A business loan is a type of financing that you can use for virtually any purpose related to your business. You can use the funds to buy inventory, acquire an asset, or pay your employees.
Essentially for anything that can help you develop your business.
In this article, we will consult on how business loans work. We will also explain the different types of business loans and how they can be used.
What is a business loan?
The first specialty to remember is that the terms “business loan” and “business loan” can be utilized interchangeably. They mean the same thing. Both refer to the sums that financial institutions lend to businesses.
How can a business loan be used?
Most business landlords use funds in one or more of the following ways:
To meet your working capital needs
It could be that you don’t have enough cash because you recently purchased inventory. Or your accounts payable may have increased.
A business loan might be the best solution for a business that needs capital.
To buy new properties or machinery
Fixed assets can be expensive. Most business owners don’t have enough money to buy costly equipment or office space with their funds.
A loan can be the perfect solution to buy new machinery.
To buy another business.
There are two ways to increase your company’s revenue and net income.
The first involves organic growth. This method uses existing infrastructure to increase your sales steadily.
Inorganic growth is faster. You can double the size of your company by acquiring another business. A business loan could be the source of income you need to make the purchase.
To pay for a marketing campaign
Sometimes a marketing campaign can mean a massive increase in your profits. You could have more sales and customers if you increase your geographic reach or market segment.
But these campaigns can be expensive. A business loan could provide you with the funds to take advantage of marketing.
Different types of business loans
Business loans can be grouped into several categories.
How long it takes to pay them:
Short-term business loans can provide you with immediate cash. Short-term business loans are usually repaid over 1 to 5 years.
Some entrepreneurs use credit cards to meet their urgent cash needs. However, short-term loans are a better option with lower interest rates.
Banks and other financial institutions make term loans. They are for a period that could be extended up to 10 years. Refunds are usually made monthly or quarterly.
These business loans are usually used to purchase expensive equipment. They can also be used for a company’s working capital requirements.
For the amount you receive:
This type of business loan is aimed at business owners who need a relatively small sum. For example, Camino Financial offers microloans in amounts up to $75,000.
Some entrepreneurs turn to personal loans or payday loans when they need quick cash. This can be a mistake that will hurt your finances. Microloans are cheaper and better suited to a company’s needs.
Small Business Loan
The size of these loans can be tailored to any of your business needs. For example, Camino Financial has small business loans ranging from $10,000 to $400,000.
These loans are the most used and requested: they offer enough money to finance most business projects and offer enough time to pay them that the monthly payments do not end up being enormous.
The loans that can be accessed through banks are among the highest loans: they offer you more cash and lower interest rates. But the problem is that they are harder to come by than alternative lenders.
Bank loans typically range from $10,000 to up to $1 million.
It might be a good idea to apply for an SBA loan. These are business loans for entrepreneurs that the government partially subsidizes. The government grant helps lower the interest rate. Ergo: you’ll have a cheaper loan. Their rates can be as low as 7.5% to 9.5%.
You can receive up to $5 million and 25 years to pay!
However, it can be tough to be approved, as these loans have stringent requirements.
A business loan can also be used to refinance your existing debt. This involves taking out a low-cost loan to pay off your high-cost debt.
Refinancing could keep you hundreds of dollars a month in interest costs.
This type of business loan involves borrowing against the security of an office building or other commercial property.
Commercial mortgages are different from residential real estate loans.
A commercial mortgage is usually approved depending on the expected operating income of the property. A residential real estate loan, on the other hand, is approved after determining the borrower’s creditworthiness.
Cash advances (or MCAs)
A Merchant Cash Advance is a loan you are given depending on your credit and debit card sales. This means that the amount of money offered by the lender will depend on your regular card sales: if they are low, you receive little; if they are high, a lot. Then, a percentage of every sale you make will go directly to pay for your MCA.
While many use MCAs as a quick and easy form of financing, they can be costly – the APR can go up to 400%!
Lines of credit
Lines of credit are like credit cards: you can spend the amount you want as long as it doesn’t exceed the range you were approved (your credit limit). Monthly you will pay only the amount you spent, no more. Of course, you also have to pay interest.
These types of loans are great if you have ongoing but fluctuating expenses. But if you need capital for just one business opportunity, we recommend looking for a different kind of loan.
Business Loan Requirements
Planning to get a business loan? Before you begin the process, you should know business loans’ essential requirements and details.
Many lenders insist on having a guarantee, collateral, or collateral.
They want to make sure they won’t lose money. If you can’t repay your business loan, the lender could sell the asset you provided as collateral. This could be real estate, inventory, or the machinery you use to make the products you sell.
If you can’t or don’t want to provide collateral, you can opt for an unsecured business loan.
Minimum credit score
You may find financing with meager interest rates. But it’s not that easy to get one. It would help if you had a good credit score to qualify for these loans.
Each lender has different requirements, so you should research what credit score you need to be approved. Most will ask for a credit score of 620 to 680.
How long does it take to get a business loan approved?
According to the 2019 Small Business Credit Survey, conducted by a collaboration of the 12 Federal Reserve banks, traditional lenders can take long to approve loans.
The Survey reveals that “those who borrowed from banks were more dissatisfied with waiting times for credit decisions.”
Speed is a critical factor when an entrepreneur applies for a business loan. Getting approval weeks or months after the application was made could mean losing the business opportunity.
On the other hand, online lenders tend to be faster. Some online lenders have an approval period of less than a week, and sometimes you can receive your funds two days after being approved.
Social Security Number
You may be asked to provide a social security number. If you don’t have one, your application will be rejected.
Most lenders will need your SSN to approve your loan. They use this number to check your credit score and prove that you are a U.S. citizen. This is a problem for immigrants who have opened businesses in the United States.