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Small Business Loans: How it Works

Updated: Sep 7, 2020

There are two main reasons why small business loans exist. It is to help small business owners fuel their dream business or help their existing business stay afloat. Whether it’s to pursue business ownership for something you’ve been working on for quite some time now or purchase a piece of equipment to start, a small-business loan can help you achieve that. There are just so many options available but the most important thing is to know how small business loans actually work.

What is a Small Business Loan?

Small Business Loans are provided to small business owners for different purposes by various lenders to help them secure funds with less restrictive requirements. Lenders could either be direct online lenders, large commercial banks, large community banks, peer-to-peer lending sites, and bank lenders backed by the U.S. Small Business Administration or SBA.

Types of Small Business Loans, how they work

Over time, small business loans have evolved since it has helped different entrepreneurs meet their goals. For you to know how Small Business Loans work, you need to understand the types of loans needed.

Small Business Line of Credit

A Small Business Line of Credit is similar to having a credit card. A business owner can borrow up to a certain limit and pay only the interest on the amount you borrow. Having a Small Business Line of Credit means you can draw funds and repay as often as you’d like as long as you do not exceed the allowed credit limit.

Working Capital Loans

Working Capital Loan is a type of financial assistance that helps the everyday operation of a business. This would include paying rent, debt payments, or maybe even payroll. This type of loan is features lower amounts and shorter terms and are linked to personal credit.

Accounts Receivable Financing

This type of Small Business Loan is also known as “factoring.” This involves selling outstanding invoices or receivable to a lender who provides cash for a fee. The amount lent depends on the age and quality of the receivables. While it’s one of the fastest ways to get financing, it does cost more.

SBA Small Business Loans

SBA stands for U.S. Small Business Administration. This type of small business loan is guaranteed by the SBA, a federal agency that helps business owners grow their starting businesses. How it works is that if a business owner is not able to pay, the SBA pays for it. Because of this type of assistance, it’s usually harder to get.

Small Business Credit Cards

Small Business Credit Cards works the same as a regular personal credit card with a few different features. A Small Business Credit Card can track spending and can also categorize them. It can also have a rewards program tha can be used to the business owners’ advantage.

How do I qualify for a Small Business Loan?

For a business owners to quality for Small Business Loans, a personal credit score should be in the liking of the lenders. They need to know if you have the ability to repay certain debts like a car loan, mortgage or credit cards. The credit score is a gauge for lenders to know how much assistance they can give and basically know whether or not they would even approve.

The thing about Small Business Loans is that requirements are not that complicated and lenders are not stringent. With direct online lenders or peer-to-peer lending sites, business owners can be approved with an average credit score in the low to mid 600s. A few more documents could include a drivers license, bank statements, business and personal tax returns, and a business plan.

Understanding how Small Business Loans works is very important most especially if you are looking into getting one soon. Knowing your options and knowing that there are options would help you understand that there are ways to keep your business afloat and maybe even make it work better and earn better.

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