What Exactly is a Business Loan?

Businesses are the lifeblood of any economy, driving innovation, job creation, and economic growth. However, achieving success and growth often requires financial resources that may not be readily available. This is where business loans come into play. 

A business loan is a financial tool designed to provide entrepreneurs and enterprises with the capital they need to fund various aspects of their operations. Whether it’s expanding facilities, purchasing equipment, managing cash flow, or investing in new projects, business loans offer a vital lifeline. In this article, we’ll explore the ins and outs of business loans, shedding light on their significance, types, benefits, and the application process.

So what is a business loan?

A business loan is a type of financial arrangement where a lender provides funds to a business entity, such as a company, partnership, or sole proprietorship, to meet its financial needs. It is a form of debt financing that allows businesses to access capital for various purposes, including expanding operations, purchasing assets, managing cash flow, funding marketing campaigns, or investing in new projects. 

Business loans typically have a predetermined loan amount, interest rate, and repayment period. The borrower is required to repay the loan amount, along with interest, through regular installments over the agreed-upon term. 

Business loans can be obtained from banks, credit unions, online lenders, or government-backed programs like the Small Business Administration (SBA). The terms and conditions of a business loan may vary based on factors such as the borrower’s creditworthiness, the purpose of the loan, and the lender’s policies.

What are some of the features of business loans?

Business loans come with a range of features that make them distinct from other types of financing options. Some key features include the loan amount, interest rates, repayment terms, and collateral. These features collectively shape the terms and conditions of a business loan. Let’s look at each of these:

Loan Amount: The amount of money borrowed, which varies based on the business’s needs and the lender’s policies.

Interest Rates: The cost of borrowing, usually expressed as an annual percentage rate (APR). Interest rates can be fixed or variable.

Repayment Terms: The duration within which the loan must be repaid, which can range from months to several years.

Collateral: Some business loans may require collateral, such as property or equipment, which serves as security for the lender.

What are the types of business loans?

Business loans come in various forms, each catering to different financing needs. Some common types of business loans include:

Term loans: Term loans are traditional loans with a fixed amount, interest rate, and repayment period. They are ideal for long-term investments, such as purchasing assets or expanding operations.

Lines of credit: Similar to a credit card, a line of credit provides businesses with access to a predetermined amount of capital. The borrower can withdraw funds as needed, paying interest only on the amount used.

Equipment loans: Specifically designed for purchasing equipment or machinery, equipment loans offer favorable terms and often use the equipment as collateral.

Agency Guaranteed loans: Backed by various agencies, including the Small Business Administration (SBA) or Finance Authority of Maine (FAME), etc., these loans  are ideal for small businesses that may not qualify for traditional loans for various reasons.

How do I apply for a business loan?

Applying for a business loan involves a series of steps. While the specific process may vary depending on the lender and the type of loan, here’s a general outline of how to apply for a business loan. 

Note: lenders may have specific requirements and processes, so it’s important to reach out to them directly or visit their websites for detailed instructions on how to apply for a business loan. 

Step 1: Determine your loan needs 

Evaluate your business’ financial requirements and the purpose for which you need the loan. Determine the specific amount of capital you require, as well as the desired repayment term and any specific features or conditions you seek in a loan.

Step 2: Research lenders and loan options 

Explore different lenders, including banks, credit unions, online lenders, and agency or government-backed programs ( SBA, FAME, CEI, GPCOG, AVCOG USDA Rural Development, etc.). Compare their loan offerings, interest rates, repayment terms, eligibility criteria, and application requirements. Choose the lender and loan option that best aligns with your business’s needs.

Step 3: Prepare your documents 

Gather the necessary documentation that lenders typically require for a business loan application. This may include:

• Business plan: A comprehensive overview of your business, including its operations, market analysis, financial projections, and growth strategies.
• Financial statements: Such as balance sheets, income statements, and cash flow statements.
• Tax returns: Both personal and business tax returns for the past few years.
• Bank statements: Recent bank statements to demonstrate your business’s financial health and cash flow.
• Legal documents: Business licenses, permits, articles of incorporation, and other relevant legal paperwork.

Step 4: Complete the loan application 

Fill out the loan application form provided by the lender. Be thorough and accurate in providing all requested information, including personal and business details, financial information, and loan specifics.

Step 5: Submit your application and documents 

Submit your completed loan application along with the required documentation to the lender. This can be done online, through email, or in person, depending on the lender’s preferred method.

Step 6: Wait for the loan decision

The lender will review your application and supporting documents, conduct credit checks, and assess the viability of your business. This process may take some time, ranging from a few days to a few weeks, depending on the lender and complexity of your business and request.

Step 7: Loan approval and closing 

If your application is approved, the lender will provide a loan commitment, including the loan amount, interest rate, repayment terms, and any other conditions. Review the offer carefully, ask any questions you may have, consult with legal counsel if necessary, and if you agree with the terms, accept the offer. The loan closing process involves signing the necessary agreements and documentation to finalize the loan.

Additionally, maintaining a good credit score, preparing a solid business plan, and having organized financial records can improve your chances of a successful loan application. 

Putting it all together

Business loans are an essential financial tool for enterprises seeking capital for growth, operational needs, or bridging cash flow gaps. Understanding the features, types, benefits, and application process of business loans empowers entrepreneurs to make informed decisions and secure the necessary financial resources to achieve their business goals.

Norway Savings Bank—Business Banking that starts with you

At Norway Savings, we have the privilege of working alongside business owners from start-ups to national expansions. We’re right there with you as you take that first step—and every step afterwards—to listen, strategize, celebrate and advocate. Our lenders have a broad range of experiences and can offer valuable insight and recommendations as you embark on a new path to build or expand your business. If it’s important to you, then it’s important to us. Check out Business Banking or let’s talk.