How Do Small Business Loans Work

Articles Posted By TransactWell

  • October 13, 2020

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Every small business owner needs capital and cash flow to survive. In order for many businesses to grow and scale their businesses, they rely on a small business loans for such things as new projects, marketing, technology, or updating and renovating their place of business to operate, grow and survive.


Small business loans are a form of financing your business and gaining capital. Money is borrowed from a lender such as a bank or private lender and repaid with interest over a predetermined period of time such as 12 months.


The Benefits of Small Business Loans

Small business loans are of great help to entrepreneurs who are looking to expand their business. There are various benefits of getting a small business loan. Some of the primary benefits of getting a small business loan are mentioned below:


Wide range of Purposes

The small business loan amount can be utilized for a wide range of purposes. Some of the common reasons for getting a business loan are upgrading the infrastructure, purchasing equipment, machinery, stocking inventory, recruiting staff, meeting working capital needs, marketing and promotion, paying utility bills etc. The loan amount can also be used for merger and acquisition.


Getting a Small Business Loan

You can get a small business loan quickly and conveniently through a hassle-free online application process in most cases. Funding from a business loan can be in your account in as little as 24 to 48 hours.


Small Business Loan Interest

With reputed financial institutions, you can get a small business loan at an attractive interest rate. A high credit score can help you negotiate with the lender to obtain a competitive rate and favorable terms on your business loan.


Flexible Repayment Tenure

You can choose small business loan terms and rates according to your cash flow. To make your payments more affordable, you can opt for a long-term business loan. On the other hand, if you wish to get rid of your debt sooner, you can opt for a business loan with shorter term or even pay it out early.


What Business Loans can be used for?


1. Purchasing inventory

A large percentage of businesses use their small business loan for purchasing inventory. Retailers and storefront typically use business loans in this way which helps with seasonal fluctuations and change over.  Other types of business include manufacturing, buying inventory such as raw material to turn into finished products.

2. Purchasing equipment

Having the right equipment is essential for all businesses to operate. A high number of small businesses use small business loans to purchase equipment they require to run operations. A Business loan for purchasing equipment would be an alterative to equipment financing or equipment leasing.

3. Day-to-day expenses

Business owners can use business loans for their daily and monthly operating expenses and cover bills and utilities.

4. Refinancing or paying other debts

A business loan can be used to consolidate debt into one manageable payment.

5. Marketing

To grow your business, it’s imperative to get new customers in the door and keep loyal customers. Whether it’s through social media, email, events, or more traditional paid media, marketing is one of the best ways to grow your business.


First Time Small Business Loans

For new business owners, small business loans require more work and can sometimes be harder to obtain then established businesses seeking the same type of loan. This is namely due to the fact that there is no business history for lenders to review or use to base their decision. This can affect eligibility for a small business loan.


Here is what you need to keep in mind:

  • Your credit score is important. Since there is no business history, credit decisions will rely heavily on your personal credit score.
  • Know how much you need and what you need it for. This show you have a plan to use the money for your business and how you are going to generate income and pay back the loan.
  • Have your paperwork ready. Different lenders may ask for different things. In most cases you can expect to provide:
    • Business license
    • Bank Statements
    • Tax Returns
    • Small Business Plan
    • ID
  • Small Business loans can take time and feel overwhelming. Putting in the time to do things right pays off. Do you research on lenders and their requirements before applying.


Repayment and Terms to Consider

When people talk about small business loans, they are typically referring to term loans. These loans are repaid in regular payments over an agreed upon period of time - this time period is the loan term. Each lender has specific loan terms; some as low as 3 months to a year and some up to twenty-five years. If you require specific repayment terms, this is where it pays to do your research – long term business loans vs. short term business loans.


As with anything, it’s important to compare your options and see if a small business loan is the right financial decision for your business and your small business funding. If it is, then it’s a good idea to also see which loan provider is your best fit and provides you with the most value and flexibility. Another option tip is to also consult your bookkeeper or accountant  to see how a loan would work with your small business accounting and needs.


Need a Business Loan – Start Here


Hope that helps!


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