advances out of daily credit card sales.
Equipment financing, which is a loan used expressly to acquire equipment, which is then used as collateral for the loan.
Commercial real estate loans, which allow businesses to acquire real estate. Like traditional mortgages, the property becomes collateral for the loan.
Personal loans for business use, which make business owners personally liable for repaying the loan amount and interest. This is remarkably risky, and many lenders refuse to offer personal loans to entrepreneurs.
Where Do Small Business Loans Come From?
Banks and credit unions are among the most well-known commercial lenders, but by no means are they a business leader’s only option. In fact, many business leaders opt not to work with traditional banks because they are not always the easiest financial institutions to work with. Banks tend to have much more stringent requirements for borrowers, such as higher personal and business credit scores, more comprehensive business plans and more. Plus, banks can take a frustratingly long amount of time to approve loan applications, which means that businesses in desperate need of immediate funding might need a different solution.
Fortunately, there are other lenders that provide commercial loans to small businesses. Online lenders come in a variety of shapes and sizes, and they tend to make the loan application and acquisition process faster and more straightforward for business leaders. However, business leaders do need to perform due diligence on any prospective lender before agreeing to a loan; non-traditional lenders are notorious for levying exorbitant fees and employing other terms that can make repaying loans more difficult.
When Do Businesses Obtain Small Business Loans?
Because there are so many different types of small business loans, small businesses can acquire loans to achieve almost any goal that requires extra funding. Often, entrepreneurs will use startup loans in addition to other forms of funding to gain enough capital to launch their ventures; business leaders will also acquire loans to initiate growth endeavors, perhaps to reach new markets or to introduce new products or services. Sometimes, small businesses take advantage of financing to manage during off-seasons, and on occasion, loans are necessary tools to save businesses from failure and collapse. No two reasons for acquiring a small business loan are exactly the same.
Your small business needs money to survive, and eventually, that money could come from a small business loan. You should take more time to acquaint yourself with the small business lending process, just in case your small business could benefit from a loan sooner rather than later.