Business loans are small capital offered by financial institutions to private businesses. In return for this cash, lenders demand repayment of a portion of the principle with additional fees and interest added on to it. Typically, business loans require timely payments on a set time-table, although interest rates and repayment terms can vary greatly. Because most businesses are seasonal in nature, most business loans have shorter repayment periods than other kinds of loans, though this is not always the case. For instance, many merchant cash advance loans are due in 30 days, whereas many credit card cash advance agreements have repayment terms of anywhere from three months to a year. The terms of repayment for small business loans often reflect the risk that lenders bear by offering them, as well as the potential repayment capabilities of the business.
To understand how business loans work, it helps to take a closer look at what they are. Business loans provide small business owners with the financing they need to expand their business, launch new ventures, or pay off existing debts. Business loans can also be used to purchase additional equipment that will help in running the business more efficiently. In order to qualify for a business loan, business owners need to convince potential lenders that they are in dire straits financially and will need the loan in order to keep the business operating. Lenders will review business plans, business income statements, and financial statements provided by the owners to determine if a business loan is merited.
Business loans are either long-term or short-term in nature. Long-term loans are used to purchase real estate or inventory, infrastructure that will last over a few years, and equipment that will help the business continue to operate smoothly. Long-term business loans often have a set repayment term of five years or more. The advantage of long-term loans is that they require lower monthly payments and a lower interest rate, but the disadvantage is that the longer repayment period requires higher monthly payments and higher interest rates.
Short-term business loans come in two types: secured and unsecured. Secured business loans have collateral, usually in the form of fixed assets like real estate or plant and machinery. Unsecured business loans do not have any type of collateral attached to them. Business owners hoping to secure a short-term business loan may apply for unsecured business loans by submitting personal credit reports to potential lenders. Personal credit reports include information about the owners’ current debts, current income levels, and their credit history with creditors.
To apply for a loan from the Small Business Administration (SBA), business owners must first obtain a loan application from the SBA. To do this, business owners must complete and submit an application that includes the following information: personal and business financial information; business and personal references; business plan; business expenses; and a letter describing how the SBA will compensate the lender. The SBA reviews this information and decides whether or not to approve the application. If it is approved, the SBA then conducts a background check to determine if the business owner has any criminal record and to check out his or her credit rating. After approval, the SBA will provide the lender with a loan guarantee.
Debt consolidation is another way for small businesses to get help with debt. Consolidation allows a borrower to bundle all of his or her high-interest debt into one low-interest payment. Since the borrower pays a lower interest rate on the debt, he or she will pay less in overall debt payments. This method requires collateral – either property or cash. When a borrower consolidates debt, he or she releases the equity in his or her business or takes out a new loan to pay off the debt.