What Is a Business Loan?

Business loans are an attractive financing solution for small businesses, and can help finance new projects, equipment purchases and working capital needs. When paid on time they can also establish credit within an enterprise.

Different lenders have unique requirements for business loans; however, having an understanding of how these loans operate will enable you to select the ideal loan solution for your company.

Definition

Business loans are a form of debt financing that provide companies with money they can repay with interest over time, often used for purchasing inventory, funding expansion plans or managing cash flow. Business owners may use them for any number of purposes including inventory purchases, expansion planning or cash management.

Lenders typically assess a business’s most recent financial accounts to ascertain its creditworthiness, such as P&L statements and balance sheets. Lenders will also review credit histories, turnover data, and turnover trends to assess risk.

Lenders will consider both the company and borrower’s personal credit when reviewing loan applications, since most business loans require personal guarantees from both. Should the business go bust, the borrower will still be held liable to repaying debt.

Types

Banks and online lenders typically provide business loans at competitive rates with flexible repayment terms, often requiring that borrowers submit recent financial accounts (P&L and balance sheet), personal guarantees and collateral as a guarantee against this type of financing – unlike venture capitalists or angel investors who may demand equity stakes and profits share for these types of financing solutions.

Alternative business loans such as merchant cash advances and invoice financing offer funds based on future credit and debit card sales; respectively. Invoice financing helps companies get paid faster by lending them money against outstanding invoices; both may provide more flexible terms than traditional term loans with shorter loan tenures and higher interest rates.

Interest rates

Interest rates for business loans depend on several factors, including lender, loan type and borrower qualifications. One way of comparing various loan products is examining their annual percentage rates (APRs), which take into account all fees associated with a loan (such as interest and charges). Lenders may offer reduced rates if collateral such as inventory or real estate reduces risk to them – something annual percentage rates do not capture.

Factors that influence business loan rates include loan repayment period length and amount borrowed. Traditional bank small-business loans generally offer lower interest rates but more stringent eligibility standards while online lenders have looser eligibility standards but higher rates.

Requirements

When applying for a business loan, lenders require several documents from you – among them your business plan which should outline both financial goals and qualitative business objectives. It should also demonstrate that your company has enough of a buffer against debt repayment that it can maintain profitability over time.

Size and industry of your business can have an effect on lender decision. Some may prefer working with corporations rather than sole proprietorships or partnerships; the length of time your company has been running can also impact eligibility.

Once approved for a business loan, banks will draft an individual loan contract tailored specifically for your company. Carefully read it to ensure all collateral, interest rate and term length provisions correspond with what was discussed during the application process.

Options

There are various business loan options to meet the needs of virtually any company, such as term loans, lines of credit and invoice factoring. Although alternative financing may have less stringent qualifications than traditional loans, its interest rates and fees could still be more costly.

Some businesses rely on working capital loans to manage cash flow issues or cover short-term expenses, with more lenient qualification requirements than SBA or term loans and lower rates than credit cards.

Some businesses need help purchasing or leasing equipment such as vehicles for delivery services or restaurant kitchen equipment. Asset finance solutions from both online lenders and traditional banks may provide such support, with repayment terms that span months or even years depending on which lender they work with.