A Guide to Understanding Different Types of Business Loans

Everyone has heard about personal loans, but not everyone knows the difference between business loans and personal loans. To make it even more complicated, there are many different types of business loans out there to choose from. If your business is a startup, needs new equipment, or is looking to expand, then you might benefit from getting a business loan. Before you make such a big commitment, though, you should learn about the different types of business loans out there. Business loan shopping doesn’t have to be difficult if you have a great understanding of what is offered.

What Are the Different Types of Business Loans?

As a small business owner, you will need to find funding from outside sources every now and then. It is important to understand the different types of business loans available to you. There are several kinds of business loans, and you may or may not qualify for all of them depending on factors such as how old your business is, what your credit is like, and what you want to use the money for. There is also a big difference between traditional business loans and some more nontraditional ones, and knowing how to seek out the kind of loan you want can save your business money and help build your credit.

One important thing to keep in mind is that most loans go to individuals, but business loans go to the business itself. A business is a separate entity, with its own credit history and creditworthiness. Any effect of not paying will only affect you in relation to how you are tied to the business. The liability you carry depends on what kind of business you have, such as whether it is a sole proprietorship, partnership, limited liability company (LLC), or corporation.

Traditional Small Business Loans

SBA Loans

SBA Loans can be one of the best options because they can offer great benefits. This isn’t the kind of loan to take out for most last minute or emergency needs. U.S. Small Business Loans are for big decisions, like acquiring a company or refinancing a mortgage. Among the benefits:

  • You can choose between fixed rate and variable rate loans.
  • The financing from the SBA is good for up to 90%.
  • There are various loan terms, up to 25 years.

Part of the loan is guaranteed by the SBA, even in cases of default, making this one of the safer options. However, there are some drawbacks, such as:

  • The application can be time-consuming and will include everything from financial reports to background checks and possibly even owner information.
  • Because of the stringent requirements, not everyone will qualify.
  • You may be required to put down collateral to guarantee the loan.

There are different kinds of SBA loans, such as the SBA 7(a) which is specifically designed for very large decisions; the SBA 504 which focuses on real estate, including construction projects; and the SBA Express, a smaller class of loan with a $350,000 cap that is designed more for sudden needs like business equipment, working capital, and other needs. The SBA Express is also different in that once approved, the funds can be available in as soon as 48 hours. The SBA guarantees 50% of SBA Express loans.

Roadmap to SBA loan

Term Loans

Term loans are a more traditional kind of loan and are probably the most common kind of small business loan. Business term loans help with any kind of business needs that can’t be paid with cash, such as new equipment, working capital, or large expansions. Term loans are flexible and have flexible terms, and you can get one from a regular bank or a nontraditional lender.  More established companies like term loans because of the flexible terms, but companies with less history might have a harder time qualifying. The advantages to business term loans are:

  • Term loans have flexibility, such as the amount borrowed, the repayment terms, and the kind of lender used.
  • You can use a term loan for almost any kind of need or situation.
  • Using a term loan can help to improve your business credit ratings.

Drawbacks, on the other hand, can include:

  • Term loans may require at least some collateral to guarantee the loan.
  • There is a lot of documentation required in order to apply for a term loan, including business statements.

The interest rate is often easier to predict on a term loan because it will carry standard fixed rate interest or flat fees. The actual rate may vary widely and can be anywhere from 6 to 30 percent. If your company has been operating for at least 2 years and you can show a high enough level of solvency, a business term loan might be the best one for you.

Equipment Financing Loans

An equipment financing loan is a loan or lease used to purchase or borrow hard assets, like equipment, vehicles, machinery, or computers needed for your business. Unlike the loans already mentioned, an equipment financing loan is a secured loan, in the sense that the equipment itself can act as collateral for the loan.

Because it is a secured loan, your equipment financing loan may have better terms, such as a lower interest rate. Not every lender offers equipment financing loans, and your credit will need to be good to qualify. This may also be a good time to consider the advantages and disadvantages involved in buying versus leasing your company’s equipment.

Reasong to Finance Equipment to Your Business

Lease vs Buy Equipment

When it comes to equipment buying versus leasing, you have to take into account your own short term and long term needs and assets. While buying seems like a good idea because it means you can keep the equipment forever and give you more flexibility in dealing with it, leasing could end up saving you money.

When you lease equipment, you don’t have to come up with as much money to start. Unlike the major expenditure when you buy expensive equipment, leasing will probably not affect your cash flow much if at all. Also unlike when buying, lease payments can be written off on your taxes as business expenses. You may be able to get better terms when leasing, especially if your credit isn’t stellar. It is also easier to upgrade to better and more modern equipment as soon as your lease expires.

On the other hand, if you buy equipment, you will own it forever. With some kinds of equipment that lasts a long time, like office furniture, it makes more sense to buy it. If you decide you don’t need it anymore, it’s yours to sell. You may be able to get a tax break during the first year after a big purchase by using Section 179 of the Internal Revenue Code to deduct up to $500,000 of equipment. There are also potential tax incentives for depreciation, so you may be able to deduct money off your taxes because your assets have gone down in value.

