It is a famous saying that making money requires spending money. Operating a business requires money, but where can you obtain the money if you aren't independently wealthy or established? This is where you might need a business loan. Most business demands can be met with a business loan. Regardless of the size of the company, nearly every business owner will need to seek a loan at some point.
A business loan can help a company get started, expand after it's up and running, or get through the difficult patches that occur from time to time. Choosing a business loan type is an important step, but knowing which loan is suitable for you is also vital. In this guide, we shall start with defining business loans and work our way downwards.
What is a Business Loan?
Business loans are agreements between a business owner and a bank or private lender in which money is received in exchange for future repayment of principal plus interest. Business loans are collected only for business reasons.
The Importance of a Business Loan
Business loans have been a viable tool to keep companies running for a long time. They are employed by business owners for various purposes, including a short-term increase in cash flow or to fund the cost of expensive equipment. Business loans can also be utilized to fund expansion or pay off high-interest debt. There are numerous advantages to pursuing the business loan option, including the following:
• Funding is speedily available.
Raising cash from venture capitalists or other investors might take up to a year. Borrowing money from a bank, credit union, or online lender is significantly faster, and some lenders will accept your application in minutes if you apply online.
• Loans have lower interest rates than credit cards.
When it comes to credit cards and business loans, the latter usually wins in terms of borrowing costs. According to Experian, business loan interest rates range from 2% to 13% for business owners with the best credit scores. The rate range for corporate credit cards is 13.9 percent and higher. Bear in mind that your credit score has a significant impact on the cost of borrowing and whether or not you will be approved for a loan.
• You retain complete control of your company.
When you take out a business loan, your bank or alternative lender will not tell you how to use the funds. That is not the case when investors provide capital. Investors typically want a say in how the company is run. Bank loans have interest and fees, but you aren't giving up a stake in your company, a share of the profits, or operational control.
What are the Distinctive Categories of Business Loans?
The two categories of loans are unsecured and secured business loans. A secured loan requires the borrower to provide collateral if they default on the loan. In contrast, an unsecured loan does not necessitate the use of collateral. Small businesses can apply for a variety of low-interest loans.
Assets are used as collateral for a secured business loan. If you are beginning a business, you could, for example, place a lien on your home to secure the loan that will get your business off the ground. In general, secured loans are more advantageous because the lender assumes less risk. When you have enough collateral to qualify for a secured loan, taking on that extra risk yourself is a wonderful way to persuade lenders or investors to step in, and it can help your business get off to a fantastic start.
Unsecured loans do not have any collateral. This makes them significantly riskier for a lender, which alters a few aspects of the loan. Unsecured loans, for example, are more likely to be declined. If a lender perceives too much risk, they will refuse the loan proposal, and if the loan is approved, the interest rate will most probably be higher. Despite this, unsecured loans might be the best option for an entrepreneur in many situations, primarily because they do not directly jeopardize your livelihood or financial security.
Business Loan Types
There are numerous kinds of loans and lenders, and understanding which is suitable to your business can be difficult. If you're thinking about getting a loan for your business, but you don't know which, this section will help you figure out which kind of loan is best for your business. The major types are as follows;
• Asset-based loan
This type of business loan is intended to assist firms in obtaining finance through the use of collateral, such as accounts receivable. These loans are typically easier to apply for and get, and businesses benefit from immediate access to funds to minimize or eliminate short-term financial needs.
It is appropriate for businesses that require funds to maintain normal business operations and can utilize their personal assets as collateral.
• Business line of credit
This is a popular loan option for small firms that functions similarly to a credit card. You can borrow some money, pay interest on that specific amount of money, and repay it as often as you need so long as you don't exceed your credit limit.
A line of credit is great for firms that need short-term finance to capitalize on a growth opportunity, bridge a gap, balance seasonal cash flow variations, or fulfill an unanticipated demand.
• Microloan
Yeah, these are small loans, as the name implies. They are usually between $5,000 and $50,000. It may not seem like it can do a lot, but microloans can be very useful to certain businesses.
The aim of getting a microloan is to help a business get off to a good start, including making down payments on larger investments, purchasing inventory or raw materials, and various other things. Microloans often have low-interest rates but a short repayment duration.
• Invoice Financing (or invoice factoring)
Also known as accounts receivable finance, invoice financing is the practice of selling your unpaid invoices to a lender in exchange for an instant advance on the money your customers owe you. Businesses frequently use invoice factoring to enhance cash flow and secure funds on invoices.
