Business loans 101 | Everything You Need to Know
Sufficient capital is one of the key requirements when starting a business. Savings, donations, and monetary gifts could give you just enough. Alternatively, you could opt for business loans.
Business loans are not only important when starting a business but running it, too. You may need cash to boost your stock, add a new line of trade, acquire a new asset, or offset business bills such as rent and utilities.
In this article, we take a deeper look into business loans. We cover what they really are, how to use them, and how to get them. We’ll also point you to the best lenders in the market and tell you what you can do to guarantee your approval.
- Rep rate
- Loan amount
- Min time in Business
Lendio
- 4.2%
- $100,000 – 5,000,000
- 6 months
Fundbox
- 4.66%
- Up to $150,000
- 3 months
Fundera
- 4%
- $2,500 – 5,000,000
- Not specified
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
How do Business loans work?
Business loans, otherwise called commercial loans, are meant to help you afford what you need e.g. assets and additional stock to make your business grow. They’ll also help ensure a smooth cash flow so all business operations can run smoothly.
But most importantly, business loans, after successful repayment. That will develop your business credit, putting you up for even more exciting loan products in the future.
Once offered a loan, the lender expects payment of the principal amount and the agreed interests. This varies according to the lender, the business borrowing, and the exact loan product being borrowed.
Please note that due to the constant evolution witnessed in regulations, technology, and consumer preference, it’s only normal that we witness a constant change in the way business loans work.
However, the basics of business loans remain the same. And, it’s as simple as a business identifying its financial needs, going through various methods of financing, finding an appropriate lender, getting a loan, and repaying the same over the agreed period.
Requirements to qualify
The requirements to qualify for a business loan vary depending on the lender in question and the specific business loan product.
Most lenders will require that the business be existing and operating in the United States. While applying, the owners will have to prove compliance with the local.
You’ll also be required to fill out the business’ physical address in your application form. The name and how long it’s been operational are also key details that’ll be required. You may also need to explain your nature of business.
The business should also have a good credit history. The lender will first likely look at your annual revenue. They’ll then proceed to look at your past and present debts and how prompt you are with repayments.
Businesses with poor credit histories are likely to miss out on loans with most lenders. And, even if they qualify, they’ll most likely part with higher interest rates than those with stellar credit histories.
Be on the lookout for any possible mistakes with your credit and in case you notice any, notify the credit agency immediately for correction.
Most lenders, especially banks will also require that you be an existing customer. You must, therefore, be operating an account with them before application.
Since lenders will want to look at your financial records, be sure to keep them in order. Make it easier for the lender to determine your possibility of repaying the loan. If you haven’t been keeping the records, then consider starting immediately.
Again, be sure to shop around and compare rates and loan products from different lenders. Do this till you find one that better suits your needs.
Monitor your personal and business credit profile regularly to avoid poor credit histories.
Types of business loans
Knowing the exact loan product you need is a crucial step in getting a business loan. This way, you’ll get what best meets your business needs. You’ll also get something affordable with flexible terms.
The following are the common business loan products you can choose from;
Business line of credit
This is one of the most flexible business loan products. Here, you only pay interest on what you borrow. It works the same way as a credit card loan. For both, the drawings and repayment decisions lie on the borrower. You only have to ensure you don’t exceed your limit and make timely repayments. This is an excellent choice for businesses looking to meet unforeseen expenses or get enough funds for a good cash flow and enough inventory.
You can also make early repayments to cut the interest costs. However, the limits of a line of credit are lower, and the loans are unsecured. You can borrow between $1,000 and $250,000
Online lenders are the best option for this loan product. They are less strict. However, they tend to attract high-interest rates and have lower loan limits
Business term loans
These are given out in lump sum. You then make regular repayments at fixed rates and a defined period, usually one to five years. The loan is meant to help your business in major purchases of stock, assets, or acquiring new facilities.
To qualify, your business must have a good credit standing. It must also be generating enough revenue to repay the loan.
Business term loans have predetermined amounts and fixed interests. The loan amount you can access is based on your business needs, credit standing, and revenue. You can borrow from $25,000 to $500,000. Your loan will also attract an interest rate of between 7% to 30%.
Business term loans are best known for their rare flexibility in payment and minimum restrictions.
Working capital loans
These are short-term loans that are meant to help businesses get some extra funding to facilitate growth and expansion. The funds also help with daily business operations and meeting such expenses as advertising and inventory purchase.
This loan requires the business owner to have a stellar credit profile. Its application process is long and tedious and subsequent approval even longer.
Apart from helping with the day-to-day running of the business, the loan also attracts low interests of 3 to 7% for borrowers with a good credit score
Short term vs long term business loan
Short-term business loans are meant to help with the business’ operational needs. They can be used for such expenses as rent, employee salaries, and even adding the stock.