Commercial Real Estate Loans

Other traditional loan possibilities are commercial real estate loans. These are secured loans like the equipment loans, and the collateral is the real estate itself. If you have ever been involved in buying your own home, you understand what a long and complicated process it can be, with many players working together to provide the financing, appraise the property, and clear the title, among other tasks.

Because of the strict rules around selling property, the lenders can feel assured that the property really does belong to the person taking out the money. Like property loans, real estate loans are also secured loans. With that security and the fact that the loan is secured, you can get some great rates when it comes to buying real estate. You also get longer to pay off a real estate loan, usually 30 years, although you can usually get a better interest rate with a shorter repayment period.

Business Line of Credit

If you just want to have the funds available if you need them, you may want to look into applying for a business line of credit. You would basically apply for a certain limit but only take out as much as you needed at one time. Lines of credit are a lot like credit cards, in that you have a maximum limit but you can use them to purchase whatever you need at any time. You would need a strong credit rating to apply for this kind of loan, as it is an unsecured loan with a lot of flexibility. It offers some great benefits, including:

  • You can take out funds whenever you need them, up to your limit, without going through another application process.
  • You will only ever pay interest on funds you have actually withdrawn.
  • This kind of credit can help with all kinds of both short term and longer term business needs.

The disadvantages of using a business line of credit include:

  • If you do have poor credit and they offer you a line of credit, you will likely pay a higher interest rate.
  • A line of credit isn’t for big purchases that you would normally take out in one lump sum.
  • They may ask you to provide collateral to back up your loan, turning it into at least a partially secured loan.

Before you consider getting this kind of loan, think about what you need the money for. Some businesses use a line of credit to meet ongoing needs. To purchase supplies they need, or to make up for income they lose when business is slow, such as in the off season. Interest rates tend to be between as little as 8% and as much as 24%.

Nontraditional Small Business Loans

If you’re just starting out, you may not have much credit history yet, so you may not qualify for the traditional business loans. And if you do qualify, the rates might not be as good as you can get with a more nontraditional business loan.

If you are committed enough to your business, you may take it a step further and take out a personal loan to get what you need for your business. If you take out a personal loan to start a business, the rates and terms will depend on what kind of credit you have personally.

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The Pros of Using a Personal Loan for Business

The positive reasons that you should use a personal loan for business include:

  • It’s easier. When you apply for a personal loan, the lender will only consider your personal trustworthiness, so you only need to provide information about your own income and credit trustworthiness. When you apply for a business loan, you will need to provide all the information about the business, including business tax returns and other information that can be difficult to get together. You may even be able to apply for a personal loan online.
  • Your interest rate may be lower. Especially if your business is new, you probably have a much longer history of borrowing money and paying it back. That means you may personally be able to get better terms than your business can.
  • It’s usually faster. Because of the larger amount of information that needs to be processed for a business loan, it usually takes much longer to be processed. A Small Business Administration Loan can take months to approve because it is a government loan. You could get your funds with a personal loan in just a few days.

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The Cons of Using a Personal Loan for Business

The downsides of using a personal loan for your business include:

  • You’re on the hook. If your business isn’t able to pay back the money, you are the one responsible for paying back all the money. Even if the business closes because it doesn’t succeed, you will have to pay back the entire loan or your personal credit will suffer.
  • Your income to debt ratio suffers. Even if you plan on using all the money for the business, the amount of money will show up as personal debt when you use a personal loan. That means that you may be turned down if you try to take out another loan, like for a house or car, or you may not be offered good terms because of your high amount of debt.
  • It may not be big enough. Even if you have great credit, you probably won’t be able to borrow as much as a typical business loan. An unsecured personal loan might be for thousands of dollars, while business loans can be millions. Unfortunately, the amount you borrow will depend on your own personal salary and ability to pay the money back.

Reasons for Taking Out a Business Loan

Taking out a business loan is a big commitment. You need to carefully consider whether a loan is the best idea and what the effects will be if your company borrows money. The basic premise is the same as with any other type of loan, as far as that you will need to fill out an application and try to get money. But there is a lot to consider.

The first question you should be asking yourself is: why does the business need this loan? Here are some legitimate reasons for business loans:

  • Do you need more space? Are you doing so well your supply can’t keep up with demand? Do you need to hire more employees but don’t have space for them? Business growth is a great reason to take out a business loan.
  • Do you need new equipment? Is your old equipment outdated, or do you just need new equipment to keep up with your current demand? If you really need new equipment, it’s better to get it than to let your business suffer without it.
  • Does your business have seasonal needs? You might need to get supplies for an upcoming rush, or you might need to pay for expenses during a break. A business loan can help you get through those kinds of periods.
  • Does your business need to build its credit? Just like with your personal credit, your business also needs to build its credit. Your business builds credit the same way you do, by taking out a loan and making regular payments on time every time. If you work on building the credit for your business, your business will qualify for better loans with more favorable terms in the future.

