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Introduction to Small Business Loans

Jason Smith

Jason Smith

Senior Author

Jason Smith

Senior Author

Business loan is a loan you take out for non-personal use, particularly to help you reach a particular agenda in your business. In simpler terms, it is any kind of loan where the granted money is reserved for the business alone. This is not its strictest definition. However, for our purposes and for you to expand your view on this matter as well, this is what we deem to be the best path to take.   There are a lot to consider before going on to a creditor for this loan. Here, before we answer the big “how” we must first address a few “what’s”.

What are the different uses of small business loan?

Introduction to Small Business LoansContrary to popular belief, a business loan is not a sign that your business is going downhill. There are legitimate reasons for you to engage in such kind of financial transaction besides a temporary bailout.

  1. To start a business – If you have a business plan you think will work, but have no funding, you can get a loan to get the things started.
  2. To fund day-to-day expenses – When you are still in the process of building your brand, it is normal to come out negative after all the expenses. This does not necessarily mean you close the whole operation down, right? Until such time that your business starts to earn, you can get a loan to keep the lights on.
  3. To grow your business – Ready for the next big move? A small business loan can help you get the boost you need.
  4. To have a fallback – Sometimes, you do not really need it. However, if you are not one to wait until disaster strikes, this can help you sleep soundly at night.

What types of loans can you get for your business?

The options listed are specifically for small businesses. However, there are other ways to can get a loan. These include personal loan, peer-to-peer lending, and other alternative lenders.

  1. Small business term loans

These can be used for expansion, capital expenditure, or business operations. With the life of the loan ranging from three months to three years, it can either be secured or unsecured while the interest rates can be variable or fixed.

  1. SBA small business loans

Although the time for your loan to get processed and approved is longer than other options, you can enjoy lower SBA loan interest rates and better repayment terms with them. You can also be approved for as much as $5 million, backed and guaranteed by the U.S. Small Business Administration. A fair share of caution, they have very strict requirements so be sure that you qualify before applying for this loan.

  1. Accounts receivable financing

If you need quick cash, accounts receivable financing is your best bet. It is secured by your business’ accounts receivable, meaning you pay the balance back as you receive money from your customers. Having a variable interest rate, it is a great option when the economy is in a great financial state.

  1. Equipment loans

Equipment loans can be used to fund vehicles, software, and other vehicles. However, unlike the first three on this list, you need to cover 20% down payment to be eligible. The loan term usually ranges from two to four years, with the principal amount being anywhere from $5,000 to $500,000.

  1. Working capital loan

This is a short-term loan with the life of the loan ending at a maximum of 1 year. Here, you can borrow as little as $5,000 or as much as $100,000 which you can use to augment the budget for day-to-day expenses.

  1. Small business line of credit

Small business line of credit gives you ready access to a capped balance for a fee. In exchange, you the balance does not accrue interest until you actually take out the money. If you simply want to secure your business against uncertainties, this is a good way to go.

  1. Small business credit card

Like the small business line of credit, it gives ready access to funds. The only difference, however, is because you have a plastic card, you can withdraw funds directly from an ATM. Moreover, there is usually an introductory 0% interest rate for a short period plus purchase rewards. Small business credit card is a great choice if you always need to make company purchases and you have a good credit rating.

How do you get a small business loan?

While the actual application process may differ from one lender to another, here is a general step-by-step procedure of what you have to do to secure a loan.

  1. Identify the kind of loan you need

The first step is to make a list of features your ideal loan has. Your list should include the amount of money you need, how soon you need the fund, as well as the maximum interest rate you can handle. From these information, identify the loan that best fit your needs. Still, note that your chance of approval is affected by the company’s credit rating, and its credit history.

  1. Research viable lenders

Now that you have everything you know the loan you need, find the best deal out there. Here are a few general options that you have:

  • Commercial banks
  • Peer-to-peer lenders
  • Direct lenders

Make sure that you do your research thoroughly. Who knows, you might just save a few bucks in fees and interests. If your business is relatively new, submit an application to your top three or top 5 creditors. More importantly, note that they will look at the following factors to decide whether to accept or reject your application:

  • Company Assets
  • Company investors
  • Credit score
  • Financial statements
  • Outstanding loans
  • Years of operation
  1. Submit all the necessary documents

Provide the most detailed requirements and documents for your application. The requirements may vary depending on the type of loan, but here are the most basic you will need:

  • Federal Tax I.D.
  • Name of business
  • List of executive officers
  • Business credit report
  • Business plan
  • Business bank statements
  • Tax returns of the company

After going through these steps, you only have to wait for the decision of your prospective lenders. Remember, do not take out a loan when unnecessary. In the end, the limit of your company’s success is the quality of you decisions.

Jason Smith

Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state. 

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