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Understanding How Business Loans Work and Tips to Help You Secure One

Is funding your small business your biggest challenge? It doesn’t have to be. You might be wondering, “Is it hard to get a business loan?”

Once you understand how business loans work, you’ll see that there are several lending programs ideal for funding your small business. For many small business owners, getting a business loan is the first step in turning the vision you have for your business into a reality.

Read more to learn about small business loans, and how they work.

What Is a Small-Business Loan?

You can apply for several different types of lending for your small business. The most common one is a term loan.

You receive one lump sum when you get a small-business term loan. Your lender, usually a bank, advances you the amount of cash designated in the loan agreement. Then you repay the borrowed amount plus interest using scheduled installments.

How Business Loans Work and Repayment Terms

Typical business loan terms have several variables and can vary depending on your lender. Here are common business loan terms:

Commencing Payment

Not all small-business loan payments are due right away. Some lenders will give you a grace period before you start repayment. They wait until you earn some revenue before requiring payments. Usually, you make monthly payments once repayment begins.

Interest Rates

Your loan will have either a fixed or variable interest rate. A fixed interest rate has the same rate for the life of the loan. Variable interest can increase or decrease over time. Your loan interest will also compound each month or yearly.

How to Qualify for a Small Business Loan

To qualify for a small business loan, you’ll have to give each lender important facts about you and your company. Some business services will match you up with a lender so you only have to fill out one application.

Most lenders will require the following information:

  • Credit score
  • Business history
  • Collateral
  • Cash flow
  • Business model

This information allows the lender to see if you’re serious about your business. It also lets them decide if you’re a risk. Think of them as investors in your business.

What Are the Types of Lenders?

Banks are the most common small-business lenders for traditional loans and SBA secured loans. It’s often easier to get a loan from your local bank because you have connections to your community.

Government loans and grants are other types of lending for small businesses. They’re run by your state or local community. Keep in mind that these usually have limited funding so if you need more than they offer, go with traditional bank loans.

Online lenders also offer small business loans. If you decide to apply for an online business loan, read the fine print. Many online lenders are notorious for unfavorable repayment and interest terms.

Business Loans Can Help Your Business Grow

Applying for a business loan can be challenging, especially if you’re not sure of how business loans work. Hopefully, this article helped explain a few factors about these loans.

Business loans are great options to help you get started with your business or help your existing business grow.

If you found this small-business loan information helpful, read more of our educational business content.

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