When it comes to business finance, you want to make the best choices every time if possible. In order to grow your business, you have to make some tough decisions, but you can make better decisions if you have more knowledge. To make money, you often have to have money, and shopping for business loans is a way to find a good deal that will give you the cash you need to make an investment in your business.

Warning Signs

You don’t want to take out a business loan for the wrong reason. Using loans to meet everyday expenses or overextending your business will only hurt you financially in the long run. There are many pros and cons of small business loans, so it is important to make sure that you are making the right decision for your business. Here are some warning signs to look out for:

  • Are you regularly falling behind when it comes to meeting your responsibilities?
  • Is your business just not producing the kind of income you expected?
  • Have the original circumstances changed? You made your original business plans based on a particular set of circumstances. But the only thing you can really count on is change. Take a good look at the current situation and be honest with yourself.
  • Are you trying to bite off more than you can chew? Everyone has big plans, but you need to be realistic if you are going to be successful. Don’t take on more than you can handle.

Long Term and Short Term Business Loans

Another important distinction between types of business loans is between long term and short term business loans. Long term business loans are paid back over an extended amount of time, but there are more differences than that.

Short Term Business Loans

These types of business loans need to be paid back on a daily, weekly, or monthly basis. Normally the entire period for paying back a short term loan is only 3 to 18 months. When it comes to short term business loans, they are usually for emergencies, for immediate financing needs, or to take advantage of an opportunity. Short term loans may have a higher interest rate than longer term loans, and they need to be repaid quickly. The interest rate can vary from 9% to 80%, which is very expensive.

Some people make the mistake of turning to short term loans to fill regular needs, keeping them in an endless debt cycle. Unfortunately, if your business doesn’t have good credit, your business may only qualify for a short term loan.

Long Term Business Loans

You can use a long term business loan for almost any kind of purpose. You don’t have to use these types of business loans in a certain way. So you can use them for everything from purchasing new equipment to opening a new branch of your business. There is no limit to how much you can borrow with a long term business loan, as long as the lender is willing. Traditional lenders like banks don’t offer small long term loans, so if you are trying to borrow a smaller amount over an extended repayment period, it is better to use a service that can help you find a loan online.

It is important to do your research when looking for a lender for a long term business loan. Because different lenders offer different amounts, different interest rates, and different terms. Longer term business loans tend to have lower interest rates than short term business loans, with rates ranging from 4% to 30%. While the terms are better for longer term loans, these types of business loans are harder to get.

Humans head silhouette, light bulb idea.

Keep In Mind

The longer term is a longer commitment. And the lenders want to make sure they can trust you that you will pay off the loan over an extended period of time. Competition is also very high to receive a long term business loan, and there is a lot of paperwork involved. The bank may collect personal information from you before approving the loan, and some lenders will require collateral for at least part of the loan. On the other hand, online loans aren’t as cumbersome and don’t require as much paperwork.

Where Get a Business Loan?

But where to find a business loan shop? There are many places where you might look, but make sure you are dealing with reputable companies. Not every company is legitimate, and some offer deals that are legal but barely so.

Luckily, there are ways to recognize and avoid personal loan scams. Plus, there are a lot of legitimate business loan companies that want to lend companies money. Because they know it will help their business. There are so many ways to finance your business. Once you have looked at all of your options and have decided to get a business loan, then it is time to find the right lender. Credit unions, banks, online lenders, and the Small Business Administration (SBA) are all great places to start. The process of applying for a small business loan is pretty simple from there.

The Process Explained

First, you need to select the right loan amount for your business loan. Then you should pull your credit history and score, to see what kind of options you have. For instance, a better credit score could mean a better interest rate. Once you know what your credit is like, you should create a business plan and gather all of your pertinent financial information. Evaluate a variety of lenders, so that you are sure that you have found the best option for you and your business. Then all you have to do it fill out the application and hope that the lender approves it!

Don’t worry if your loan application is rejected, it just means you need to try again. Once you find out the reason or reasons that they rejected your application, you can fix any of the issues that you have control over. Once you have fixed any issues that you possibly can, you should wait for a better time to reapply. Maybe waiting for different market trends is best for your business, or maybe you just need a year or so to improve your credit and build up your business profile. Sometimes you think you found a perfect fit, but it turns out differently.

Conclusion

Regardless of the reason your business needs financing, there is a way to get help with financing. There are many different types of business loans to choose from. And there should be one out there that is just right for you and your business. There are traditional and nontraditional types of business loans. As well as short term types of business loans and long term types of business loans. One of these will be the right one for you.

Loanry

Pros and Cons of Small Business Loans: Steady Growth

We live in complicated economic times. It’s never been easy to own or manage your own business, but the past several years have certainly added wrinkles most of us never anticipated. Then again, you didn’t get where you are by playing things too safe. Small business owners understand perhaps better than anyone the need to weigh their options, consider the possibilities, and the plow ahead. Maybe that means consolidating. Maybe it means expanding. Maybe it requires evolving in some way. Whatever your decision, funding is always a consideration. Is it time to dial back, or invest more in your business? Just what are the pros and cons of small business loans at the moment?

