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Understanding How a Business Loan Works

One of the most important aspects of starting your own business is knowing how to get funding for your ideas. Ideas are the backbone of all businesses, but money is the lifeline to help companies to open and stay afloat. Small business loans are among the best ways to get the funding you need. It’s important to understand how a business loan works.

What Business Loans are There?

When you need a business loan, there are many choices available to you. It’s good to know the various options so that you can ultimately choose the one that’s best for your business and needs. The following are a few examples of what’s available:

  • Business line of credit: A business line of credit is a flexible type of loan that lets you pay only toward the interest on the amount of money borrowed. You are allowed to use money when you need to pay for business expenses as long as you don’t exceed the credit limit. This is similar to using a credit card. A business line of credit is good for businesses that want to better manage their cash flow, make business-related purchases and pay for business-related expenses.
  • Business term loan: This is a lump sum of money that you are required to pay back in regular payments. They have a fixed interest rate for a specific amount of time. Usually, the term is one to five years. Many different types of businesses are eligible for this type of loan. There are also lower payments and longer payment terms on these loans.
  • Small Business Administration or SDB loan: SBA loans are backed by the government and are among the best choices of business loans for small businesses. They are secured loans that require collateral as backing and are available through private lenders. SBA loan rates are flexible and allow you a variety of options. According to Lantern Credit, “..each loan targets different purposes with different funding limits.” You can choose SBA loans from the Loan Program, the Microloan Program or the CDC/504 Loan Program.

What Can You Use Them For?

There are several ways you can use a business loan. The following are some of the most common uses:

  • Purchasing inventory: When your business needs inventory, you can buy it with the funds from your business loan.
  • Purchasing equipment: Equipment is essential for your business. You can use your business loan to buy it.
  • Daily expenses: Your business loan can also fund your daily expenses for running your business. For example, your office space needs electricity, heat and cooling depending on the time of year and the office space itself.
  • Refinancing or paying debts: All businesses have debts. You can use money from your loan to pay them off or refinance.
  • Marketing: Your business loan can also pay for marketing your product or services and company.

What are the Typical Interest Rates?

Just like any other type of loan, business loans carry certain interest rates. SBA loans are among the most popular due to the fair rates they offer. You can expect rates for around 8 to 12 percent on these loans while their amounts may be as low as $50,000 or as high as $250,000.

However, if you obtained a different type of business loan online, the interest rates can be far broader, ranging from as little as 7 percent all the way up to 100 percent. Merchant cash advances can run you interest rates of 20 to 250 percent.

What this tells you is that SBA loans are the best option for funding your small business. The interest rates are fair and the amount toward the loan is generous. You have options depending on your needs and type of business.