Are you looking for a business loan to finance your business? Here is all you need to know about business loans.
Business loans play a vital role in the growth and sustainability of businesses of all sizes. These loans serve as lifesavers, providing the needed financial support for vital aspects of a business, beginning from the cost of starting the business to expansion and capital for the day-to-day running of the business.
According to statistics over 43% of companies and businesses applied for a loan last year.
This shows that businesses of all kinds need loans for various purposes, and it is important to understand the critical role they play and the types of loans that are available to business owners seeking financial support.
Banks, financial institutions, and government agencies offer loans with huge benefits to any business, providing them with flexible and affordable interest rates to help businesses achieve their business goals.
This article is written to explain in detail the benefits and types of business loan as well as how business owners can apply for loans that meet their needs.
What is a business loan?
A business loan is a type of financing that business owners secure from conventional banks, loan platforms, or any financial organization. These loans are used to fund business operations like day-to-day business operations, expansion, the purchase and repair of work equipment, and any other business-related expenses.
Business loans offered to businesses are repaid over time with affordable interest, either in bulk or on a credit line.
These loans cater to businesses of all kinds because they come in different forms and each one is designed to meet the specific needs and financial situation of a business owner.
How does a business loan work?
Business loans operate on the basis of borrowing a particular amount of money from a financial institution and are repaid during a specific period of time, which can be daily, weekly, or monthly, with interest until the loan is fully paid.
The term of the loan includes the refund schedule, interest cost, and collateral, depending on whether the loan is secured or unsecured.
Secured loans require collateral, which the lender will determine, while unsecured loans do not require collateral but may require the business owner to provide a personal guarantee.
Businesses can use these funds for a wide range of purposes, such as hiring workers, expansion, purchasing equipment, real estate purchases, daily business operations, and so on.
Types of business loans
There are different types of loans that business owners can secure, and each of these loans serves different purposes.
They include:
Term Loan
This refers to the period it takes to payback a loan through regular payments. The borrower can pay the loan either in the short term or long term, depending on the type of loan.
In this type of loan, businesses receive the cash and agree to pay within a specific period of time. Small businesses mostly use these loans to acquire assets like equipment or buildings.
A term loan often comes with fixed or floating interest and requires the business owner to pay over a specific period of time agreed. Businesses sometimes prefer term loans because of their flexibility, low interest costs, and upfront cash availability.
A term loan may be secured or unsecured, involving a careful approval process to avoid the risk of non-payment.
Equipment Financing
Businesses secure equipment financing, also known as an equipment loan, to purchase specific business equipment like vehicles, medical equipment, or computers.
It allows businesses to break the cost of expensive assets into tangible payments over a period of time. The equipment purchased serves as collateral, and the borrower may need to make an initial payment ranging from 10% to 20%.
Equipment financing usually comes with a fixed interest rate and refund terms ranging from 3 to 10 years. Banks or any equipment financing institution can provide this loan.
Invoice Financing
 Invoice financing is a short-term loan secured by businesses against unpaid invoices. They pay a fee to the lender, who then loans them a percentage of the invoice amount upfront.
This then allows businesses to improve their cash flow, pay expenses, and reinvest in their daily operations earlier instead of waiting for customers to pay in full.
The loan repayment occurs in two ways: in invoice factoring, the lender collects payments directly from the customers, and in invoice discounting, the business collects the payment and pays the lender.
This type of financing is favorable for businesses with creditworthy customers and can be easier to secure than other types of loans, even though it may sometimes have a higher borrowing cost.
Working Capital Loan
 A working capital loan is a type of financing designed for the running of day-to-day business operations. This loan covers short-term expenses like debt payments, rent, and payroll.
Working capital financing comes in various forms, such as business lines of credit, term loans, or invoice financing.
Companies with huge sales sometimes rely on working capital loans to control reduced business periods.
Business Line of Credit
 This is a type of business loan that is similar to a business credit card. Businesses can secure a specific amount and withdraw on their line of credit, paying interest only on the amount they collect as a loan.
Business line of credit gives small business owners access to short-term funds that they use to take care of vital expenses like payroll.
This loan can be either secure or unsecured, and borrowers can renew it, frequently accessing cash without reapplying.
