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A small or medium business (SMB) can run into problems when it comes to getting the money needed to make important purchases, expand the business, keep it up and running, or make pivots. If you run a business, then you should make sure that you understand SMB loans so that you look into them if your business ever needs to use this type of business financing.

Small business loans can be confusing because there are a few different types, plenty of research to be done during the application process, and much introspection needed to determine if the funding will support or grow the business in order to make the loan worthwhile.

Here is a quick guide to the facts about small and medium-sized business loans and determining if this funding option is right for your business.

What is a Small Business Loan Used For?

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In most cases, small business loans are used to cover large expenses that a business needs to purchase. Loans are also often used to start a business, introduce new products or services, make pivots in business models (such as going virtual or opening a brick and mortar location), or to fulfill orders with inventory production. These are usually for required or important expenses, such as purchasing new equipment, getting a marketing team, or similar things. This way, small and medium-sized businesses can cover those expenses through a loan. Many small businesses are run by solopreneurs or just a few people that often don’t have cash on hand to afford the expenses associated with the beginning stages of a business or pursuing growth opportunities as they come up. This is why a loan is usually seen as a relief. Funding in this form can help a business make more money and become a bigger, more profitable business. Therefore, taking a loan does come with fees, but the payoff can be greater.

As the name implies, a loan requires you to pay the bank or lender that gave it to you. As with most loans, this usually incorporates interest into the loan so that the lender can make money from the loan. This is typical for all loans, not just small or medium-size business loans.

Term Loans

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While many businesses require you to pay loans with interest, you can look into term loans to simplify the process. Term loans are a plan that you create with the bank to pay off the loan in a set period of time. This happens as your business pays back a set amount of money each pay period.

This way, your business can pace itself and pay back the loan while providing the bank with the reassurance that they will get their money back. This way, both the lender and the receiver will benefit from it. Terms pans have their pros and cons compared to other types of loans, so do your research to ensure this option is right for your business needs.

Collateral For Loans

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On top of this, to offer extra reassurance to lenders, some may require you to give them collateral for your loan. Collateral means that you offer something of value to the lender that they can sell or use if you can’t pay back the loan. This way, the lender can make back the money that they gave you if you fail to pay them. Typical collateral items include homes, cars, or other high-value items the business owners may own personally.

Collateral works as a great way to ensure that lenders get their money back. Due to this, you should be mindful of the potential need for collateral if you get a loan. Depending on the loan amount will also determine the type of collateral an owner would have to put up. For this reason, collateral loans aren’t a feasible funding solution for some business owners.

Finding the Right Lending Company

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Finding the right small business lending company can be a tough process. Be sure to do your research and look for companies that offer the best rates and terms possible. Also, make sure that you know the actual amount you need to take out at the rates may vary depending on the loan size and term. You can use a comparison website like Lantern Credit in which you can plug in your company information and financial needs, and then easily be able to see lenders willing to lend to your business and compare the rates and terms they offer in one place. If you see one that aligns with your business needs, then you can take the next step to officially apply with that lender.

This is a much easier option than searching for companies on Google and writing down the rates and terms that they offer to compare and find the best option for you. The research portion of this process is crucial to making smart business and financial decisions. The loan selection process should not be rushed or made on a whim, as a big decision like this could make or break a business.

Make the Right Choice for Your Business

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Businesses that need to get money to make a large purchase can look into the different small and medium-size business loans and lenders available. This way, you can get the money you need, use it to make more money, and pay the lender back so that your business can succeed.

When considering a loan for your business, pay close mind to what your business intends to use the money for. Is it to grow your business with marketing, new products, or service development? Or is it for maintaining operations, funding the production of inventory to fulfill orders? Or can the business be run scrappy enough that a loan is not essential at the time? Only take a loan if it’s going to help sustain or grow the business and will pay for itself with the future stage of the business as a result of the funding.