Loans 101: How Do Small Business Loans Work? - FOX21- Entertaining Delmarva One Click at a Time

Loans 101: How Do Small Business Loans Work?



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The national average for small business loans is more than $600,000. You can take out a loan for up to $5 million depending on your financing needs and your qualifications though.

To get the funds you need, you need to know how these loans work. So, how do small business loans work? This will depend on the type of loan you use to meet your needs.

How Do Loans Work?

If you’re taking out a loan, you’re borrowing money from a lender that you agree to pay back based on a predetermined schedule. You will also pay interest rates on the loan based on a percentage of the loan amount.

Interest rates range from 7.5%-10% depending on many factors. The interest you pay depends on:

  • The lender
  • Your financial history
  • Down payments for the loan
  • Collateral available

Before you take out a loan, you need to check your credit score and make sure you have all your business finances in order. Your ability to qualify for a loan will depend on what you need the money for and your ability to pay back your debt.

How Do Small Business Loans Work?

If you want to take out a loan for a small business, you have many options. You can go through your bank to set up a loan, or you can use the Small Business Administration to get a government-backed loan.

You can also go through online vendors or check online lists to find a lender for business loans. The terms for your loan will depend on the type of loan you choose.

Term Capital Loans

Term loans are the basic type of loan you think of when you hear the word loan. A long-term loan allows you to borrow a larger amount of money with an extended repayment schedule. You can get terms to repay a long-term loan over a one-to-five-year period.

Long-term loans usually have lower interest rates than short-term loans, but the interest accumulates over a longer period. A short-term loan allows you to borrow a smaller amount with a shorter repayment schedule. Generally, a short-term loan gets paid off over one year or less.

Self-Secured Loans

A self-secured loan is a loan for a specific need. The items covered under the loan act as collateral against the loan, so you can receive lower interest rates. The two most common self-secured loans are equipment and invoice financing.

An equipment loan is a loan to purchase specific equipment needed. The repayment terms are based on the life of the equipment. Since the equipment acts as collateral, the lender can take the equipment if you don’t pay back the loan.

Invoice financing is a loan against outstanding customer invoices. You can take out up to 90% of the invoice total. You pay the loan back once the invoice is paid. You will pay interest for each week the invoice remains outstanding though.

Business Line-of-Credit

A line-of-credit works similar to a credit card. The lender extends credit based on your qualifications. You can pull from this credit monthly.

With a line-of-credit, you only pay interest and scheduled payments based on the amount you spend each month. This type of loan can act as a long or short-term loan.

Understanding Business Financing

As you can see, the answer to how do small business loans work is, it depends. You need to do your research to find the type of loan that will meet your needs.

Loans aren’t your only financing option though. Check out more business and financing tips to know all your options.

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