That’s what we’re going to consider today. Some of what we’ll talk about may be familiar to you already. Other considerations may not have crossed your mind. Our goal isn’t to decide for you what you need to do – it’s to help you think through your options more clearly, despite all the noise and distractions. We could all use a little more of that these days, don’t you think?

Let’s start off by clarifying what we’re talking about when we discuss small business loans.

Small Business Loan Basics

In general, small business loans allow you to expand your business, survive seasonal fluctuations, update your technology, or otherwise push your business forward without exhausting your company savings or exposing yourself to unnecessary personal risk. A small business loan essentially offers your operation flexibility and resources beyond what it can manage in isolation.

When things go well, your business benefits from the opportunity and the lender makes a reasonable return on its investment. If things go poorly, however, you may end up with your business weighed down by debt that didn’t accomplish what you’d hoped.

There are several varieties of small business loans. Which one makes the most sense for you depends on your business and your current situation.

Traditional Term Loans

This is the type of loan most of us think of anytime the issue is considered. A financial institution like a bank, credit union, or online lender loans you a lump sum based on your needs, credit history, and ability to repay. Sometimes collateral is required; other times it’s not. You repay the loan in predetermined monthly installments for a set period of time. Interest rates are traditionally fixed for this sort of loan, but adjustable rates might be considered in some cases.

The advantage to this sort of loan is that you acquire the full amount up front and can largely spend it however you think best for your business. A traditional term loan can offer great flexibility and, with the right terms, make it easier to accomplish your small business goals. In addition to local banks or credit unions, many online lenders specialize in offering very competitive terms on relatively small, short-term small business loans.

Potential disadvantages are largely determined by your credit history, either personally or as a business. Unless you’re able to secure a reasonable interest rate and favorable repayment terms, you risk putting your small business into debt for more than you gain from whatever you do with the loan. You’re also committing yourself to regular monthly payments for an extended period, whether business is great that month or not. The larger the loan or the longer the repayment period, the better credit is typically required. 

SBA Loans

These are term loans backed by the Small Business Administration. They’re logistically similar to traditional term loans, but with a few important distinctions.

The biggest advantage of an SBA loan is that because they’re guaranteed by the federal government, these loans often offer better rates and similar or slightly lower fees than non-guaranteed loans. On the other hand, SBA loans are sometimes a bit harder to qualify for. Because you’re going through a government institution, there may be a bit more paperwork and additional requirements before approval.

Don’t assume you won’t qualify based on your business history or recent credit problems. The only way to be certain you won’t get an SBA loan is not to try.

Microloans

These loans are a subcategory of SBA loans in some way and they are given to newly established start-ups or small businesses, including non-for-profit childcare centers. SBA makes the fund available to nonprofit community-based lender up to a maximum of $50,000 per borrower. However, the average loan size is substantially lower at $13,000. 

Microloans can be particularly beneficial if you’re a veteran or you can claim membership in any category other than the traditional “straight white male” small business owner. We can argue the politics of it some other time; for now, it’s a wonderful opportunity for traditionally underrepresented entrepreneurs to kickstart their vision.

Even if you are a straight white man, it could very well be worth looking into the Microloan program anyway. There are all sorts of factors which might mean you qualify.

Line of Credit Loans

These loans operate in many ways like a credit card for your business. (In fact, many small businesses choose to utilize a company credit card to accomplish the same thing.) The application process is similar to any other small business loan, but once approved, you only withdraw the amount you need at that moment. You can spend as much or as little of the total available in whatever way you like as long as you make the required minimum payment each month.

The major advantage of a line of credit loan (or small business credit card) is that you’re not paying interest on the money you haven’t spent yet. You don’t have to do everything at once to make effective use of your line of credit – you can pay as you go. Repayment is based on the total amount utilized so that monthly obligations can be managed through the strategic timing of your spending. Unlike a traditional loan, every time you make a payment lowering your balance, those funds become available for you to borrow again as needed.  

The potential disadvantage is one familiar to any credit card user. Unless you pay attention and avoid letting your balance swell month after month, it’s easy to spend more than absolutely necessary and to let your balance and monthly interest payments pile up. It’s often harder to qualify for a line of credit loan than for a more traditional small business loan, but thanks to the proliferation of online lenders, this is no longer as true as it used to be. Interest rates largely depend on your credit history, but as you continue to meet your repayment obligations, you put yourself in a position to secure better and better terms.

The 9 Best Business Lines of Credit to Consider

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Equipment Loans

If you’re looking to expand your business via the purchase of new or better technology or equipment, this may be the loan for you. When considering the pros and cons of small business loans, the two most common issues that come up over and over are qualifying for the loan and securing decent terms. An equipment loan improves your position in both categories.

The advantage to an equipment loan is that it includes natural collateral for the loan – the equipment being purchased. Because the value of your purchase is presumably pretty close to the amount borrowed, lenders have greater protection in the event you default on your payments or otherwise prove unable to pay. Much like an auto loan or home mortgage, your personal and business credit history certainly matter, but they’re not all the lender has to go on when considering your application.

