Home  /  Blog  /  Small business loans

Small business loans

Struggling to secure funding for your small business? It can get tough, but small business loans can help! They help manage cash flow, cover unexpected expenses, and grow your business. So, here’s everything you need to know about small business loans to help you make informed decisions and feel more confident and in control of your financial future.
Updated 12 Aug, 2024

|

read

Mette Johansen

Midweight Copywriter

small business loans

Small business loans: Types, benefits, approval rates & how to apply

Struggling to secure funding for your small business? You’re not alone—many entrepreneurs face significant challenges when trying to obtain the financial resources needed to sustain or grow their ventures. Whether it’s managing cash flow, addressing unexpected expenses, or expanding operations, access to funding can make all the difference. This is where small business loans come in, offering tailored financial solutions to help businesses navigate tough times and seize opportunities.

Small business loans provide a critical lifeline for entrepreneurs, enabling them to invest in inventory, hire additional staff, upgrade equipment, or even launch new products or services. By offering structured repayment terms and flexible borrowing options, these loans empower business owners to focus on building their operations without the constant worry of financial strain. Furthermore, they help establish creditworthiness, which can be instrumental in securing better funding options in the future.

Understanding your funding options is key to making informed decisions. By evaluating the types of small business loans available, such as term loans, lines of credit, or SBA loans, you can choose the best fit for your needs. With proper planning, small business loans can boost your financial confidence and set your business on a path toward growth and stability.

small business loans

What are small business loans?

Small business loans are a valuable resource for entrepreneurs, providing the funds needed to support a wide range of business activities. Whether you’re launching a new venture, expanding an existing operation, purchasing essential equipment, or managing day-to-day expenses, these loans can help bridge financial gaps. They are designed to empower small business owners by offering the capital necessary to tackle immediate challenges and pursue growth opportunities.

The primary purpose of small business loans is to provide businesses with the financial support required to thrive in a competitive environment. With access to these funds, small businesses can invest in improvements, hire additional staff, upgrade technology, or even explore new markets. By addressing both short-term needs and long-term goals, these loans serve as a strategic tool to foster success and sustainability.

Choosing the right loan involves understanding your specific needs and evaluating available options, such as term loans, lines of credit, or government-backed loans like SBA loans. With the right funding, small businesses can overcome financial hurdles, create stability, and focus on achieving growth milestones. Ultimately, small business loans are not just a source of funding—they’re a stepping stone toward long-term prosperity.

How do small business loans work?

Small business loans typically come in two main types: lump-sum loans and lines of credit.

Lump-sum loans

Small business loans typically provide a fixed sum of money upfront, offering business owners immediate access to the capital they require. Once the funds are received, repayment begins through a structured plan involving regular monthly payments. These payments cover both the principal amount borrowed and the interest accrued, ensuring the loan is gradually repaid over time. Consequently, this predictable schedule helps business owners manage their finances more effectively and plan for future expenses.

When considering the types of lump-sum loans, they can be categorized into short-term and long-term options. For instance, short-term loans are designed for immediate needs and are usually repaid within a year, making them an excellent choice for addressing urgent expenses, bridging cash flow gaps, or funding smaller-scale projects. Conversely, long-term loans have repayment periods that extend over several years, making them better suited for substantial investments, such as purchasing equipment, expanding business operations, or supporting major growth initiatives.

Moreover, the ability to choose between short-term and long-term loans provides flexibility, allowing businesses to align their funding solutions with their unique needs. By understanding these options and their implications, small business owners can make informed decisions, ensuring that the funding they secure supports both their immediate and future objectives.

Lines of credit

A line of credit offers greater flexibility compared to traditional loans and functions in a way that is similar to a credit card. With this financing option, the lender approves a maximum credit limit, which serves as the upper boundary for how much you can borrow. Rather than receiving a lump sum all at once, you have the freedom to draw funds as needed, up to the approved limit. This makes a line of credit ideal for managing fluctuating expenses or addressing unexpected financial needs.

What sets a line of credit apart is that you only pay interest on the amount you borrow, not the total credit limit. For example, if you have a $50,000 credit limit but only use $10,000, interest will only accrue on that $10,000. Additionally, once you repay the borrowed amount, those funds become available to borrow again, providing a revolving credit feature that ensures ongoing access to capital.

This flexibility makes lines of credit especially useful for businesses that experience seasonal revenue fluctuations or require funds for short-term operational expenses. By offering a combination of convenience and cost-effectiveness, a line of credit enables businesses to better manage cash flow while maintaining financial agility.

Types of small business loans

small businesses loan

Understanding these various types of small business loans can help European business owners make informed decisions about the best financing options for their needs.

Bank term loans

Bank term loans are a widely preferred option for small businesses requiring a substantial amount of money upfront. These loans are designed to provide a lump sum of capital that businesses repay over a predetermined period, typically ranging from one to ten years. The structured repayment terms make them an attractive choice for businesses looking for predictable financing solutions.

Repayment of a term loan is done through regular installments, which include both the principal and the accrued interest. This consistent schedule helps businesses manage their finances effectively while gradually reducing their debt over time. Furthermore, the fixed repayment period allows business owners to plan their cash flow with greater confidence and clarity.