Factoring invoices is suitable for companies with longer receivable payment terms, often ranging from one to two months. If you want to increase the cash flow of your business, factoring is a smart way to get your money faster.
• Equipment Financing
Equipment can be unreasonably expensive, depending on the industry. If it's appropriate (to you) to get a loan for a car, it's also reasonable to get a loan for specialist equipment that costs tens of thousands of dollars. This kind of loan operates the same way as other types of loans; your assets, cash flow, and credit will be evaluated to determine an acceptable loan amount and interest rate.
• Business cash advance (merchant cash advance)
This type of loan is sponsored by a lender based on the borrower's future credit card sales. The borrower must repay the advance with interest calculated on a percentage of your credit card sales until it is paid in full. There is no set payment term for a merchant cash advance because it is paid as a percentage of your credit card receivables. Rather, your ability to repay the advance is determined by the number of credit card sales you make is determined by your ability to repay the advance.
A business cash advance is ideal for companies that rely heavily on credit card transactions, such as retail stores and restaurants. This type of loan also does not necessitate a high credit score or the ability to make manual payments to repay the advance.
• Small business term loan
A small business term loan is a sort of short-term finance that is typically intended to meet a single demand to help your company expand. For example, if you need to modernize your equipment, recruit more personnel, or relocate to a new location, a term loan can help you bridge the financial gap. As the name implies, this form of loan has a fixed period that might range from a few months to several years.
This loan is great for business owners who require upfront cash to bridge a financial gap to fulfill a specific job, such as recruiting seasonal employees or launching a new location.
• SBA Loan
An SBA loan can be used for almost anything. It is a long-term, low-interest loan that the American government partially guarantees through the United States Small Business Administration. SBA loans are frequently more difficult to qualify for than other forms of loans, and even if a business qualifies, the approval procedure and receiving funds might take several weeks.
An SBA loan is best suited to small businesses that have a solid credit score and have been in operation for a minimum of two years.
What Is the Typical Business Loan Process?
While each lender type has its own loan application procedure for all the loan types, there is a sure-fire process every lender goes through. Below are the fundamental basic steps in applying for a business loan.
1. A Company Contacts a Lender
When choosing a lender for your business loan, there are numerous choices to pick from. Shop around for a lender that provides services and products that meet your needs and offers competitive rates and conditions. It is ideal to consult with multiple lenders to guarantee you obtain the best rate; in this case, you can review all options before making your choice.
2. The lender provides information that best meets the needs of the business.
In contacting a lender about a business loan, they may assist you in determining the type of loan that best suits your business requirements. So many factors determine the type of loan you need for your business to avoid discrepancies.
3. Lender Requests Documentation
Following that, the lender will request the supporting papers discussed previously in this article in order to evaluate your application. The required documents may be submitted electronically or physically, depending on your lender.
4. The business loan is underwritten and then closed.
Loan underwriting is the method through which a bank, loan provider, or online lender examines your application and supporting documentation to assess the risk and rewards of lending you money. The underwriting time duration varies depending on the lender, but typically, a business loan takes about 14 days to underwrite once all information is received, and it can happen considerably faster.
Once a borrower's credit, ability, and collateral have been evaluated, and the organization is determined to be eligible for the loan, the lender chooses the loan amount, interest rate, and payback terms. To complete the loan, both the lender and the borrower must sign documentation confirming the terms.
5. Funds are released.
It's time to get your loan! After the loan is underwritten, the borrower will get the funds into the business account through a closing attorney or otherwise agreed in the loan terms.
6. The business repays the loan in accordance with the agreed-upon terms.
The borrower will subsequently begin paying payments based on the agreed-upon loan terms. Some lenders may levy a penalty if you repay the loan early, so read the tiny print to ensure you understand the terms you agreed to.
What Are the Merits of a Business Loan?
Business loans are a popular instrument for starting or growing a business since they provide various benefits depending on the situation. Below are some of the most essential merits of business loans:
• It helps quicken your business's growth.
• It helps you develop a trustful relationship with the lender.
• It helps your business avoid the dissolution of its equity by bringing on new partners or investors.
• Availability of lending for a wide range of purposes.
Conclusion
Knowing how to secure a business loan isn't always simple. However, if you put in the time and effort to get your personal and business finances in order, your chances of securing a business loan — and a good one at that — can increase significantly.
With this in mind, once you've done everything you can to prepare and are ready to begin your search, remember to compare loans and lenders to guarantee you're getting the best and most reasonable loan for your business.
.png)