Tens of millions of small businesses operate in the United States. They collectively employ almost 50% of the nation’s population.
If you have your eyes set on becoming an entrepreneur and are thinking of foraying into the world of small business ownership, you’re probably wondering how you can get your hands on the money required to start up and stay up. Therein lies the purpose of this post.
Our team aims to answer the age-old how do small business loans work question in hopes of helping you acquire one, manage it properly, and invest it well. Curious to learn more? If so, keep reading!
What Is a Small Business Loan?
Small business loans describe a slew of lending products that are targeted at small businesses. While people’s definition of what constitutes a small business varies, if you have under 250 employees and are doing less than a million dollars in sales, you’ll meet most small business loan standards.
Like any loan, small business loans will give you access to a lump sum of money that you’ll have to pay back over a period of time. That period of time and how much over what you borrow (interest) you’ll have to pay back will vary from loan to loan.
Who Gives Out Small Business Loans?
Several parties give out loans offered to small businesses. Furthermore, each of those lenders gives out different small business loan variants.
Here’s where most small-scale entrepreneurs will find loan products that work for them.
As is the case with most loans, when people need to borrow money, most will head to their local bank or credit union. Both banks and credit unions offer several loan products for small business owners, many of which they’ll fund in under a week for qualified individuals.
To improve your chances of getting a bank/credit union loan, it helps to have a relationship with the institution you’re trying to work with rather than just walking in off the street. In other words, try the bank/credit union that you do your personal banking with before branching out to others for loan approval.
Another popular place small business owners love flocking to for loan approval is the SBA. The SBA offers a loan that’s backed by the federal government to an extent. That backing makes it so lenders can offer lower interest rates since their risk of loss is largely mitigated.
You don’t have to find an SBA location to get SBA loans. You can head over to their website and see which private lenders are licensed to offer SBA loans in your community and work directly with them to secure it.
Friends and Family
You’d probably be surprised by just how many people turn to friends and family to get their business off the ground. The reason why friends and family are such a popular way to find answers to your how do small business loans work questions is that the loans they offer generally accompany little to no interest and you’re not likely to get sent to collections over a couple of missed payments.
The downside here is that violating friends and family members’ expectations when it comes to lending can put you in a position where you end up losing the relationships that shape your life. That can be a high cost to doing business which, in our opinion, is something that’s best avoided.
What Kinds of Loans Exist?
As we’ve alluded to a couple of times, several loans exist under the small business loan umbrella. Therein lies the importance of having a base understanding of the most common loan products. That way, you can get matched with small business loan products that actually work for you.
Here are a handful of common loan options you may run into at various lenders.
Account Receivable Loans
Having trouble keeping up with those “net-90” terms some of your clients demand on their invoices? You’re not alone.
Several small businesses have cash flow problems which create situations where it can be catastrophic waiting months for involves to get paid. Fortunately, lenders that offer account receivable loans will pay out your invoices immediately, for a slight fee, and will then wait for your clients to pay them.
Working Capital Loans
Working capital loans in the small business arena are like short-term loans in the personal loan arena. They are usually smaller loans that have a short payback window. They’re intended for business owners to be able to fund expenses that they need to get through today.
Things like payroll, overdue invoices, lease payments, and similar imminent expenses would all be appropriate to cover with this loan product.
Term loans are broader types of business loans. They offer varying amounts of money and their term, which dictates how long you’ll have to pay the loan back, will vary as well.
A typical term loan gives borrowers 5-years to make good on debts. Again though, that number could be larger or smaller.
How Do Small Business Loans Work – Answered
After reading this how do small business loans work post, we’re hopeful that you have an appreciation for what small business loans are, where to get them, and the types of loans that are out there. Beyond that, all you need to do when you acquire a loan is to read its guidelines carefully so you understand what’s expected from you and to pay back your loan correctly.
Our team wishes you the best as you find the right loan to power your venture. If you find yourself in need of more guidance throughout the loan process, feel free to browse additional helpful content on our blog.