These loans are particularly well-suited for significant investments or long-term projects. For instance, they are an excellent option for purchasing essential equipment, acquiring real estate, or funding large-scale expansion initiatives. Additionally, term loans often come with competitive interest rates, especially when secured by collateral, making them a cost-effective solution for funding substantial business needs.

Overall, bank term loans provide small businesses with the financial support necessary to achieve their growth objectives while maintaining a structured and manageable repayment plan.

Short-term vs long-term loans

Short-term loans

They are typically repaid within a year or less, making them an ideal solution for addressing immediate financial needs. These loans are often used to bridge gaps in cash flow, cover unexpected expenses, or fund urgent business requirements that cannot wait for long-term financing. Their quick access to capital can provide critical support for small businesses facing temporary financial challenges.

However, because of their shorter repayment periods, short-term loans often come with higher interest rates compared to long-term financing options. The elevated rates compensate lenders for the increased risk and the expedited repayment timeline. Despite this, the convenience and speed of these loans make them a popular choice for businesses that need to address pressing issues, such as covering payroll, replenishing inventory, or managing seasonal fluctuations in revenue.

Additionally, short-term loans are generally easier to qualify for and involve less paperwork, making them accessible to small businesses that might not meet the criteria for larger loans. While the higher costs require careful consideration, the benefits of fast funding and flexibility often outweigh the drawbacks, particularly for businesses needing immediate financial relief or short-term operational support.

Long-term loans

Long-term loans are designed for repayment over an extended period, typically exceeding one year and sometimes stretching up to ten years or more. These loans are ideal for businesses seeking substantial funding for significant, long-term investments. Their structured repayment terms provide the flexibility needed to manage large financial commitments without overwhelming the business’s cash flow.

These loans are particularly well-suited for purposes such as business expansion, purchasing high-value equipment, or undertaking large-scale capital expenditures. For example, if a company is planning to open a new location, buy advanced machinery, or invest in large infrastructure projects, long-term loans offer the financial support necessary to turn these plans into reality.

The extended repayment period allows businesses to distribute the cost of their investment over several years, making monthly payments more manageable. Additionally, long-term loans often come with competitive interest rates, especially when secured by collateral, further reducing the financial burden on the borrower.

By providing the resources needed for growth and development, long-term loans enable businesses to pursue ambitious goals and maintain financial stability. Proper planning and realistic forecasting are essential to ensure these loans are used effectively, aligning with the company’s strategic vision and long-term objectives.

Secured vs unsecured loans

Secured loans

These loans require collateral, which is a valuable asset that you pledge to the lender to secure the loan. If the loan is not repaid, the lender can seize the collateral. Common types of collateral include real estate, equipment, or inventory. Secured loans typically offer lower interest rates because they pose less risk to the lender.

Unsecured loans

These loans do not require collateral, making them riskier for lenders. As a result, they often come with higher interest rates and stricter qualification requirements. Unsecured loans are suitable for businesses that may not have significant assets to pledge as collateral.

SBA guaranteed loans

In the United States, the Small Business Administration (SBA) guarantees loans to reduce lenders’ risks. Europe has similar programs funded by the European Union (EU) and individual countries to support small and medium-sized enterprises (SMEs).

European funding programs for small businesses

EU-funded SME loans

The European Investment Fund (EIF) and European Investment Bank (EIB) provide funding and guarantees to support small businesses. Programs like the COSME Loan Guarantee Facility (LGF) under the Competitiveness of Enterprises and Small and Medium-sized Enterprises (COSME) program help SMEs access financing by reducing the risk for lenders.

National programs

Many European countries have their own government-backed loan programs. For instance, the UK offers the British Business Bank’s Enterprise Finance Guarantee (EFG), and Germany has the KfW Bankengruppe that supports SMEs with various financing options.

Online loans

Online lenders have become a popular option for small businesses due to their speed and convenience. They often offer faster approval times compared to traditional banks, sometimes within 24 hours.

Moreover, the application process is usually straightforward and can be completed entirely online, making it accessible for busy business owners. Online loans can vary significantly in terms of repayment periods, loan amounts, and interest rates. Some lenders offer short-term loans, while others provide longer-term financing options.

Due to the increased risk and convenience, online loans may have higher interest rates compared to traditional bank loans.

Lines of credit

A line of credit is a flexible loan that provides access to a set amount of funds that businesses can draw from as needed. Lines of credit are perfect for managing cash flow, covering short-term expenses, or handling unexpected costs. They offer flexibility that fixed-term loans do not.

Businesses are approved for a maximum credit limit and can borrow up to that amount. They only pay interest on the funds they use. Once the borrowed amount is repaid, it becomes available to borrow again.

How to get a small business loan

small business loan

Applying for a small business loan involves several key steps:

Step 1: Determine your needs

Clearly defining how much funding you need and what you will use it for is a crucial step. This helps you choose the right type of loan and keeps you focused on your financial goals.

Step 2: Check your credit scores

Both your personal and business credit scores will be assessed by lenders. Ensure your credit reports are accurate, and work on improving your scores if necessary.

