Small business loans work the same way any traditional loan works. A lender extends money to the business and the borrower then becomes responsible for paying back both principal and interest over a specified period of time.
Small businesses are a wonderful part of the business world because they often give their work a special touch that larger companies fail to deliver. A downfall of small business ownership is financial struggle at times due to their lack of resources. Small businesses don’t emerge from nothing, they often need financing to start up, become more established or grow. Securing a small business loan can help small businesses achieve their goals and is likely a requirement at some point in the business’s lifetime.
If you own a small business and are considering obtaining financing to achieve your objectives, you’ve come to the right place! In this guide, you will find information on small business loans, their affiliated advantages and disadvantages, and tips for getting approved.
A small business loan is exactly what it sounds like, financing for small businesses. Small businesses have rather unique needs in the world of personal finance when compared to other business structures. The purpose of a small business loan is to cater to the special needs of small businesses.
Small business loans work the same way any traditional loan works. A lender extends money to the business and the borrower then becomes responsible for paying back both principal and interest over a specified period of time. The exact terms of how the principal and interest is repaid can vary a lot from loan to loan and lender to lender. All of the particulars will be determined during the application and approval process.
All businesses have different financing needs at different times, even small companies. For this reason, there are many varying small business loan products on the market. While ample choice is great, it can also be challenging to navigate through all of the financing products out there. To help you work through the selection process, below are all the main types of small business loans along with their advantages and disadvantages.
This type of loan is typically used for a one time expense and are the most commonly used form of small business financing. Its main characteristics include a fixed lump sum amount, a fixed term and a fixed payment - essentially everything is fixed!
As the name implies, this type of loan has a shorter repayment period compared to regular term loans. Otherwise, a short term loan is exactly the same as a regular term loan. The repayment period of this type of loan is commonly between six and eighteen months.
Many small businesses require equipment to operate their company day to day. An equipment loan helps small businesses purchase the assets they need, no matter how specialized or unique those assets are. The purchased equipment is often used as collateral to secure the loan.
Unlike a loan, a line of credit is revolving which means the balance is carried from month to month. Typically, a line of credit is used as the business needs it, up to the maximum threshold, and the balance isn’t due right away. The only thing you’re responsible for on a regular basis is interest payments.
This type of financing enables businesses to leverage the cost of outstanding invoices. In simpler words, the business will obtain financing in the amount of a received invoice and have that cash available to them until the invoice is actually due. Essentially, this type of financing helps businesses manage and optimize their cash flow.
The SBA is a non-profit organization in Canada that helps small businesses achieve their unique goals. These loans tend to have custom terms and conditions that suit the borrower’s needs comfortably.
Each lender differs in what they consider with regards to a loan applicant and they will have varying requirements. Before applying, reach out to the potential lender to see what their requirements are. Knowing the requirements ahead of time will help you prepare for the application process and better your odds of approval. Not only that, you won’t waste your time applying for a loan only to find out that you don’t meet the minimum requirements. Below are common factors that small business loan lenders will consider:
Getting approved for a small business loan is actually easier than you might think. The key is to spend some time researching and preparing before actually applying. As the old saying goes, prepare for the worst and hope for the best! Below are several tips and tricks that you can use to better your chances of approval.
Every business starts somewhere, but to get somewhere else financing is usually a requirement. Whatever it is you want to change about your business is possible with the help of financing. Before proceeding with just any form of financing, take the time to write down your business goals and needs. When researching and shopping for financing, always refer back to your goals and needs to ensure you make the best decision possible for your business. Good luck on your small business loan search!
Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook.
