How Cash Advance Loans and Other Funding Options Work


Jeffrey Bumbales

If you’ve recently set up your first business, or you’ve always financed your small business through your own personal resources, then you may be unfamiliar with the terms and processes of business loans. But you need to understand what these agreements are and how they work so you can make intelligent use of them when you need cash for an emergency shortfall or long-term expansion. Here are some of the central concepts and points every business owner should know.

Types of Loans and Other Funding Options

A business loan is an agreement between a lender and a borrower in which the lender provides a lump sum of money in return for repayment with interest. This arrangement enables the borrower to get his hands on vital funding for tools, equipment, facilities, overhead, and other business applications while enabling the lender to profit from the risk they assume.

There’s no one type of business loan that’s right for everybody. You can take out a business loan from a major lending institution, small-town credit union, peer-to-peer lending group, or private lenders such as friends and family members. Some of the primary loan types you might consider include:

    • Standard commercial business loans – This is the most common type of business loan offered at banks and credit unions across the nation. They can be a good choice for more established businesses taking out larger loans, but as the Houston Chronicle points out, they can be difficult for small businesses or startups to obtain.
    • SBA loans – Small business loans that might not qualify for a standard commercial loan can sometimes have better luck with an SBA (Small Business Administration) loan. Since these loans are backed by the federal government, lenders breathe a little easier about disbursing them. They also offer some of the longest repayment terms available (up to 20 years, according to Business News Daily).
    • Peer-to-peer loans – These Web-based loan platforms connect lenders with small businesses seeking relatively small loans of $35,000 or less. Interest rates can be somewhat higher than the best commercial rates, and the typical repayment window for these “micro-loans” is 3 to 7 years.

Obligations to Your Financing

As anyone who has ever owned a credit card knows, there’s no such thing as free money. You’ll sign a promissory note in which you agree to pay the loan amount back on a specific schedule and at a specific interest rate. If you fail to meet these obligations, the lender has the legal right to seize and sell any assets you may have put up as collateral. According to Nolo, these may include either the business’s assets (if your business is its own legal entity) or your own personal assets (if you’re a sole proprietor). If the loan required a co-signer, that person may also be liable. So it’s important that you only take out an amount you’re confident you can pay back.

The Application Process

Business loan applications involve more than merely filling out a form. Your typical bank-based loan requires you to provide detailed personal and commercial financial information, a business plan, explanations of how you intend to spend the money, and financial projections demonstrating your anticipated ability to repay the loan. Be aware that both your personal credit score and that of your business will also influence the final decision.

Business loans can vary in the amount of time required to process them. SBA loans tend to require the longest amount of processing time at 60 to 90 days, although Business News Daily reports that loans smaller than $150,000 can take as little as one week for some programs. Certain short-term and peer-to-peer loans may be processed in a matter of days. Make sure you know how long you can expect to wait if your financial need is an urgent one.

Alternatives to Loans: Cash Advances

Just as you should have some basic understanding of small business loans, it also pays to know when alternatives to lending can resolve your financial issues quickly and easily. One such option are cash advance “loans”. Businesses that accept credit cards can commit a percentage of that income to pay back the cash advancement they’ve received. If you’d like to get the money your business needs while reserving that big loan for another occasion, you can prequalify for your merchant cash advance at Credibly today!