Step 3: Research lenders

Look into various lenders, including banks, credit unions, online lenders, and government-backed loan programs, to find the best fit for your business needs.

Step 4: Gather documentation

Collect all required documents, such as financial statements, tax returns, business plans, and legal documents.

Step 5: Submit your application

Complete the loan application with the chosen lender, providing all necessary information and documentation.

Documentation requirements for getting a small business loan

Make sure you have the following documents before applying for a small business loan:

  • Business and personal tax returns
  • Financial statements (balance sheets, income statements)
  • Business plan outlining your business model and financial projections
  • Legal documents such as business licenses and articles of incorporation
  • Bank statements and details of any existing debts

Key factors affecting your chances of getting a small business loan

Several key factors play a role in whether or not you’ll get approved for a small business loan:

Credit score

In order to get a business laon, your personal and business credit scores are crucial. Lenders look at these scores to determine your creditworthiness. A higher credit score means you’re seen as a lower risk, which can lead to better loan terms and easier approval.

Business income

Lenders want to see that your business makes enough money to repay the loan. Consistent and sufficient cash flow is essential. They’ll look at your business’s financial health to make sure you can meet the repayment requirements.

Collateral

Some loans require you to put up collateral, which is an asset that the lender can take if you don’t repay the loan. Common forms of collateral include real estate, equipment, or inventory. Providing collateral reduces the lender’s risk and can increase your chances of getting approved.

Tips for improving loan approval chances

Small business loans

Improve credit scores

Pay off debts and ensure timely payments to boost your credit scores.

Strengthen your business plan

A detailed and realistic business plan can make a strong case to lenders.

Prepare thorough documentation

Organize and present all required documents clearly and accurately.

Build relationships with lenders

Establishing a rapport with potential lenders can improve your chances of approval.

Pros and cons of different loan types

Choosing the right type of small business loan depends on various factors, like interest rates, repayment terms, and eligibility criteria.

Bank loans

Pros

Bank loans offer lower interest rates and longer repayment terms. Established banks can provide stability and trust.

Cons

Require strong credit scores and substantial documentation. The approval process can be lengthy and rigid.

Government-backed loans

Pros

They have lower interest rates and favorable terms. Programs like the EU-funded SME loans reduce lender risk, making it easier to qualify.

Cons

The application process for government funding and loans is usually complex and time-consuming. Specific eligibility criteria must be met.

Online loans

Pros

Quick application and approval processes, often within 24 hours. Easier qualification criteria compared to traditional banks.

Cons

Higher interest rates due to increased risk for lenders. Shorter repayment terms and higher fees may apply.

Alternatives to small business loans 

Small businesses have several alternative financing options aside from traditional loans and lines of credit:

Business credit cards

These provide a revolving line of credit with additional perks, such as earning rewards or cashback.

Invoice factoring

This means selling outstanding invoices to a factoring company at a discount in exchange for immediate cash.

Merchant cash advances

In this type of funding, small businesses receive a lump sum upfront in exchange for a percentage of future sales, typically repaid through daily or weekly deductions.

Equipment loans

These loans are specifically for purchasing business equipment, with the equipment itself serving as collateral.

Crowdfunding

Platforms like Kickstarter and Indiegogo allow businesses to raise funds from a large number of people, often in exchange for early access to products or equity in the company.

Conclusion

Understanding small business loans is key to getting the right funding for your needs. Check your credit scores, ensure your business income is stable, and gather all necessary documents. Choosing the right loan type, whether it’s from a bank, an online lender, or a government-backed program, will help your business grow and succeed. Make sure to pick the loan that best fits your business goals and financial situation.

Simplify your business finances today

Set up a low-cost business account in just 5 minutes with OneMoneyWay so you can focus on growth for your business.

FAQs

What is the best loan option for a small business?

It depends on your business needs. Bank loans are great for lower interest rates, SBA loans offer good terms for qualifying businesses, and online loans provide fast access to funds.

What is the easiest SBA loan to get?

The SBA Express loan is the easiest to get due to its simpler application process and faster approval times, although it has a lower maximum loan amount.

What is the most common type of small business loan?

Term loans are the most common type of small business loan, offering a lump sum of money repaid over a fixed period with regular installments.

What is a CC loan?

A CC (Cash Credit) loan is a short-term loan used by businesses to finance their working capital needs. It allows businesses to withdraw funds up to a certain limit based on their inventory and receivables.

How do I get an investor for my business?

To get an investor, create a solid business plan, network with potential investors, pitch your business idea clearly, and show how it can generate returns. Platforms like AngelList and networking events can help you connect with investors.

Mette Johansen

Content Writer at OneMoneyWay

You may also like

How to open a company in latvia

How to open a company in latvia

How to open a company in Latvia? Latvia, a vibrant Baltic state strategically positioned at the crossroads of Europe, stands out as an exceptional destination...

read more

Get Started Today

Unlock Your Business Potential with OneMoneyWay

OneMoneyWay is your passport to seamless global payments, secure transfers, and limitless opportunities for your businesses success.