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How Do Business Loans Work?

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Business loans are money lent to a business and are repaid within a certain period of time. This payment takes place with the principal and interest together. The nature of interest rates varies according to lenders. Fixed or variable interest rates can be used. In addition lenders may charge extra fees for management or early payment on the loan amount. These extra fees are usually;

  • Origination fee,
  • Servicing or processing fees,
  • Early repayment fee,
  • Late payment fee.

Origination fee;

Initially charged. It is usually added to the total refund amount. The principal is calculated as the percentage of the loan you have received. Covers the costs incurred when receiving business loans. This fee may also be an adjustment fee.

Servicing or processing fees;

Costs incurred while managing the payment of the business credit you received. This fee can be converted to the total refund amount or collected at regular intervals.

Early repayment fee;

Early payment is a problem for lenders giving business loans. When early payment is made, interest earnings decrease. For this reason, in the first place they get a certain amount of money to discourage you from the idea of ​​early payment. This way, even if you make early payments later, they will compensate the interest income they lose with this money.

Late payment fee;

As with other loans, penalties will be applied if business loans are paid late or not.

Who gives business loans?

Business loans are issued by two lenders; banks and alternative lenders.

Banks – Businesses generally receive their loans from the banks giving their current accounts. However, this situation changed after 2008. Due to the financial problem, banks have become reluctant to provide business loans, especially to small enterprises. Therefore, when you apply to banks, you have to wait a long time and you will deal with a lot of documents.

Alternative lenders – All lenders, except for banks, that provide business loans are included in this group. It is relatively new compared to banks and its popularity is increasing over time. Because people are turning to different alternatives, especially since there are banks that make it difficult for small businesses to get business loans. These give business loans faster than banks. The eligibility criteria are also less than in banks.

Who can receive business loans?

As with other loans, lenders want to make sure that you will reimburse for business loans. Therefore, they evaluate some criteria. These criteria are generally as follows;

1- Time in business,

2- Credit score,

3- Annual turnover,

4- Industry,

5- Business type.

If the lender did not accept your application for business loans in accordance with these criteria, the reason may be:

  • Your business doesn’t have a high enough turnover.
  • You’re in a restricted or risky industry.
  • The lender doesn’t have enough information to make a decision.
  • Your business hasn’t been trading for long enough.
  • Your business has a weak cash flow.
  • You don’t have any assets to offer as security (for secured loans only).
  • Your personal or business credit score is too low.
  • The lender disapproves of your intended use for the funds.
  • You already have other, similar loans (this is called stacking).

What are the maturity periods and typical interest rates of business loans?

Business loans are divided in terms of maturity; long – term business loans and short – term business loans.

  • Short-term business loans;

Short-term business loans have maturities from several months to 2 years and the monthly payment is higher than long-term business loans. But it ends sooner.

  • Long-term business loans;

Long-term business loans are those with maturities of 2 years or more. The monthly payments of these loans are lower, but the total debt amount is higher. You may also have problems when you need urgent funding because you will be paying this credit for many years

Interest rates for business loans may come in three different ways; Annual interest rate, monthly interest rate and Annual percentage rate (APR). If you receive short-term business loans from alternative lenders, you will encounter an average interest rate of 30% to 55%. If you receive long-term business loans from banks, this rate falls to an average interest rate of 8% to 12%.

For what purposes can I use business loans?

Business loans are not only used to grow small businesses. All areas where you can use business loans are;

  • To hire new or train existing staff,
  • To pay off existing debts,
  • To replace stock or buy in bulk to make savings,
  • To launch a marketing campaign,
  • To pay an upcoming tax bill,
  • To replace or repair equipment or machinery,
  • To relocate to new premises.

Business loans cannot be used for personal expenses for any reason. When the lender notices this, they will ask you to pay the full loan.

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