How Do Small Business Loans Work?

If your small business could use additional funds to boost growth, SmartBiz Loans is here to help. Learn what’s out there in terms of business financing and how you can take advantage of available resources.

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Types of Small Business Loans

Depending on the type of financing you apply for, you’ll encounter different processes, rates, terms, requirements, and uses of proceeds.

Long-Term Loans

Term loans are arguably the most traditional form of small business financing. Your lender makes a deposit with your loan amount which you then repay over a predetermined period of time through regular installments.

Long-term loans usually offer low APRs and monthly payments since the total is divided into more segments. Typically, bank lenders will make these types of loans for larger amounts. These funds can be used for extended projects or goals, like hiring more employees, purchasing large equipment, expanding into a new location, refinancing high-cost debt, and more.

There are many benefits to long-term debt. Check out our article on long-term debt and how it can save your business money and help fuel growth: Benefits of Long Term Debt for Your Business.

SBA Loans

SBA loans are considered the gold standard in small business lending because of low rates, long terms and very low payments. To give small business owners easier access to long-term loans, the US Small Business Administration guarantees a percentage of SBA loan amounts in the case of default. That way, lenders are more likely to work with small businesses and offer better terms.

SmartBiz Loans can help you obtain an SBA loan through it’s marketplace of preferred SBA banks and a streamlined, online application. We’ll work to match you with the lender who will be the best fit for your business needs. Find out how we’ve helped small business owners like you achieve their dreams by visiting our TrustPilot profile.




Short-Term Loans

These loans work like long-term loans, except that they have to be paid back in a shorter period of time. They typically have smaller amounts, more frequent payments, and significantly higher APRs. Although they can be quick and convenient, short-term loans can cost you a steep price. It can be easier to qualify for a short-term loan, but you might find that they’ll negatively impact on your business cash flow in the end.

Other Financing

Other types of small business funding can be used for more specific purposes. For example, equipment financing allows you to spread out your payments instead of purchasing upfront, using the equipment itself as collateral to secure the loan. Invoice financing involves handing over your invoices to an invoice factoring company, which can lend you up to 90% of the amount that your outstanding invoices make up. A business line of credit is different from a loan because you only repay the amount you use, up to a specified limit. This product can be useful for minor day-to-day expenses and emergency funds, rather than large-scale projects.

How to Take Out a Small Business Loan

Depending on the product, you can apply for small business financing through various lenders. Generally, there are two major categories: traditional bank lenders and so-called “alternative” lenders. Alternative lending emerged as a way to make the application process more convenient. Most are online, have looser eligibility requirements, and deposit funds more quickly than banks. But because of this ease, the products they offer are typically more risky and therefore more pricey for the small business borrower.

For most loan products, you’ll have to demonstrate your eligibility through different kinds of documentation. Some commonly requested documents include driver’s licenses, personal and business tax returns, and credit scores. You should work with your lender to make sure that you’re prepared for the application process. Learn more about how to apply for a small business loan in 5 simple steps on our SmartBiz Small Business Blog.

SmartBiz lets you take advantage of both the low rates of a secure long-term loan and an easy online application process. See if you pre-qualify in under 5 minutes and start your SBA loan application today!