What Is a Small Business Loan [How it Works + Types of Loans]
Getting the right funding can make all the difference when it comes to expanding your business or simply keeping your business alive.
Did you know that nearly 43% of small businesses in the U.S. applied for a loan in 2023 to support their growth?
It’s a common move, but what exactly is a small business loan, and how does it work?
We’ll cover the basics, explore different loan types, and walk you through what you need to get started.
Plus, we’ll show you how Capixa makes the application process easy and hassle-free.
What Is a Small Business Loan?
A small business loan is a way to get the funds you need to keep things running smoothly and help your business grow, without dipping into your personal savings or waiting for profits to roll in.
If you’re buying inventory, covering day-to-day expenses, or expanding your operations, a loan gives you that extra cash freedom you might need.
How Do Small Business Loans Work?
The way small business loans work depends on the type of loan you want, but generally, it involves applying, receiving funds, and repaying the amount in regular installments.
The process of a small business loan includes:
Loan Application Process
While it sounds like a lot of work, the loan application process is simpler than you think.
You’ll start the process by providing some basic information about your business, including financial documents and details about how you plan to use the loan.
This helps lenders understand your business and assess how much money they can offer you.
Many lenders, including Capixa, make the application process quick and easy, so you can focus on what matters — running your business.
Once you submit your application, the lender will review it, focusing on key financing factors like your business history, cash flow, and credit score.
Interest Rates and Repayment Terms
Interest rates and repayment terms play a big role in how your loan works, so it’s important to understand them.
Your interest rate is what the lender charges for borrowing the money and depends on things like your credit score, the type of loan you pick, and sometimes even the lender itself.
A lower interest rate means you’ll end up paying less in total, which is why it pays to compare options and know where you stand financially.
Repayment terms dictate how long you’ll have to pay back the loan. They can vary from a few months to several years, depending on the loan type and amount.
A shorter term means you’ll pay off the loan faster, but your monthly payments will be higher. A longer term can lower your monthly payments, making them easier to manage, but you might pay more interest over time.
Loan Application Assessment
Once your application is in, lenders will assess it to figure out how much they can lend you. They’ll look at your business’s financial health, credit score, and cash flow to make sure you can comfortably handle the loan repayments.
This step is all about setting you up with a loan that meets your needs without straining your business.
Types of Small Business Loans: Which One Is Right for You?
Choosing the right loan can make or break your business, which is why you should be well-informed about the different types of small business loans.
The most common types of small business loans include:
1. Term Loans
A term loan is a simple way to get a lump sum of cash that you repay over a set period, usually with fixed monthly payments.
It’s a great option if you’re looking to make a big purchase, like new equipment, inventory, or an expansion project.
You can pick a repayment term that fits your business needs, whether short-term or long-term.
2. SBA Loans
Small Business Administration (SBA) loans are backed by the government, offering lower interest rates and longer repayment terms.
They’re perfect if you need a large amount of capital but might not qualify for traditional bank loans.
While the application process can be a bit more involved, the benefits often make it worthwhile.
3. Line of Credit vs. Invoice Financing
A line of credit gives you flexible access to funds up to a set limit. You can decide when to use it and only pay interest on the amount you use.
It’s like having a financial safety net for managing cash flow or covering unexpected expenses.
Invoice financing, on the other hand, lets you borrow against your outstanding invoices. This is especially handy when you’re waiting for clients to pay but need cash now to keep things running smoothly.
4. Merchant Cash Advances
A merchant cash advance gives you a certain amount of cash upfront, which you repay through a percentage of your daily credit card sales.
It’s a solid option if your sales fluctuate and you need quick access to funds. Since repayment is tied to your revenue, there’s no fixed monthly payment.
Capixa can help you decide if this flexible funding option is the right fit, especially when you need quick capital to seize new opportunities.
Benefits of Small Business Loans
Small business loans can be the key to unlocking your business’s full potential.
With the help of a small business loan, you can:
Access Capital for Business Growth
Planning to expand, invest in new equipment, or open a new location? A small business loan gives you the capital to take that next big step without draining your cash reserves.
Growth usually comes with some hefty upfront costs, and a loan can be the boost you need to make it happen.
Improve Cash Flow Stability
Cash flow keeps your business alive. If you’re dealing with seasonal slowdowns or waiting on customer payments, a loan can help bridge the gap.
With quick and reliable funding, you can cover expenses, pay your staff, and keep everything moving forward without thinking about going bankrupt.
Use More Financing Options
Financing isn’t a one-size-fits-all solution. Small business loans come in various forms, from lines of credit to term loans, giving you the flexibility to choose what works best for you.
This way, you can tailor your financing to different business needs, whether it’s managing short-term cash flow or making a long-term investment.
Build Credit for Future Financing
Taking out and repaying a small business loan is a great way to build your business credit. Lenders look at your credit history when deciding on future loan applications.
By showing that you can handle debt responsibly, you make it easier to access larger funding when you’re ready to take your business to the next level.
What Are the Requirements for Getting a Small Business Loan?
Before applying for a small business loan, it’s good to know what lenders typically look for. Here’s a quick rundown of the main requirements:
- Credit score: A strong credit score can get you better rates, but don’t worry if it’s not perfect. Capixa works with businesses in various situations to find the best financing.
- Business history: Most lenders prefer businesses that have been operating for at least 6 months to a year, showing stability and reliability.
- Cash flow and financials: Lenders review income statements, bank statements, and other financial documents to ensure your business can handle loan payments.
- Collateral or personal guarantee: Some loans may require collateral, such as equipment or real estate. If collateral isn’t available, a personal guarantee may be needed.
- Required documentation: Gather key documents like tax returns, bank statements, profit and loss statements, and identification. Capixa simplifies this process by letting you know exactly what’s needed to get a small business loan.
Apply for a Small Business Loan at Capixa
Capixa is an investment capital funding company that takes a personalized approach to business lending, understanding your needs to find the best small business loan solution.
We don’t limit ourselves by industry, and strive to provide an equal chance to every business owner who is interested in a small business loan.
If you’re running a small business and seeking support, Capixa offers:
- Custom solutions: Our service extends beyond transactions, we offer loan solutions designed to align with your business’s needs, ensuring your financial endeavors are both strategic and beneficial.
- Friendly service: At our core, we value building enduring relationships with our clients. You are not just a customer to us, you’re a partner whose growth and success we are genuinely invested in, fostering a friendly and supportive financial journey.
- An efficient approach: Our approach is honed to be precisely efficient, ensuring your loan application process is streamlined, straightforward, and free of unnecessary complications.
- Transparent communication: Your trust is important to us, and we safeguard it with a commitment to clear and transparent communication.
To apply for a small business loan at Capixa, fill out our form and our team will contact you shortly.
