What Is a Small Business Loan?

If you are looking to start up your own business project or you already own a successful business and are looking to expand, there is a high chance that you have heard of a small business loan. This type of loan gives entrepreneurs a chance to get their business off the ground while remaining in control. This article will help you understand what loans are, the different kinds, which type might be the best fit for you, and how to apply.

This loan can be defined as a type that will let you get needed funds and grow your business. There are multiple ways of getting these loans, such as banks, online lenders, and microlenders. 

If you’re wondering how and where to get a small business loan, this article will tell.

How Do Small Business Loans Work?

Business loans provide business owners with financing either as a lump-sum payment or a credit line which allows you to borrow cash when you need it, repay what you have borrowed, and continue borrowing without requiring a new loan. In exchange for this funding, your business agrees to refund the money borrowed over time, plus interest and fees. Depending on the type of business loan you choose, your lender may require daily, weekly, or monthly payments until the loan is fully paid off.

This type of loan can either be secured or unsecured. Secured loans require collateral- something that is used to support your loan. This can include real estate, equipment, cash, or investments. Unsecured loans, on the other hand, don’t require collateral. Instead, you have to sign a personal guarantee agreeing to accept liability if the business doesn’t repay its debt.

Where to Get Small Business Loans?

Small Business Administration (SBA) is a government agency that serves as the primary resource for government-backed business loans. It means that the federal government isn’t the one lending you money; the bank lends you the capital, and the government is there to guarantee a percentage in the event you fail to repay the loan.

Only a small portion of SBA loans is guaranteed by the government, and these loans allow small business owners to get the needed capital with less equity. Another way to get this loan is through a bank or microlender. You need to consider what loan would suit your business the best.

How to Qualify for Small Business Loans?

For you to be able to qualify for a specific loan requirements may vary, depending on the loan you are trying to get. Disregarding the lender you chose, there are some items that you must consider and provide, such as: 

• time in business, 
• personal and business credit score, 
• annual revenue (or monthly sales), 
• various bank statements, 
• the purpose of the loan, and 
• a business plan.

Once you submit all this, you will need things that are relevant to your business (business licenses, franchise agreements, leases for commercial real estate, etc.).

If you are applying for an SBA loan, you can do it through their website, but if you choose a bank as your lender, you will need to pay them a personal visit to discuss the matter because they usually provide limited information online.

Types of Small Business Loans

There are multiple loans you can qualify for regarding business aspects, but choosing the right one for you depends on the business that you have and the amount of money you need.

A lot of people are deciding on SBA loans since they are backed up by the government, but know that the waiting period is long. Here are a few types of loans they offer:

•  7(a) loans, 
• Microloan, 
• 504 loans, and 
• Disaster loans.

7(a) Loan Program

This is the most common and flexible loan you can get. This loan is usually used for many different things, like buying needed machinery, equipment, furniture, land, and buildings. The amount you can get is up to $5 million. This loan is usually paid in 10 years, while fixed assets are paid out up to 25 years.

Microloan program

This loan can offer a minimal amount to new or growing small businesses. With this loan, you can buy inventory, supplies, furniture, machinery, or equipment, but you can’t use them to pay existing debts or purchase real estate. This loan can be up to $50,000, but averaging about $13,000. There are several factors that affect the payments of this loan, and it includes the amount you borrowed and the plan that you have to repay it back. The maximum repayment time you can get is six years.

504 Loan Program

With this loan, you can get long-term fixed rate finance for certain assets, like real estate. The money that you get from this loan, you can use to buy existing buildings or even renovate them. The amount of this loan can be up to $5.5 million, and it can be paid out in a 10 to 20 year period. Keep in mind that it can’t be used for working capital or inventory.

Disaster loans

The SBA gives these low-interest disaster loans to businesses of all sizes. This type of loan can be up to $2 million. You can use this money to repair or replace various things like machinery and equipment that were damaged or destroyed in a disaster.

Other loans you can get that are not government-backed are from banks and other lenders. This type of lender offers some types of loans that SBA doesn’t include: working capital loans, equipment loans, merchant cash, etc..

Working capital loans

This can be looked at as a short-term option for businesses in need of money. They are offered from both banks and alternative lenders. The advantage of this loan is that small businesses can keep their operations running while they search for other ways to boost earnings. The biggest downsides of this loan are that they come with higher interest rates and have short repayment time.

Equipment loans

As the name already says, this is the type of loan that gives money to small businesses for office equipment, like computers, desks, stationary, or things such as machinery, tools, and vehicles. This loan is usually easier to get than other types because the purchased equipment serves as collateral. Instead of paying for the large purchases upfront, owners make monthly payments.

Merchant cash advance

This loan is usually given to a business based on its monthly credit card spending. Ways of repaying these loans can vary. Some take a fixed amount of money out daily, while others take a percentage of credit card sales. What this loan offers is a relatively easy way of getting the funding that just takes a couple of days, and the loan is paid from credit card sales. The biggest downside is an interest rate that is high as 30% a month, depending on your chosen lender.

Are Small Business Loans a Good Option?

These types of loans can be a great option if you don’t have the necessary funding but should be taken cautiously. Before applying for a business loan, you must ask yourself how much money you need, what you are using it for, and how long it will take to pay it back. If you come to the realization that you will be able to pay it back, these types of loans are a good option because they don’t require you to give up a piece of your business to an investor.

Final Thoughts

Like any other loan, this one involves some risk as well. Even though they can help your company achieve its goals or provide financial stability, you also need to be sure that you can pay off the loan and also the interest that comes with it.

As we mentioned in this article, there are different types of loans you can take but be sure that you understand how each one of them works. That’s why it’s advisable to do research and consult with a financial advisor to find the most suitable loan for you.

Remember, just because one loan suits someone else, that doesn’t mean it will be good for your business.