For people who want to start a business, expand it, or buy new machinery, small business loans are mostly what helps them.
However, before taking a small business loan, business owners should understand how they work to ensure that they get the best from the loans and know what the lender expects.
What Is A Small Business Loan?
A small business loan is a type of financing that a small business gets for different business purposes from a lender. Over the years, there have been many sources of small business loans, and according to Lantern by SoFi, a borrower has to choose their lender well.
Lenders have different terms and requirements for qualifications, give different amounts, have different repayment times and interest rates. For this reason, it’s imperative to compare business loans before making a final decision.
There are also several types of small business loans available, and they all work in different ways.
Types Of Small Business Loans
- Term loans– these are the most common category of loans, where the lender gives the borrower a lot of cash for them to repay within a certain fixed period, including interest.
- Small business line of credit- This is a small business loan that operates like a credit card. Borrowers have a maximum limit of money they can withdraw, and to get more money, they have to repay their first withdrawal.
- Account receivable financing- Commonly known as factoring, this type of loan involves the business owner selling their outstanding invoices or receivables to the lender to get early payment for them.
How much money the business owner gets from this type of loan depends on the quality of the receivables and the borrower’s age. While this gives the borrower quick access to the cash they need, they pay more than other types of loans.
- Working capital loans- These are loans that business owners can use to finance the day-to-day operations of their business. They come in lower amounts and have shorter terms.
- SBA loans- These are long-term loans given by banks but partially guaranteed by the government. That means that the SBA pays off the guaranteed amount if you are unable to pay your loan.
- Equipment loans- These are loans that help a small business purchase large equipment for their business. If they are unable to pay, lenders come for the new equipment as collateral.
After business owners compare business loans available, they need to understand the loan application process.
- Building a business and personal credit score – The higher the credit score is, the more likely a small business gets the loan, and the more money they are likely to get. The best credit score should be above 700, and to build it, a borrower needs to pay off their debts on time.
- Understand the requirement- Borrowers need to research all the requirements to qualify for the type of loan they choose.
- Have a business plan- This helps the lender understand how the borrower will spend the money they want.
- Have collateral if necessary- Some loans, like SBA loans, require that borrowers have collateral in case they can’t repay the loan. This includes equipment, real estate, personal property, or the business’ inventory.
Every type of loan has different repayment terms and periods, which is one thing borrowers should consider when they compare business loans. Some like term loans have longer repayment periods, while others like working capital have shorter periods.
Before taking out a loan, small business owners should research how all the loans work to ensure they’re choosing the option that best fits their needs.