Small Business Loans and How They Work
Whether you're a startup or an established company in the development and expansion stage, you'll almost certainly require financing. Considering that about 45% of business owners took small business loans to counter the effects of inflation, it's safe to say they are a key ingredient to an organization's success. Especially during uncertainty.
It doesn't matter what industry you are in or your level of experience as a small business owner. Having access to a small business loan is a great resource when you need to finance a small enterprise's diverse needs.
Small business loans are an ideal option for people who meet the requirements because they are considerably easier to obtain than investment money and help you keep full control of your organization.
What Is a Small Business Loan?
A small business loan is a credit to borrow to launch, maintain, or grow an enterprise. They are usually repaid over a defined period with interest and frequently in regular installments.
Once you fulfill the eligibility requirements, knowing how small business loans work will help you choose the best loan for your company.
How Do Small Business Loans Work?
The fundamental difference between personal loan’s and small business loans is that personal loans are for individuals while small business loans are for corporations.
Business loans provide financing to entrepreneurs as a lump sum or credit line. In exchange for the funds, your company agrees to pay back the money, plus interest and fees. Your lender may need daily, weekly, or monthly installments until the loan is fully paid, depending on the type of loan.
Loans for small businesses can be secured or unsecured. Secured the loans demand collateral, such as real estate, equipment, cash, or assets. The lender can seize the collateral if you default on the loan. Conversely, collateral is not mandatory for unsecured loans. Instead, you usually need to sign a personal guarantee committing yourself to accept liability in case the company defaults on its payments.
Common Steps in The Small Business Loan Application Process
Each type of loan may have a different application process. Choosing the type of loan you want will give you clarity on how to proceed with the application. Here are some essential steps involved with most loans:
Identify the type of loan you want.
If you want to apply for a small business loan, you must first identify the type of loan you want. There will be different loans available based on the amount of money that you need. These can be cash advances, long-term loans, or short-term loans, depending on the purpose of your project or purchase.
Fill out an application
After deciding how much money you will need for your project or purchase, you’ll fill out an application. On the form, supply all of your information, including your name, address, phone number, Social Security number, and bank account numbers.
Provide supporting documents
To proceed with the application, the bank/financial institution may require proof that you own or operate a business or non-profit organization. The best way to do this is by sending copies of tax returns, bank statements, or pay stubs showing earnings. If you don't have these documents handy, then try looking up your last two years' worth of tax returns online.
Supply proof of operations
Unless you have a prior relationship with the financier, most banks and financial institutions require proof that your business is operational or has been operating for at least six months before applying for the loan. You can do this by providing copies of your business license or by sending in a copy of your current registration with the state.
While applying for a small business loan, you need to have all necessary documents available before submitting your application so that the lender can easily review them and approve your loan request without delays.
Types Of Business Loans
There are many different small business loans available to business owners. Each type of loan has benefits and drawbacks, so it's important to understand the different options before choosing one, and the impact it would have on your business’s earnings.
Small business line of credit
A line of credit is a revolving loan, which means you can borrow up to a certain limit, make repayments, and then borrow again. This type of loan is helpful if you need flexibility with financing your business. It also allows you to borrow up to a certain amount, which can be used for any business purpose.
The major benefit of this type of loan in small business banking is that you only have to pay interest in the amount that you borrow. However, lines of credit typically have higher interest rates than other types of loans, so use them cautiously.
Accounts receivable financing
Accounts receivable financing allows you to borrow against your outstanding invoices. This is a valuable resource because it gives you the cash upfront when your customers are paying slowly s or other conditions result in a lack of available working capital.
These loans are easy to qualify for, even if you have bad credit, but may include significant fees and interest rates. Your accounts receivable (money that your customers owe you) can act as collateral. This provides you with the funding you need upfront and gives you the time to wait for payments.
Working Capital Loans
Working capital loans are designed to help businesses with their day-to-day expenses, such as payroll or inventory. With this type of loan, you can borrow money to help with your day-to-day expenses. This can be a great option if you are having trouble making ends meet each month.
Small Business Term Loans
A small business term loan can be used for short-term financing needs. These loans have a term of one to five years and fixed interest rates. The main benefit of a small business term loan is that you can use it for a variety of purposes, such as working capital, equipment purchases, or even expansion. One downside is that the interest rates can be higher than other types of loans, such as SBA loans.
SBA Small Business Loans
SBA small business loans are backed by the Small Business Administration and typically have lower interest rates than other types of loans. These comprise SBA 7(a) loan, CDC/504 loan, and microloans for which you can borrow as little as $2,000.
One disadvantage to these loans is that they often have longer repayment terms of up to 25 years. This implies the loan can be subject to both fixed and variable interest rates throughout the repayment period.
Equipment loans allow you to finance the purchase or lease of new or used equipment. The equipment serves as collateral for the loan, so the lender could seize the equipment if you default.
Small business credit cards
Small business owners can finance everyday expenses for their business, such as office supplies or travel, with small business credit cards. This is a revolving credit line that can carry a balance from month-to-month if needed. Just be sure to make your payments on time and keep your balances low to avoid costly interest charges.
If you're a small business owner who needs financing, there are more options available to you than ever before at Valiance Bank. However, taking the wrong loan can slow you down or even sink you. To ensure you are seeking the right type of loan, thoroughly research all of your options before making any decisions. At Valliance Bank, we take the time to explain to you what loans are available and how they work so you can choose the loan that’s right for your business.
Start your Valiance Bank small business loan application today! Contact us to discuss eligibility for a small business loan and other lending options available to you.