This form of loan is popular because it offers flexibility, quick access to funds, and is readily available from different lenders.
Commercial Real Estate Loans
 Commercial real estate loans are used to fund or acquire properties that produce income, like shopping centers, hotels, and office buildings.
Banks, insurance companies, and other sources make this type of loan available and it is different from a resident loan. They make them for businesses and have short terms spanning from 5 years to 20 years, with a loan-to-value ratio of around 65% to 80%.
Businesses that acquire this loan are corporations, limited partnerships, trust developers, or individuals. The interest rate is higher than that of a resident loan, which is between 3% and 20%, depending on the type of loan and the borrower’s financial status.
There are different types of commercial real estate loans, such as SBA loans and portfolio loans.
QUALIFYING FOR A BUSINESS LOAN
This involves meeting specific requirements or criteria outlined, and these criteria may differ depending on the borrowers.
Here are some of the basic criteria:
Credit Score
These can either be personal or credit scores. The lender evaluates the business owner and his business to know if he is creditworthy to receive a loan. Lenders do this in order to avoid giving out funds to defaulters. A good credit score will increase the likelihood of loan approval and may lead to a lower interest rate.
Annual Revenue
This is the income a business generates from its day-to-day operations in a year. Lenders evaluate this vital information to know the financial status and profitability of the business, as it tells them if the business will be able to repay the loan. The minimum annual revenue requirements for lenders may differ; however, most lenders will like to ensure that the business has a good cash flow to handle a loan.
Years in Business
This refers to the number of years of business operation. The minimum requirement for lenders like banks is two years, while other lenders may require a minimum of six months. This ensures the business remains stable and successful and enables borrowers to repay the loan since new businesses have a higher risk of failure.
Collateral or personal guarantee
To qualify for a business loan, the lender may demand collateral or a personal guarantee for businesses to secure a loan. The collateral involves assets such as vehicles, business equipment, real estate, or inventory, and these collaterals vary based on the loan package. A personal guarantee involves the business owner agreeing to pay with personal assets if the business defaults on the loan.
Business Plan
- A business plan is a document that states the business’s goals and objectives. A detailed business plan will outline how the business intends to use the loan. The business plan should involve projections, competitive analysis, and, most importantly, the purpose of the fund.
BUSINESS LOAN APPLICATION PROCESS
The process of applying for a business loan involves the following:
- Determine the type of loan that is suitable for your business needs and check if you meet its criteria, like credit score, revenue, and business operation period.
- Carry out research on lenders that offer the kind of loan your business needs and compare them to find the one that best suits your business’s financial situation.
- Gather the essential documents like your business profile, financial statements, collateral and personal guarantee information, and other vital information.
- Complete and submit the application form to the lender either in person or online, as required.
- The lender reviews the submitted application, and if it meets all the stipulated requirements, the lender will give the funds to the business owner for use.
Advantages of Business Loans
- Business owners have access to capital for the expansion of business operations.
- A business owner does not pay taxes on the profit he made with the loan he collected
- It provides a great opportunity for businesses to build a good credit history for future borrowing.
- Loans collected by a business have a flexible repayment schedule, which allows borrowers to pay at a considerable pace over a period of time.
Frequently Asked Questions
How long does it take a lender to approve a business loan?
If you meet the requirements, the loan will be approved almost immediately.
What is the maximum loan I can get for my business?
The loan amount for every lender is different, and they also consider some factors before considering the amount to give an individual.
Can I repay the business loan before the due date?
Yes, you can, but the terms of repayment depend on the lender, so you have to get all the necessary information before applying for a business loan.
Do I need a perfect credit score before I can get a business loan?
No, you only need a good score, but that depends on the lender to decide if the score is good enough to get your business loan approved.
What is the interest rate on a business loan?
There are no specific interest rates for a particular business loan; the lender will determine the interest rate based on the type of business loan you are applying for.
You can Also Read : (Zenith Bank Business Loan)
In conclusion
Business loans enable businesses to achieve their business objectives.
By understanding the complexities of business loans, which include the types, application processes, requirements, interest rates, repayment plans, and penalties for default, business owners can make a well-articulated decision when seeking financial aid for business operations.
Did you find this article on business loans helpful?
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