Short-term business loans have shorter maturity terms, usually 1 to 18 months. This makes them best suited for tackling recurrent operational costs and constant changes in working capital.
These loans are mostly offered by banks. And, they come with floating interests. Businesses usually use financial derivatives like swaps to take care of the floating rates.
Short-term loans are best at meeting unexpected expenses. The cash flow you get from the loan can come in handy in adding stock or making a quick asset purchase.
Most short-term loans have a faster application process. You can receive your funds as soon as 24 hours after approval.
| Pros | Cons |
|---|---|
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Lower interest rates |
Shorter repayment term |
|
Faster application and approval |
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The loan can be used for any purpose in the business |
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The good thing about short-term loans is their use isn’t restricted, and unlike mortgages, you can use the loans for any business purpose.
Long-term loans, on the other hand, are meant to help businesses to extend their refinancing beyond the normal bank tenor.
Businesses usually go for these to seek financing for major asset purchases such as vehicles, land, building, etc., or expansion.
Long-term loans come with longer repayment terms, usually 5 to 25 years. They generally attract lower interest rates than their short-term counterparts.
Long-term loans usually involve large amounts of up to $500,000 or more. Repayment of these loans is usually monthly.
Long-term business loans are mostly preferred by companies in their growth phase. And, most of them also don’t have a specific use tied to it. The business, therefore, freely chooses where to assign the funds.
Since they are long-term they are better off in the hands of established businesses with strong financial histories.
Though it’s required that a business must have been in operation for one year to qualify, most lenders prefer those that have been in operation for three to five years.
| Pros | Cons |
|---|---|
|
Longer repayment period |
Strict requirements |
|
Access to larger loan amounts |
|
|
Lower interests |
|
If you have trouble deciding between short-term and long-term loans, then you can as well use them simultaneously.
Short-term business loans help with the expenses incurred in the daily running of the business. Long-term business loans, on the other hand, will help the business finance its expansion such as opening a branch or purchasing an asset.
When is a small business loan better?
A small business loan is a type of financing offered to businesses by lenders for various purposes. They are meant to help them meet their entrepreneurial goals. Therefore, their uses differ from one loan product to another.
Small business loans are viable options if you have your financial statements in order. Depending on the loan amount, most lenders will want to go over your financial statements to decide whether or not to issue you with a loan.
Therefore, the balance sheet, cash flow, and income statement should be thorough, complete, and accurate. Getting these financial statements audited by a certified public accountant will give you an upper hand with most lenders.
Small business loans will also make more sense when you’re looking for funds to expand the business. New businesses have a big appetite for growth. This helps double the business revenues.
A small business loan is also better when the business is established well enough to get affordable business loans with credible lenders. This should be when your business has a good credit profile.
If the business funds have also leveled, then you could secure a small business loan with a good lender and at an affordable rate.
Generally, we’re counting on the business being mature enough to catch the eyes of a lender. And, that’s just by being in a good financial position.
A small business loan is also better when you’re building credit for your business. Borrowing is the first step towards building a credit history. While at it, you want to ensure you make repayments on time to have a good credit report.
A small business loan would also make sense if it opens the door to more opportunities. For instance, if you land a deal and need extra cash to enforce it, then a small business loan would be an excellent source of financing.
Secured vs Unsecured business loan
For secured business loans, business owners offer collateral. Such include vehicles, stocks, real estate, government bonds, or any other valuable assets. The value of the assets offered as collateral should match that of the loan in question.
Secured business loans are less risky to lenders. You, therefore, stand a chance of easily getting a loan. Plus, you’ll also be open to lower interests and flexible repayment terms. Having collateral will also mean qualifying for higher loan limits.
However, secured loans are risky to the borrower. You’re personally held liable to the terms of the loan and should you breach any, you risk losing your collateral to the lender.
Unsecured loans, on the other hand, don’t require any collateral. That makes them less risky to borrowers. However, they are risky to lenders since they have no assurance that you’ll repay the loan.
They, therefore, attract higher rates. And, their repayment terms may not be as flexible as other business loan products.
Frequently Asked Questions (FAQ)
It’s a type of loan entrepreneurs take to fund business operations such as inventory and salaries.
Different lenders have different qualification requirements. However, your business must have been operational for at least a year before application. It should also have a good credit profile and income.
A business line of credit, SBA loans, business term loans, and working capital loans are the most common. sole purpose of earning a decent return.
You can use them for daily business operations, business expansion, or acquiring a business asset.
The most challenging part is often building a good credit score and solid cash flow. determining their risk in lending you money.