The downside, of course, is that if you default on repayment for any reason, the lender could seize equipment essential to the operation of your business. Any business expansion assumes the resulting growth will offset expansion costs relatively quickly. If it does not, you may be left paying for expensive equipment or other materials which haven’t had the impact you’d hoped on your bottom line.

Merchant Cash Advance (MCA)

This is a short-term option which relies primarily on your business’s cash flow. Lenders offer small, short-term advances in exchange for direct access to a set percentage of your revenues. Repayment is deducted from your account automatically based on an agreed-upon formula.

On the one hand, merchant cash advance offers great flexibility and convenience for your small business when you know money will be coming in soon, but you need the cash now. Because repayment is based on a percentage of your revenue, you repay more when times are good and your obligation decreases during slow periods. You’re less likely to end up owing a large monthly installment when business has been unexpectedly slow.

On the other hand, MCAs are typically one of the most expensive forms of financing available. Fees can be high and interest rates reflect the unpredictable nature of the loan. In other words, these can be short-term solutions or seasonal strategies, but you probably don’t want to rely heavily on merchant cash advances over the long haul.

Merchant Cash Advance When Money Today Matters Most

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Invoice Factoring / Invoice Financing

Both invoice factoring and invoice financing rely on your small business’s outstanding invoices as “assets” or “collateral.”

With factoring, the factor (they’re not officially considered “lenders”) purchases your outstanding invoices at a discount and takes on the responsibility for collecting those balances. You get the cash and they profit only if they secure repayment on their own. The downside is that you’re giving up a sizeable slice of revenue in exchange for rapid access to the funds. Not every customer is thrilled to discover they’ve been “handed off” to what sometimes seems like a collection agency (but isn’t).

Invoice financing, on the other hand, is an actual loan for which repayment is guaranteed by your outstanding invoices. The money currently owed to you by customers becomes security for the loan. As with factoring, however, you tend to sacrifice a higher percentage of your revenue in order to get what’s left more quickly. This can give you the pliancy you need to navigate difficult periods, or it can inject increasing instability into your business as you scramble to get back on top of your profits.

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Investors / Partnerships

The ideal scenario is for some rich uncle or weird acquaintance from college to hear about your efforts to start your own business and offer you a blank check to get in on the action. These “angel investors” provide working capital with minimal interference in exchange for a reasonable return when and if you become wildly successful.

More commonly, you might consider taking on investors or even forming a partnership in order to combine resources. The pros and cons of this have been covered elsewhere, but basically you’re giving up a little (or a lot) control in exchange for better funding.

Kickstarting / Gofunding / Online Campaigns

The 21st century has introduced a wide range of options for pitching your ideas to others and giving them a chance to chip in on your dream. The rules vary from site to site, as do the pros and cons. In general, however, these sorts of sites work best for specific projects or limited goals. They’re not really set up to sustain an ongoing operation in a meaningful way.

Interesting Small Business Statistics:

  • 69 percent of entrepreneurs in the United States start a businesses from home.
  • According to the National Association of Small Business’s 2017 Economic Report, the majority of small businesses surveyed are LLCs (35 percent) followed by S-corporations (33 percent), corporations (19 percent), sole proprietorships (12 percent), and partnerships (2 percent).
  • Out of the 50% of those asked, “What’s the best way to learn more about entrepreneurship?” responded with “Start a company”.

Conclusion

These are challenging times for many people, and for small businesses in particular. But that doesn’t mean it’s not possible to succeed in the face of those challenges. The right financing and effective strategizing can propel you forward while so many others are still trying to figure out how they ended up so far behind.

Goalry has never been about telling you what’s best for you or your business. We prefer to offer insights, tools, and connections to the sorts of financial options which were only available to a handful of insiders a generation ago. The Goalry blogs break down complex financial ideas into easy-to-understand terms with practical examples. The Goalry App makes it easy for you to track your various accounts, categorize your small business spending, evaluate investment options, compare insurance companies, and conveniently navigate dozens of other fiscal decisions all in one central location.

Life is complicated enough without having essential information and tools scattered all over the internet or divided up into countless hiding places. Some are experts in dentistry, others know their chemistry, history, optometry, or podiatry. You may excel at microbrewery, puppetry, or archery. We’re all about goals – hence the name: Goalry.

Whether your goals are, short-term, long term, personal, financial, or whatever else you decide is important to you, we’d like to help you get there. Dreams are wonderful, but steps are what move us towards them. At Goalry, our priority is to help you take more effective control of your personal or small business finances – to get focused and stay organized so that you can better accomplish whatever your goals happen to be. Sometimes that’s weighing the pros and cons of small business loans, other times it might mean evaluating the benefits and risks of refinancing your mortgage or helping you figure out how to start saving for retirement when you’re already worried it’s too late.

Whatever your goals – and whatever’s stopping you from reaching them already – let us help. They may be closer than you think.

Loanry

Business Loan Basics Spelled Out: Loans 101

In many ways, business loans are very similar to any other sort of loan you might consider. You evaluate your needs, prepare your financial information, and shop for a lender willing to offer terms you consider acceptable. As with any other loan, the better your credit history, the better the terms you’re likely to be offered.

