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8 Business Loan Basics You Need to Know

May 2, 2017 By Samantha Novick 19 Comments

If capital is the lifeblood of business, business loans are the most common medicine.

8 Business Loan Basics You Need to Know
Photo by Olu Eletu

Many business owners enjoy the benefits of borrowing a set amount of money with a clear repayment plan. Loans are a familiar way to fund business growth.

  • Business loans, credit cards, and lines of credit account for about three-fourths of financing for new firms, according to the Small Business Association (SBA).
  • About one third of small businesses used a bank loan in the last 12 months, according to the National Small Business Association (NSBA).
  • Banks are lending less to smaller firms. In 2016, 41% of small business owners complained that lack of capital is hindering their growth or expansion. Thirty-one percent said they couldn’t find the funding they needed (NSBA).

It’s clear that startups and mature small businesses rely heavily on business loans. But traditional bank loans are not the only option.

Let’s take a look at where business loans fit into the financing picture and how different types of loans compare.

Table of Contents

  • A Quick Overview of Business Loan Basics
  • Types of Loans
    • 1. Large Commercial Banks
    • 2. Small or Community Banks
    • 3. Credit Unions
    • 4. Small Business Administration (SBA)
    • 5. Alternative Lenders
    • 6. Friends & Family
    • 7. Non-Profit Microlenders
    • 8. Peer-to-Peer
  • Tips for Borrowers
      • Samantha Novick
      • Latest posts by Samantha Novick (see all)

A Quick Overview of Business Loan Basics

All business financing from outside the business falls into two categories: debt and equity. Debt financing involves borrowing a fixed sum from a lender.

Equity financing is essentially trading a certain amount of capital for a percentage of ownership. Lenders take less risk and make money through interest and fees. Investors take more risk and make money through returns on their investments.

When business owners think of debt financing, many only think of term loans. In fact, a term loan is only one of several debt financing options available to companies:

  • Term loans
  • Secured lines of credit
  • Credit cards
  • Invoice or receivables financing
  • Merchant cash advances

If seeking equity, businesses can also choose among investor types, listed here in order of increasing ownership percentage:

  • Friends and family
  • Angel investors
  • Venture capital firms

Types of Loans

Let’s look at the business loans that each type of lender offers.

1. Large Commercial Banks

Commercial banks are the most common source of business loans. They are friendliest to well-established businesses with large annual revenues.

These banks have the highest standards for creditworthiness and tend not to lend less than $100k.

Small businesses might struggle to get a loan through a large bank.Click To Tweet

The average loan from a large bank in 2016 was $483,000. These loans tend to require extensive paperwork and over one month to process.

2. Small or Community Banks

Thirty-four percent of business owners report that a regional or community bank is their main source of capital (HBS).

Small business owners often benefit from being able to establish a personal relationship with a local banker. In small and regional banks, the average loan amount is $155k.

3. Credit Unions

Credit unions are nonprofit institutions owned by customers.

There are over 7,000 in the country, and they operate much like community banks, often with additional services and support.

While large banks have decreased small business lending since 2008, credit unions have been increasing their small business lending every year. The average credit union’s business loan is around $212k.

4. Small Business Administration (SBA)

The SBA does not technically give out loans. But the organization does help facilitate small business lending by partnering with banks and credit unions to guarantee loans for many purposes.

The SBA effectively takes on some of the risk of your loan, making more loans available to small business owners. They have a range of programs, including microlending.

5. Alternative Lenders

Alternative lenders are usually online businesses that leverage digital tools more effectively than most traditional banks, making applications faster and more flexible.

The average loan amount among all alternative lenders lands somewhere between $50k to $80k. But depending on the loan product, you can borrow up to $1 million.

Alternative lenders are striving to fill a financing gap left by traditional institutions, and they’re gaining traction. Business Insider forecasts that alternative lending companies will own over 20% of the small business lending market by 2020.

6. Friends & Family

New businesses often rely on friends and family for startup loans. These loans can be tricky to manage and keep separate from personal life.

They can also be the easiest to access. Decide on and write down the terms of the loan up front, and type payments to cash flow rather than a fixed schedule. Doing so will decrease the chance of issues arising.

