February 21, 2024

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Business loans are loans obtained from financial institutions to cover business expansion or expenses during slow periods, as well as purchasing equipment or inventory. They provide needed liquidity when the business needs access to more funding.

These loans work similarly to personal loans, providing the borrower with a lump sum and then installment repayment plans over time. There are different kinds of business loans with differing requirements and qualifications that feature on this market.

Definition

A business loan is an agreement between you and a financial institution in which the lender lends you money for use in your business, with repayment via interest on a predetermined schedule. You may use these funds for general expenses, expanding or filling cash flow gaps; however they cannot be used to cover personal expenses nor for buying residential real estate or personal vehicles with them; furthermore lenders tend not to lend as readily when lending money for new or volatile industries, and may ask you for personal guarantees in return for such loans.

As eligibility for a business loan depends on several factors, including your credit score and history and industry in which your business operates, lenders may request financial covenants such as net worth ratio or material change covenants from you before offering one.

Types

There are various kinds of business loans, each offering different terms and conditions. Some require companies to pledge collateral as security against nonpayment; other loans, like business lines of credit and merchant cash advances, allow borrowers to draw and repay funds as necessary – they often have similar qualification criteria but more flexible repayment terms with higher interest rates.

Most lenders prefer lending only to established companies with proven tracks records and solid revenue streams, in order to reduce risk. They will generally decline funding businesses operating in volatile industries and any that already carry debt obligations.

Alternative lenders have come a long way since then, making funding accessible with less stringent requirements for small business owners. At Nav, we help entrepreneurs find the ideal business loan based on their unique circumstances – check our ratings of top lenders to learn more about their rates and terms.

Getting a loan

Before applying for a business loan, be sure to review its requirements and criteria. Lenders may require you to submit financial documents like profit and loss statements, balance sheets, tax returns, bank statements and more. In some instances you might also need to provide personal details for any owners who own more than 20%-25% of your company.

2022 Small Business Credit Survey indicates that most businesses seek financing to cover operational costs or expand, though obtaining traditional business loans may not always be straightforward and require strong business credit and an accurate business plan. For businesses with poor credit, merchant cash advance and invoice factoring could offer alternative sources of funding based on future debit/credit card sales or outstanding invoices from suppliers; typically these offer shorter repayment terms and reduced interest rates than traditional term loans.

Repayment

No matter the circumstances, whether it is to purchase equipment, cover shortfalls in cash flow or meet expenses a business loan can help. Once approved for funding, an agreed upon schedule and repayment terms will determine how you receive them and pay back what was borrowed along with interest charges.

Repayment process of loans differs depending on their type and lender. Conventional loans have fixed terms with typically one down payment required while projection-based and startup business loans may have shorter repayment periods. Some loans also require personal guarantees which evaluate both your personal credit history as well as any guarantees issued against it.

Maintaining a regular repayment schedule demonstrates to lenders that you are an accountable borrower and improves your business’s financial health. Consistent payments also make future financing easier. If your loan repayment fails, penalties and fees will become due; avoid these by paying on time and keeping track of its balance.

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