How Do Business Loans Work?

That doesn’t mean, however, that newer or smaller businesses can’t secure reasonable loans to meet their needs. Nor does bad credit in your past automatically disqualify you for all loans. Sometimes, the unique nature of a growing business actually makes it easier to find attractive interest rates or willing lenders. It all comes down to doing your research ahead of time and opening yourself to a variety of business loan options based on your particular business needs.

Let’s look at some business loan basics and talk about the realities of business loan shopping.

Are Business Loans A Good Idea?

Some of them are. Others might be a horrible idea – at least right now. Perhaps a better question would be,

Is a business loan a good idea for me right now?

Do you consistently have more orders than you can fill in a reasonable time? Are there opportunities you should be seizing but which require capital up front beyond what you can immediately access? Be honest with yourself – the line between taking initiative and taking a bath can be a bit blurry in the heat of the moment. If your eyes are open, however, growth is often a very good reason for the right business loan.

Is it time to update technology or add other hardware in order to maintain or increase productivity? It’s usually a bad idea to buy new toys just because they’re shiny and no one else has them yet, but if your business relies on machinery or computing power to succeed, it’s an even worse idea to let your workplace become obsolete.

Can you say with great certainty that the rush is coming and you need to be prepared with the right items or ready to offer the right services when it does? There are plenty of lenders ready to work with you in these sorts of circumstances. It’s a great problem to have!

Even if you could probably “make do” with less for now, sometimes a few small loans you pay back in a timely manner lay the groundwork for larger loans down the road when you really need them. You shouldn’t borrow just to borrow, but when an opportunity arises to build your business and your credit at the same time, it’s certainly worth looking at your options.

If you decide to shop business loans now in order to build business credit, consider starting small. Explore your options through several business loan companies and choose the one which seems right for you. Then, if you’re happy with them (and if they’re happy with you because you make your payments in a timely manner like the awesome business owner you are), you have a relationship established for next time.

On the Other Hand

Taking out loans to make ends meet month after month is not a sound business strategy. If anything, it usually delays the inevitable while making things worse. Chasing the “next big thing” or over-extending yourself or your business for a “sure thing” that your most trusted friends and colleagues warn you not to trust might be a once-in-a-lifetime stroke of entrepreneurial genius. It’s far more likely, however, that it’s simply what it appears to be – a really bad idea of the sort which are usually available if we look for them.

In short, if we’re talking business loan basics, you should start your  business loan search if it will help your business prosper. You should generally not shop business loans as an act of desperation to keep the doors open. Hard truths from hard knocks, my friend.

What Kind of Business Loans Are There?

There are as many varieties of business loans as there are businesses, which is great news for you. Here are some business loan basics about some of the more common types you should recognize as you begin your business loan shopping:

Installment Loans

These come in many varieties under several different names, but essentially these are the most straightforward sorts of loans the average person imagines when first confronting the realities of business financing. Once approved for a specific amount, usually specified for a specific business purpose, you receive the full amount from your choice of business loan companies. Payment amounts and dates are established in advance and interest calculated over the life of the loan.

Installment loans are easy to understand and expectations are clear for both parties. Usually there’s no penalty for early payment, so you can repay part or all of the loan early without penalty. Interest rates vary, but tend to be more favorable the shorter the payback period – and of course you save even more on interest if you’re able to pay ahead of schedule.

Line-of-Credit Loans

A line-of-credit loan is one of the most common and most useful for small business owners. It can be a short-term or long-term business loan  (depending on if you keep paying it off and reusing it) that allows you to access additional funds as needed up to a predetermined limit. You only pay interest on the amount you use according to terms specified beforehand. (Usually this means monthly payments until paid in full.) At the end of the contract year, the line-of-credit is re-evaluated and – if all has gone well – usually renewed for another year.

Interest rates tend to be modest for these sorts of loans, as they’re relatively low-risk for lenders. If you’re just starting out, or looking to establish or rebuild credit for your business, a small line-of-credit loan might be a great place to start.

Revolving Credit

These are similar to line-of-credit loans, but are more easily compared to credit cards. Your business may access funds as needed up to a predetermined limit, but as you pay back borrowed funds, your available balance essentially “refills”. Interest rates tend to be a bit higher than with line-of-credit loans, but revolving credit provides greater flexibility over time.

Equipment Loans

This is a specific type of short-term business loan. Equipment loans are similar to installment loans or term loans. As the name suggests, however, they’re intended to be used primarily to purchase essential equipment for your business. If you’re still establishing your business credit, these can be a useful type of loan because the equipment you purchase is natural collateral.

I know I don’t need to say it, but entrepreneurs are risk-takers by nature and sometimes our temptations are different than other folk’s. If you take out an equipment loan, you should use it to buy the equipment. Let’s stick to business loan basics and use the money for its intended purpose, yes?

