Do you need a business loan to launch a new enterprise, enhance an existing business, meet business urgent needs, or increase working capital? If yes, it’s your great day. Business loans vary—depending on your business’s type, needs, and repayment terms—so you must understand how they work so you can decide which one is best for your company.
To Understand How Business Loans Work
- Understand What Business Loans Are
- Learn How Business Loans Work
- Know Lender-Approved Uses of Business Loan Proceeds
- Understand the Different Types of Business Loans
- Know The Requirements to Get a Business Loan
- Learn How to Choose The Right Business Loan
- Know How to Apply for a Business Loan
Ready? Let’s dig deeper!
1. Understand What Business Loans Are
To know how business loans work, understand what they are. You use business loans to address urgent expenses resulting from your enterprise’s growth and operational costs, including equipment purchases, renovations, staff salaries, etc.
Before your apply for a business loan, compare your venture’s income with the amount you need. This helps you know which business loan you can get as well as determine the most favorable repayment term for you.
2. Learn How Business Loans Work
Business loan application is not difficult. You apply to a lender and get a lump sum of money to repay over a particular period with interest. The business loan’s terms and conditions, interest rates, qualification factors, and repayment terms vary from one lender to another.
Choose a secured or an unsecured business loan. For a secured business loan, your lender requires collateral that’s worth the amount you borrow. Conversely, unsecured business loans do not require any collateral—you only sign documents to accept personal liability in case you default on the business loan.
3. Know Lender-Approved Uses of Business Loan Proceeds
To learn how business loans work, clarify why you need the loan in the first place. Don’t forget, lenders require you to specify what you plan to do with the money. You need a business loan for one or more of the following:
- Purchase inventory
- Consolidate debt
- Sustain day-to-day business cashflow
- Buy new equipment
- Clear marketing and advertisement costs
- Launch a new business
- Purchase real estate
Indicate why you need a business loan and do not include personal reasons—like buying a new car or house.
4. Understand the Different Types of Business Loans
To assimilate how business loans work, understand the types of business loans there is and choose the right one for your enterprise.
- SBA Loan. The U.S. Small Business Administration (SBA) partners with lenders to provide loans to businesses. The business loan application process is longer but offers capital up to $5 million dollars with flexible repayment terms of 25 years—depending on the amount you borrow. To boost your chances of qualification for an SBA loan, maintain a credit score of 680 and above.
- Term Loan. Get a lump sum—up to $500,000— and repay in equal installments at annual percentage rates (APRs) of 9%. The payment period extends to 10 years if you opt for a long-term loan and one year if you choose a short-term loan.
- Loan for working capital. This is a type of term loan that allows you to meet urgent needs, such as payroll. The loan ranges from $2,000 to $5 million.
- Equipment financing. Leverage this loan to purchase equipment—such as furniture, property, machinery, and so on—to boost your business’ operations.
- Business line of credit. This loan gives you access to a definite credit limit which you can draw from to meet business needs. You pay interest only on the amount you draw and access money you to $500,000 credit limit. Factors such as business profits, creditworthiness, and so on determine the interest rates. Generally, a business line of credit interest rates range from 7% to 25%.
Find out if any of these credit products—invoice financing, cash advance, trade credit or microloan—resonates well with your venture’s needs.
>>>PRO TIP: What is Business Financing?
5. Know The Requirements to Get a Business Loan
To grasp how business loans work, understand the application requirements to get one for your business. Lenders demand different requirements to approve any application for business loans. Find out what your lender requires and check if you qualify. General requirements are:
- Credit score. Determine the type of business loan you require and check what your lender demands. For instance, you need a minimum credit score of 680 and 630 for an SBA and a business line of credit loans respectively.
- Business’s revenue. Provide your business’s annual revenue report to convince the lender you can repay the business loan.
- Business longevity. Depending on your type of business, lenders require that you run your business for at least one year before applying for a business loan.
- Collateral. You need to present your collateral to your lender if you’re applying for a secured business loan.
6. Learn How to Choose The Right Business Loan
To understand how business loans work, learn how to choose the right one for your business. Work out why you demand a business loan so you can clearly identify which type of loan you need. Figure out the exact amount you require and then take a look at your personal and business credit scores.
Do a quick analysis of your longevity in business, how much your venture generates per annum, and whether you declared bankruptcy at any time. Then research lenders and compare the borrowers’ essential conditions. Decide which lender to submit your business loan application and apply online or in person.
>>>GET SMARTER: How to Get an Emergency Business Loan With No Revenue
7. Know How to Apply for a Business Loan
To comprehend how business loans work, learn the application process. The type of business loan you need determines the application requirements. Familiarize yourself with the steps that are typical to all business loans. In other words, learn to
- Fill the application form online or in-person—depending on your lender and the type of loan you need.
- Provide every necessary document such as tax returns, IDs, proof of ownership, business address, etc.
- Check your credit score to ensure it meets your lender’s requirement.
- Review your business’ financial reports before submitting your application to be sure you can repay the loan.
- Sign the agreement documents and submit your application.
- Wait for the lender to approve the application deposit the money into your back account.
Recap
To comprehend how business loans work, understand what business loans are, learn how they work, know lender-approved uses of business loan proceeds, and understand the different types of business loans. Know the requirements to get a business loan, learn how to choose the right business loan, and know how to apply for a business loan.
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