Loans

An Explanation of Small Business Loans [Infographic]

grthrheA small business loan will typically come from a bank, but it doesn’t have to come from a traditional lender.

When many business owners first start out, they need financing for their business to help with day-to-day operations, opening expenses, and other necessities. They usually take out a loan because it helps provide an added measure of security during insecure times.

Another name for a business loan is a term loan. The concept of this style of loan is very simple: the lender will provide the business with a loan for a fixed length of time, which means the company must pay back what they’ve borrowed within the designated time frame.

So, we’re going to provide an even more detailed explanation of small business loans; we’ll talk about the application process and how to get funding for a small business.

An Expanded Explanation of a Small Business Loan

A small business loan operates on an amortization scale. This means the loan is required to be paid in installments, and these installments are going to cover the amount of interest that has to be paid on the loan and the principal balance of the loan.

There are two basic categories of term loans. The two main categories include short-term loans and long-term loans.

For a short-term loan, the borrower has to pay back the entire loan amount within a shorter period of time. One to two years is the typical length of a short-term loan.

For a long-term loan, the length of the loan will last for a much longer period of time. A long-term loan will last on average between 1 to 7 years. Please know that the loan repayment date on many long-term loans may not come for decades in certain cases.

The Small Business Loan Application Process

How is it possible to secure a long or short term loan? Many small businesses will have a difficult time securing a business loan because they do not have collateral to back them up.

Getting approved for a small business loan is never an easy process. If you intend to apply for one in the near future, please understand that the screening process is quite tough. Applicants will be required to prove they are competent, trustworthy, and of upstanding moral character.

Having a good credit history is also another major qualification for small business loan approval. If your credit history is negative, the lender will believe you’re a poor credit risk and determine you do not qualify for their loan.

The Good News about the Small Business Loan Screening Process

According to Smallbusinessloans.co, a website teaching where to find the best small business loan rates, “If you are interested in applying for a small business loan there are some different options for you.”

There is good news regarding the small business loan screening process. If you qualify for a small business loan, you’re in luck because the interest rate is typically lower than many other types of loans.

For small businesses that are already established, it’s wise to consider an intermediate or long-term loan. You should keep in mind that your bank is going to thoroughly look over your credit history, so it has to be squeaky clean and in perfect health if you’re ever going to qualify for a loan of this nature. So don’t expect to get a six-figure loan with a poor credit history and negative record.

Banks will also limit the liability amount that your business can assume. So consider the pros and cons of applying for a loan of this type and determine if it’s the best choice to meet your company’s needs.

Know Your Options

If you’ve decided to go for a small business loan, in the infographic below you can find the most common financing options you may have.

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If you have any questions, please ask below!