How Business Loans Work: From Application to Final Payment

The basic mechanics

A funder gives you a lump sum or a credit limit. You repay principal plus a finance cost on a schedule until the balance reaches zero.

Every loan has five core parts:

• Principal. The amount you borrow.
• Cost. Interest or a fixed fee, sometimes with origination or other fees.
• Term. How long you have to repay.
• Payment schedule. Daily, weekly or monthly payments.
• Security. Collateral or a personal guarantee, if required.

For definitions of the words you will see, read business loan terms and business financing terms.

The main types and how each repays

Term loans repay in fixed installments, lines of credit repay as you draw, working capital repays over a short period and revenue-based financing repays as a share of sales.

• Term loans. One lump sum, fixed payments over a set term. Funding often takes 1 to 5 days.
• Business line of credit. A limit you draw from, repay and draw again. Typically 24 to 72 hours.
• Working capital. A lump sum for operating needs, repaid over a short horizon.
• Revenue-based financing. Repayment rises and falls with sales.
• Equipment financing. Funds equipment, which secures the financing. Typically 2 to 7 days.
• SBA loans. Backed in part by the government, with a slower process and lower cost.

How the cost is calculated

Cost can be quoted as an interest rate, an annual percentage rate or a factor rate. Convert any offer to total repayment and payment per month to compare.

An interest rate applies to the outstanding balance. A factor rate multiplies the amount funded once. Fees can add to either.

An illustrative example with a factor rate: $50,000 funded at a 1.25 factor means a total repayment of $62,500, so the finance cost is $12,500. If you repay over 10 months, the monthly-equivalent payment is $6,250. The same dollar cost can be a very different annual percentage rate depending on how fast you repay, because early payments reduce the money you hold.

Read factor rates, what a 1.3 factor rate costs and business loan rates to see how quotes differ.

What funders look at before approving

Funders look at time in business, monthly revenue, bank activity, credit history and sometimes collateral and cash flow coverage.

Different products weigh these differently. Banks and SBA lenders focus on tax returns, credit and collateral. Many alternative products rely more on revenue and bank statements. Common factors:

• Months in business.
• Average monthly deposits and balances.
• Personal and business credit. See credit requirements for a business loan.
• Existing debt and payment history.
• Industry and any restrictions.

See business loan requirements for a checklist. A higher credit score and stronger cash flow generally mean better terms.

Collateral, guarantees and liens

Some loans are secured by assets, and many require a personal guarantee. Read what you are pledging and what happens on default.

Secured loans give the funder a claim on specific assets, such as equipment. Unsecured loans do not name assets, but the funder may file a blanket lien or require a personal guarantee that makes you responsible if the business cannot pay. Learn more in everything about collateral, personal guarantees and UCC filings.

Read the agreement carefully, including default terms, prepayment rules and any restrictions on taking on more debt. See the business loan agreement guide.

The application and funding steps

Apply, submit documents, review offers, sign and receive funds. Complete files move fastest.

1. Pick the product that fits the use and timeline.
2. Apply. Provide business details and the amount requested.
3. Submit documents. Usually bank statements, and for some products tax returns or financials.
4. Review offers. Compare total repayment, term and payment size.
5. Sign and fund. Funds arrive by deposit, with timing depending on the product.
6. Repay. Keep payments on schedule and track the balance.

The small business loan application checklist lists what to collect.

Test whether the loan pays for itself, then apply

Start from what the money will produce. If added profit over the term clearly exceeds the total cost, the loan can make sense.

Say a $50,000 equipment purchase adds $4,500 of gross profit per month. Over 12 months, that is $54,000 of added profit. If total repayment is $60,000, you pay $10,000 in cost, and the equipment still has value after the term. Compare with the cost of waiting and the risk if sales dip. Use small business loan ROI and how much funding your business can afford.

ROI Funder works with a network of funders and matches your file to those that fit. We consider 500+ FICO, 6+ months in business and $20,000+ monthly revenue, with funding from $5,000 to $5,000,000 in all 50 states. A complete file is the application plus three months of business bank statements, and approved files can be funded the same business day. The application takes a few minutes, uses a soft credit pull and carries no obligation. Start at apply.