If you’re a business owner, you’ll know that it takes money to make money. A business loan is a financial product tailored to provide funds for commercial uses, such as purchasing a company vehicle or bridging a gap in cash flow.

While business loans bear similarities to personal loans, there are key differences that borrowers should keep in mind before applying.

So, if you’re planning to borrow start-up capital for a business of your own or need financing for an investment in operational equipment, here’s what you need to know about business loans.

Business loans enable businesses to borrow a set amount of funds from a lender or bank for commercial use. The borrowed amount will be repaid in regular repayments (monthly, quarterly, or annually), in addition to incurred interest, over a fixed period of time.

Business loans can be used to fund a wide range of commercial needs:

  • Bridging gaps in cash flow
  • Purchasing inventory
  • Financing expansion projects
  • Buying commercial property
  • Obtaining new equipment
  • Covering the cost of a start-up
  • Debt consolidation 

Lenders offer different types of business loans to suit the various commercial needs and circumstances of different organisations.

Some business loans require borrowers to provide assets like property, vehicles, or equipment as security for the loan — these are secured business loans. If businesses cannot repay the loan, the lender can take possession of the secured assets to recoup the cost of the loan. Secured business loans typically offer better interest rates and loan terms as they provide more assurance for lenders.

Unsecured business loans do not require assets to be used as collateral for the loan, which is ideal for businesses that may not have sufficient assets to use as security.

How Much Can You Borrow With a Commercial Loan?

There’s no limit to how much businesses can borrow on a business loan — lenders offer loans from thousands of dollars up to the millions.

The only real limiting factor for how much can be borrowed is the level of confidence the lender has in the business’s ability to repay the loan. Lenders look at indicators like the business’ credit score, revenue and expenses, currently held assets and liabilities, as well as projected growth. The lender will then provide the maximum amount that can be borrowed on a business loan.

Types of Business Loans

Choosing the right commercial loan for your business depends on the amount of funds needed and how frequently the funds need to be accessed. From there, businesses can select the right type of loan based on their needs.

Term loan

A term loan, or a regular business loan is simply a one-time provision of funds from a lender to be repaid over the term of the loan. Term loans come with fixed or variable interest rates and are generally preferred with collateral. There is no option to redraw additional funds with a fixed-term loan.

Business line of credit

A business line of credit is a type of loan that allows businesses to access funds when required, up to a pre-approved amount. The loan is linked to the business’s transaction account and can be accessed when there are insufficient funds to make a payment or withdrawal. Businesses can deposit funds back into the account to offset the borrowed amount to ensure that it stays under the pre-approved limit. As for interest, it is only applicable to the amount accessed from the account, not to the total borrowed limit.

Working capital loan  

A working capital loan is a short-term business loan that can be used to purchase equipment, boost cash flow, or fund day-to-day expenses. The amount that can be borrowed with a working capital loan is typically lower, but so are the interest rates, allowing businesses to access additional funds for a short period of time.

Financing lease

A finance lease allows businesses to obtain equipment or commercial vehicles without bearing the full cost of ownership. With a finance lease, businesses and lessors set up an agreement where the desired asset is purchased by the lessor and then loaned to the business for a fixed term.

The business will make regular repayments to the lessor over the course of the lease term based on the proportion of the asset’s cost, plus depreciation. At the end of the lease term, the business has the option of purchasing the asset by paying off its remaining value or choosing to lease a new asset.