What is a Business Loan?
When you start your own business, there’s a lot that you need to learn, and fast. The financial side of running a company is going to be a steep learning curve, and one thing you’ll need to figure out is business loans.
The best businesses in the world can run short of money or need an injection of capital at some point. A business loan allows you to borrow money from a bank or loan company and pay it back over time. You can use the money to cover your overheads during a slow period, to replenish your stocks, or invest in machinery or software which helps you to become more profitable.
Small business loans are a proven way to finance the growth of your business. You’re able to inject cash into your business and build in the cost of repaying into your business plan.
How do Business Loans Work?
To take a small business loan, you need to apply to borrow money from a bank or a loan company. The company will assess your company finances and your personal ability to repay the money. Once the lender is confident that you can repay the business loan, they will tell you how much you will need to pay back every month.
Interest rates for business loans can vary, and this will affect how much it will cost the business to borrow the cash. Cheap business loans are usually for borrowing small amounts over short periods of time, whereas your rate and overall cost will be higher if you borrow a large amount of money and pay it back over a long period.
Although the loan purpose can vary, the structure of small business loans is generally the same. Some things that can be different include:
- Weekly or monthly repayments
- Whether you will pay origination and other fees
- If you can repay the business loan early
- How long it can take for the loan to be approved
When you’re looking to compare business loans, you should take these factors into consideration as well as which one has the cheapest interest rates.
How to Qualify for a Business Loan
The first thing you need when making an application for a business loan is a registered company. Taking out a business loan can be done at any stage in the life of your business, but it can be more expensive if it’s not been established very long.
The owner of the business needs to be the person who makes a small business loan application. The credit score of the individual will be taken into account, as well as the financial performance of the company. Sometimes, you might also need to offer security for the loan, this can be in the form of assets that the bank or loan company would take if you were to miss payments.
Most lenders will want your business to have a monthly revenue of $10,000, but this isn’t always the case – when you compare business loans, this is a factor you should take into account. As well as your revenue, you’ll be asked to supply your business bank statements so the lender can see if your business is in good shape and can afford the loan.
Types of Business Loans Available
To get a business idea off the ground, you will need capital. Some businesses might need to invest in equipment or tools, whilst others need to cover overheads and buy stock. A start-up loan for a small business will give you the cash you need to start being productive. It’s seen by banks and loan companies as quite a big risk to lend to a new and unproven business, unfortunately, you will not get the cheapest interest rates around.
Small business loans
Reasons to take out a loan for a small business can include to plug a gap in income during a seasonal slump, to provide funds whilst waiting for an invoice to be paid, or to invest in stock, equipment, training, or software. These loans can typically be as low as $5,000 and can reach up to $5 million. The funding you get will depend on the size of your business and what you can afford to pay back.
There are different kinds of short-term lending available to small businesses. Some examples include:
- Business line of credit where you get given a credit limit from which you can keep borrowing from as you’re paying it back.
- Invoice finance in which the lender borrows money to you whilst you wait for an invoice to be settled.
- Merchant cash advances allow you to borrow money based on your future credit card sales.
There are medium- and long-term business loans available too, which can be used to fund big investments and can have lower monthly payments.
Peer-to-peer business loans
Bank loans to business firms can be difficult to get approved, especially if your business is new or you have a low credit score. A peer-to-peer business loan is funded by a group of small investors rather than a big institution. Each small lender will look at your particular circumstances and decide whether they want to take the risk to lend to your business. They won’t be the lowest business loan rates you’ll see, but they can help businesses in unusual situations to get the funding they need.
Bad credit business loans
Even when you’re taking out a loan for your business, your personal credit score will still get taken into account. If you’ve had problems before and have a low credit score, there are still places that might lend to your business. When you compare business loans, you can search for ones that offer financing to people with poor credit but have a solid and profitable business.
Benefits of Business Loans
- Allows you to make a quick investment in your business
- Gives the option to make long-term plans
- Funds expansion, making your business more profitable
- There may be tax benefits to taking out a loan
- No need to sacrifice a portion of your business to an investor
Drawbacks of Business Loans
- Requires careful cash flow management to meet monthly (sometimes daily or weekly) payments
- Can have strict eligibility criteria to meet and lots of paperwork to submit
- Interest rates can be quite high
How to Compare Business Loans
To make a business loan interest rate comparison, there are a few factors to consider. Knowing your business is healthy and profitable means you know you’ll likely get the lowest business loan rates, whereas business loans for bad credit will be more expensive.
Our table lists some of the most well-known business loan providers, ranking them on important factors such as:
- How easy and quick it is to apply
- The rates and fees charged
- Payment terms available
- Different loan types
- Customer support and benefits available
Starting to look for a business loan quote can be daunting with so many providers out there. You can choose to use a business loan comparison site like ours, which will search through lots of different lenders and help find ones that you’re eligible for. Using these sites can save you time, but it can be worth asking the bank who provides your business account for a loan too, since they are already familiar with your business and understand your cash flow and profitability.
Borrowing money for a business can feel like a negative experience, but there are plenty of positive reasons to take out a loan for your business. You can expand your production, fill a cash flow fluctuation, invest in your premises and people, and keep your business viable when an invoice is delayed in payment. As an entrepreneur, you’ll want to find the lowest business loan rates possible, and the information here will help with that.