7. Non-Profit Microlenders

Nonprofit microlenders are mission-oriented organizations that offer loans under $50k.

Because their goal is usually to help disadvantaged communities, they often operate in specific regions and provide free financial training and consulting.

8. Peer-to-Peer

Also known as P2P and crowdlending, peer-to-peer lending happens through online platforms that match lenders and borrowers.

P2P lenders take a fee for matchmaking and credit checking, but otherwise have very little overhead, making them quite competitive. These lenders are the newest loan option for small businesses.

Tips for Borrowers

While lenders from friends to banks have vastly different offerings and requirements, there are some best practices for preparing yourself for any kind of loan.

If you’re thinking about getting a business loan, make the most of your application and increase your chances of approval with these tips.

  • Perform financial forecasting and create up-to-date financial statements.
  • Begin to rely on your accountant for insight and advice.
  • Put together a business plan, however simple.
  • Identify the exact purpose and ideal amount of the loan.
  • Check your credit history and increase your credit score.
  • Learn key financial vocabulary, including APR, collateral, and debt service coverage ratio.
  • Shop different lenders before you choose your loan!

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Samantha Novick

Social Media Manager at Bond Street
Bond Street is transforming small business lending through technology, data and design. The company offers term loans up to $1,000,000, with interest rates starting at 6 percent and terms from one to three years. Learn more at: www.bondstreet.com.
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Filed Under: Small Business Advice Tagged With: business loan, business loan basics, small business advice, small business answers

Comments

  1. Franca Whyte says

    December 5, 2019 at 4:11 am

    This is a really nice post. I find it helpful and accurate. Thanks for sharing it with us.
    Franca Whyte would love you to read ..Google Groups Sign in | What is Google Groups all about?My Profile

    Reply
  2. JackHarry says

    October 23, 2019 at 3:16 am

    I really liked your post! I think that the written out of list below types of loan. Typically these loans are typically short-term, the lender minimum check credit and that the only consideration for the loan is the value and condition of any assets.
    Thanks for sharing such an informative post.
    JackHarry would love you to read ..What Is The Amount That I Can Get For A Title Loan?My Profile

    Reply
  3. Michael says

    October 26, 2017 at 8:39 pm

    One thing I know for sure about loan, is that is not Always good to start small business with loan. A small business starter should try to get money from friends and relatives, when the business starts growing, you can now get loan to boost it.

    Reply
  4. Global Capital Commercial says

    September 29, 2017 at 12:33 am

    Hi,

    Your post is very informative and helpful.

    Firstly , banks look for excellent credit, extensive financial history and collateral. Essentially, if you are in a position where you do not need money, then you will qualify. But now a days, Loan Requirement have been tightened from last few years .

    These are the loan basics which everyone should be aware of:

    1. Loans can take 30-60 days to process.

    2. You typically need an excellent credit score and credit history to even be considered.

    3. You need to have been in business for at least three years and have documentation to prove your financial stability.

    4. The bank requires an extremely detailed business plan. They want to know everything about your business, marketing plan, and your tax and bank records. The process is rigorous.

    5. Proof of collateral, or valuable property, is required for them to take if you default on the loan

    I hope my information is worth for the users who are reading this .

    Thanks

    Reply
  5. Jim Phelps says

    May 25, 2017 at 12:55 pm

    Samantha, Let me join your other readers in saying this is a great overview. One other lending option is what I do, equipment leasing. It’s a great way for businesses to finance the purchase of new or used equipment that will help their business grow. You order from any vendor you choose, we pay the vendor in full upon delivery, and you make monthly payments for 1, 3, or 5 years. The equipment is the collateral, you get to keep your cash-on-hand and leave your bank line of credit open for other needs. At the end of the lease, you own that piece of equipment. In many cases, lease payments are also a tax-deductible business expense.

    Reply
    • Gail Gardner says

      May 25, 2017 at 1:32 pm

      Hi Jim,

      Thank you so much for taking the time to share your tips with my readers. Many businesses may not be aware of or had forgotten about equipment leasing. I assume they would need decent credit to qualify? Even though the equipment is the collateral, no doubt you would still want them to pay regularly.