Commercial Real Estate Loans

These are the same basic thing as an equipment loan, only they’re not used for new equipment. You’ll never guess what they are used for. What’s that? You guessed? Hmph. Moving on…

One advantage to commercial real estate loans is that lenders are sometimes more willing to work with new businesses and may even offer better rates. You’re unlikely to sneak off with three acres and a giant metal building in the middle of the night, making this a better risk for business loan companies.

Interim Loans

These are another form of short-term business loan. Typically, an interim loan is used to pay off suppliers or contractors and then repaid once funds become available as a result.

Other Loan Terminology

While they’re not necessarily distinct types of loans, here are some terms with which you should be familiar as you begin shopping for a business loan:

SBA Loans

An SBA loan is any type of borrowing backed up by the Small Business Administration. They’re harder to qualify for than loans from direct lenders, but the terms and interest rates are generally good. Many consider starting with the SBA to be an essential (and obvious) part of business loan basics. You’ve got nothing to lose and you don’t want to have to explain why you didn’t try, right?

Balloon Loans

Picture a large cartoon thermometer laying horizontal instead of vertical. (Put the bubble-butt part to the right.) When you borrow money with a balloon loan, you pay mostly or only on the interest during the life of the loan. That’s the long thin part. Instead of temperature, the numbers are the amounts you’re paying according to whatever schedule you worked out with your lender. At the end of the loan, you pay back the principal in full – as in, one lump sum. That’s the bubble part.

These only make sense if your business expects substantial revenue at some specific point in the future. They offer great leeway in delaying that lump-sum payment at the end. On the other hand, you’re staking a great deal on the arrival of plenty of income before the “balloon payment” is due. Lenders may require some sort of verification as to what that surge of resources might look like before advancing credit for this one.

Secured vs. Unsecured Loans

If your business is relatively new or your credit less than stellar, lenders may require some form of collateral before advancing you a loan. That collateral “secures” the loan. If for some reason you’re unable to make your payments, the lender may at some point take control of your collateral in order to regain some or all of the balance. Here’s a business loan basics tip: make your payments so you don’t lose your collateral.

Once established with a specific lender, it’s much easier to qualify without collateral – an “unsecured” loan. Your reputation and history with the lender are the guarantee, not your house, car, or children.

There are numerous other varieties which your preferred lender will no doubt be happy to discuss with you.

How Do I Qualify For A Business Loan?

The details of qualifying for a business loan will vary widely from lender to lender, but there is one qualification almost every business owner who has successfully borrowed money has in common. They’ve asked to borrow money. (Hey, it’s called “Business Loan Basics” for a reason, kids.)

There are several factors which will determine how easy it will be to get a business loan and which may shape what type of loan you can get at what terms. But whatever your circumstances in relation to each of these factors, none disqualify you from asking. That said, here are the most common factors lenders will consider:

  • Your personal credit history and credit score
  • Your business’s debt-to-income ratio (income vs. “out-go”). This includes current business debt.
  • How long you’ve been in business (2+ years is ideal)
  • The type of business you’re in. (Lenders like industries they understand or which they’ve found to be reliably profitable in the past.)
  • Collateral or other risk-minimizers

Remember: Deciding in advance you don’t qualify and giving up before you’ve started is the only real way to be certain you won’t be getting that loan. Business Loan Basics: Loans 101 – Apply. For. The. Loan.

What Documents Are Required For A Business Loan

This one also varies with the type of lender and the type of loan. Generally speaking, traditional banks will require more documentation than online lenders, but both want to make sure there’s a reasonable chance you’ll be able to repay the loan as scheduled. In many ways, this part of business loan basics is the same as it would be for any sort of loan. Here are a few things you should have ready before you apply:

Name(s) and Address(es)

This one seems obvious, but if you or your business have had multiple addresses over the past decade, it’s a good idea to go ahead and organize those for ready reference. I’m often shocked (and a little embarrassed) at how quickly I forget past ZIP codes or even what year I lived where. Save yourself some stress and record this info somewhere now so that you can easily access it as needed.

You should also be prepared with identification for both yourself and your business. In the same way we’re often asked to present a driver’s license or other ID to confirm we’re who we think we are, lenders usually want to confirm that your business is documented as well. This can be done through your Articles of Incorporation, franchise agreements, or contracts with suppliers or others with whom you do business.

Background Info

How long has your business been in operation? Unless you’re well-established and can document several profitable years, what’s your background and what are your qualifications? In short, why should the lender think you can make this work?

Your Personal Credit Report

Unless you’re a well-established business, this will be essential. Bad credit is not necessarily a deal-breaker, but avoid surprises. Check your credit report and know your credit score going in; don’t wait to be asked about it by a potential lender.

At the same time, don’t let bad credit in the past prevent you from moving forward in the present. Spend a little extra time on your business plan (we’ll look at that in a moment) and look at other ways you might present yourself in the best possible light, then go for it. And remember, there’s no need to fudge the truth here – you and your business acumen are good enough as you are. Your ideas are strong. You just need a little working capital to make it all happen. Be your best you, but still you.

Your Business Plan

You should have one of these anyway, but if not, don’t panic. This is the perfect time to create one. A good business plan isn’t just part of business loan basics, it’s part of business basics, period.

