Small Business Loans Explained

Small business loans are typically bank loans. People who are just starting out on a small business like to approach banks for financing because they give a certain amount of security. Generally, these loans are what are known as term loans. The concept of a this type of credit is really simple – this is of a fixed length, which means that one must return the amount within a stipulated period of time. Generally, the amount is also amortized.

What They Are

Amortization basically means that the loan must be paid in installments, which will cover both the amount of the loan and the interest calculated on the loan, depending on the rate charged by the bank. Term loans are generally of two basic categories and it is important to understand them before applying for a small business loan. These two categories are – Short and Long.

As is obvious, in the case of a short term loan, one must pay back the amount in a short period of time – usually a year or two. But long term loans are for much longer periods of time and they reach a maturity in a period anywhere between one to seven years. A lot of times, the period of returning the amount of these loans run into decades!

Application process

How do you secure term loans? Most times, you need to secure collateral to achieve this feat. The typical amount of the loan is about twenty five thousand dollars – a reasonable amount for a small business to take off. The average rate for fees is one percent. All sounds simple till now? Well, the tricky part is the approval bit.

Generally, the process of approval is a very thorough one, so be prepared for a very tough screening process. As an applicant, you must be able to prove that you are of a good character, competent and able to handle your business and have a pretty good history when it comes to credit. This process is in fact similar to any other process of securing a loan because banks take into consideration all the same factors, in the case of a term loan.

The good news is, if you are eligible for a loan after this screening process, the interest rate which you have to pay will generally be lower than it is for any other type of loan. For an established small business, it is a smart idea to take a long term loan or an intermediate loan. But do keep in mind, that your bank will demand a squeaky clean financial statement for long term loans of amount exceeding a hundred thousand dollars.

Another thing to keep in mind when applying for a term loan is that banks often limit the liabilities that your business can assume, in addition to the loan. This may sound simple enough, but this can cover every aspect of your business, for example, the salary of your employees! So thoroughly evaluate the pros and cons before you apply for a small business loan.

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