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What are Business Loans?

Tricia Christensen
By
Updated May 16, 2024
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Business loans are money that transfers from a lender to a borrower. The borrower is typically a business instead of an individual and the lender is often a bank. The lender sets terms of interest rate and repayment schedule, to which the borrower must agree. Lenders may also differ in what types of loans they can offer, and might offer both secured and unsecured loans. Secured loans may either seek collateral in the form of the business or in the main borrower's personal property, like a home.

A number of reasons exist why a business might seek a loan. Businesses might be considering expanding, offering new services, or making large or small purchases. Lenders may take into consideration several factors before granting business loans. They may want to evaluate the current success of the business and its ability to be profitable. They’ll also generally assess the credit history of the business. If a company is new and seeking a start up loan, this is hard to assess, and it may mean that a loan is only issued if the owner of the business has excellent personal credit history.

It’s often said that businesses that seek loans don’t need them. There are fairly stringent requirements placed on borrowers. They have to show they can pay the loan back easily.

When the loan is more of a gamble, it may be easier to look for investors or family or friends who are willing to take a risk, and either lend or buy into a company. Most banks are emphatically not interested in giving high-risk loans. For smaller loans, small businesses might also look to government lending sources or to companies that issue microloans, which usually have fewer requirements.

It can be an advantage to the business to have begun with business loans or lines of credit because the business begins to build its own credit history. Just like personal lenders, businesses must be absolutely reliable when it comes to making any payments on loans. Falling behind on payments damages credit history and makes it very hard to get business loans in the future. Most business also must be successful in order to keep borrowing. Banks and other lenders don’t only look at credit rating but will also examine profits and projected profits that might be earned with new investment from business loans.

For those people looking for business loans to start or continue a small business in the US, there is one good source to investigate prior to talking to banks. The US Small Business Administration, a section of the government that works with supporting small business, has a number of loan and grant programs available. Though not all people will be able to get assistance through this branch of the government, it is certainly worth trying, and loans made through this program may have lower interest rates and more generous repayment terms. Grants may be harder to get, but have the extreme advantage of needing no repayment.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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Tricia Christensen
By Tricia Christensen , Writer
With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia Christensen is based in Northern California and brings a wealth of knowledge and passion to her writing. Her wide-ranging interests include reading, writing, medicine, art, film, history, politics, ethics, and religion, all of which she incorporates into her informative articles. Tricia is currently working on her first novel.

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Tricia Christensen

Tricia Christensen

Writer

With a Literature degree from Sonoma State University and years of experience as a SmartCapitalMind contributor, Tricia...
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