      Is it easier to get financing on equipment that is commonly used by many businesses versus equipment that is fairly unusual (and would therefore be more challenging to sell if repossession were necessary)? Perhaps you would like to write a guest post with a more extensive explanation of how equipment leasing works for my audience?
      Gail Gardner would love you to read ..5 Ways to Manage Increases in Deal FlowMy Profile

      Reply
  6. Maruf says

    May 11, 2017 at 3:43 pm

    Hi Samantha,
    I am a BBA student. For preparing my assignment on the business loan. I found your that post. :p Your post helped me to make it done! That’s why, many many thanks.
    Maruf would love you to read ..Dutch Bangla Bank SSC Scholarship 2017 InformationMy Profile

    Reply
  7. daisynosh says

    May 9, 2017 at 1:30 am

    In today’s changing world, business loans are the only option small business owners have for acquiring cash to grow their companies. Your post is simply superb which has all the steps for taking it. Thanks for posting it.

    Reply
  8. grantwilson says

    May 9, 2017 at 1:26 am

    This would be an inspiring post for young entrepreneurs.We got to know which banks to approach to get a loan from your article. Large Commercial Banks are the best source of business loans.
    Thank you

    Reply
  9. Alex Carter says

    May 8, 2017 at 8:43 am

    I think every entrepreneur or business should know about these basic types of loans to help them start new business or an idea or help them grow. Thank you for sharing such masterpiece.

    Reply
  10. Noelle Addison says

    May 7, 2017 at 6:53 am

    In today’s ever-changing economic landscape, business loans are the only option small business owners have for acquiring cash to grow their companies. With an efficient business loan, almost any enterprise can expect immediate growth as long as they use the borrowed money wisely.
    Noelle Addison would love you to read ..One Half’s Offshoring Accounting ServicesMy Profile

    Reply
  11. Manish says

    May 6, 2017 at 12:50 pm

    Thank you for sharing awesome article! We should know these basics before applying for business loan. Good work!!

    Reply
  12. Barry says

    May 5, 2017 at 12:32 am

    Nice work defining the different types of loans. Friends and crowdlending was always a personal favourite of mine back when I was looking for loans, more people should take a look at those!
    Barry would love you to read ..LOGIES: DIAMONDS DOMINATE THE RED CARPETMy Profile

    Reply
  13. Laura says

    May 4, 2017 at 5:40 pm

    I must say the information you provide is really worth it. This article has more than adequate amount of information for the Business Loan Basics.
    Thanks Samantha Novick for sharing this information.

    Reply
  14. Gurinder P Gaba says

    May 4, 2017 at 7:45 am

    Well defined the different types of loans. This post is having enough resource for small business leader. Appreciated for this publication Samantha Novick.
    Gurinder P Gaba would love you to read ..The Price Your Business Has to Pay for Poor Letterbox DeliveryMy Profile

    Reply
  15. Jack Ramon says

    May 4, 2017 at 5:54 am

    If you are will to get business loan you have to read this article, Informative article for them want to loan for your business.

    Reply
  16. Moses Dzarmah says

    May 4, 2017 at 3:27 am

    Hi samantha,

    Thanks for enlightening people like me who didn’t know better. I will look into the best loan that fits my business scale and re-apply.
    Moses Dzarmah would love you to read ..Open Heavens Monday 1st May 2017- OVERRIDING DOUBTSMy Profile

    Reply
  17. Mark says

    May 3, 2017 at 11:06 pm

    Thanks for sharing a very informative article Samantha!

    Sadly most aspiring small business owners and or start up
    entrepreneurs, may not be totally aware of all of their
    financial options.

    Hopefully your excellent blog post, has made them more
    aware of their options.

    Thanks for sharing!
    Mark would love you to read ..How Your Severely Cash Strapped Small Business Can Stop Wasting 80% Of Your Ad Budget!My Profile

    Reply
  18. Michell Joan says

    May 3, 2017 at 1:05 pm

    Thank you, Samantha Novick, for this article. This Post is very, very useful to small business owners who want to start their own new business. We know by your post which bans to approach to get a loan. Large Commercial Banks are the best source of business loans.
    Many many thanks for this post.

    Reply

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