In general most lenders will be looking for:

  • The Executive Summary. This is your business plan in the most concise and clear terms. Who are you, where are you, what do you do, and how do you plan on making a reasonable profit by doing it?
  • The Company Description. A more technical breakdown of your logistics and operations. How is your organization structured? What do you produce or provide? What can you document in terms of growth or profits, current or anticipated?
  • Your Products and Services. This zooms in a bit more on what you actual make or do and why you think customers will pay you to make or do it.
  • Organization and Management Team. Who’s responsible for what? What are their qualifications or experiences? What’s the leadership structure? (In other words, who answers to who?
  • Market Research. Now that we know what you make or do, what makes you believe people will pay you to make or do it? Don’t count on anecdotes or your personal impressions; it’s time to bust out some actual charts, tables, and projections. These are even better if they’re based on something legit.
  • Strategy and Implementation. How are you going to make it all happen? This includes location, marketing, pricing, hiring, etc. There aren’t always right or wrong answers, but you should sound like you’ve researched a bit and have a plan. Ideally, you actually do.
  • Financial Projections. This should start with any existing financial statistics. What’s your forecast for the upcoming six months? Twelve months? Thirty-six months? On what are these projections based?

This is not the most fun or exciting part of owning your own business, but it’s one of the most important whether you business loan shop or not. Entrepreneurs are valuable because we reach and dream and risk; that makes it all the more important than we discipline ourselves to remain anchored in reason and reality. A detailed business plan is one critical way to do that.

Other Financial Paperwork for Your Business

If you’re not just starting up, your business has a credit report separate from your personal credit report. You can check this through various online services such as Experian or FICO.

Some lenders will also ask questions about or require copies of your personal and business tax returns for the previous three years. They may ask for documentation supporting your financial projections or going into more detail about the information in your business plan. They may even request your bank statements. The details vary from lender to lender, but it wouldn’t hurt to have this information available and organized ahead of time.

Have I mentioned that being prepared and organized ahead of time are absolute business loan basics? I have? OK, just checking. Because they are.

What Can A Business Loan Be Used For?

There are no set rules on how you use your loan, although some lenders may require you to share this information as part of their business loan application process. Some types of loans, as we covered above, are intended for specific purposes, and you shouldn’t be surprised if the lender requires some evidence they’ve been used appropriately.

Generally, though, business loans can be used for whatever your business requires.

  • Expansion – Maybe you need more room or storage. That’s a good problem to have.
  • Upgrades – It might be time for better equipment or new technology. You might even replace that dot matrix printer that requires that special paper with the tear-off strips down the side. *shudder*
  • Inventory – You can’t sell what you don’t have, and you can’t use what you haven’t ordered. This is classic “you gotta spend money to make money” territory.
  • Salaries or Bonuses – Human resources are often the largest expense of any business, especially when it’s growing. Be careful with this one, though. You should only borrow money to pay people if you have a clear plan forward. If you’re borrowing to meet payroll every few months, something is seriously wrong.
  • Special Events – Congratulations on a great year! Great work, team! Drinks for everybody! Again, it’s up to you how you spend your borrowed funds, but only do this if you know the funds are coming soon and reliably. It’s only a great party if it doesn’t bankrupt the company, kids.

Small Business Loan Shopping

Now that you know your business loan basics and have an idea of what sorts of loans are out there, let’s talk about taking action, shall we?

How Can I Get A First-Time Business Loan?

Start by revisiting the requirements above. No matter where you’re seeking your startup business loan, you should begin the process by gathering and organizing your information. Update your business plan and revisit your plans for using a new loan effectively. Take a moment and talk yourself through anything which might come up. There’s simply no substitute for being prepared.

It might not hurt to remind yourself of why you’re doing this in the first place. You’re an entrepreneur. You offer products and services no one else does, or at least offer them differently or better. Confidence matters. It’s nice when it overflows without effort, but sometimes we have to choose it and embrace it for a while until the flow kicks in again. Don’t get cocky, of course – but believe in what you’re doing.

Otherwise, why should anyone else?

Where To Business Loan Shop

It never hurts to start with traditional sources – local banks, credit unions, etc. In the 21st century, however, more and more people are working with online lenders. The best approach is to explore your options. Visit some brick-and-mortar financial institutions in your area, then spend some time looking into online alternatives.

As you may have suspected by now, we can help you with that part. Loanry simply gathers some guiding business loan finder information from you, then connects you with lenders who work with you to discuss business loan options.

Please understand that we’re not selling anything. There’s no surprise on Step 17 asking for your credit card and no ‘free trial period’ that suddenly turns expensive once you’ve forgotten all about it in a few months. In short, we’re not asking for anything from you on this one. We connect potential customers with experienced lenders – the rest is between you and them.

Obviously we want for you end up happy and tell everyone about it. Not to brag, but we’re pretty good at this sort of thing, so that happens a lot. We’re all about business loan basics, auto loan basics, medical loan basics, and a variety of other services as well. Because in the end, it’s not just about the money. It’s not even just about the business. It’s about helping people get from where they are to where they believe they can be.

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