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How Do Business Loans Work: For Small Business

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how do small business loans work

Starting a business, expanding a business, and gaining access to working capital are all reasons why you might seek external funding. Figuring out how business loans work is essential for any entrepreneur looking to create a successful business.

The ins and outs of how business loans work can be complex, and taking out the wrong loan can be just as damaging as failing to secure funding at all. In this guide, we’ll cover everything you need to know about what a business loan is and how they work.

What is a Small Business Loan?

Before answering the question “how does the small business loan work?” it’s necessary to know what one is in the first place.

Business loans may be taken out for many reasons, including getting started, hiring new staff, funding an expansion, or even covering existing debts.

If your loan application is successful, you’ll be required to make regular monthly repayments to your lender until both the loan principal and the interest has been paid off.

Different loans come with varying rates and repayment lengths, so it’s important to shop around first.

Types of Small Business Loans

How do business loans work? In theory, all small business loans function in the same fashion. You apply for a loan, a lender approves your request, and then you receive the money. Over time, you make timely repayments.

There are many types of small business loans. Let’s take a look at some of the most common loans available:

  • Line of Credit – This loan works like a credit card. You borrow up to an upper limit and only pay interest when you borrow. With a secured business line of credit, you can borrow as many times as you want if you make your repayments on time.
  • Accounts Receivable Financing – Otherwise known as factoring, these loans are secured against outstanding invoices. It’s essentially a way of getting your money faster, but there are fees attached.
  • Working Capital Loans – These loans finance the day-to-day operations of a company, such as rent and payroll. Working capital loans are typically for smaller amounts and come with shorter terms.
  • Small Business Term Loans – Or micro loans, these business loans dispense a lump sum and come with a fixed interest rate. Most commonly, the term length is five years, and these loans are mainly used for specific small business investments.
  • SBA Small Business Loans SBA loans are guaranteed by the U.S. Small Business Administration. Loans under $150,000 are guaranteed up to 85%, whereas larger loans are guaranteed up to 75%.
  • Equipment Loans – Also known as equiptment financing. Take out this type of loan to replace aging equipment or invest in new equipment. These applications are often shorter and more likely to be approved.
  • Small Business Credit Cards – For smaller investments, small business credit cards act as personal credit cards. Take out a credit card to cover more minor business expenses, such as consulting services or office furniture.

How Do Business Loans Work?

 How does a small business loan work when you have a variety of loan types on the books? Truthfully, the only things that change are the amounts, repayment terms, and interest rates.

As a business owner, being able to see how do small business loans work with different lenders will help you to make an informed decision about which form of financing to take out.

High fees and interest rates must be measured against your business’s expected income so the loan doesn’t become a burden.

Make sure you read the lender’s terms and conditions carefully to avoid getting burned financially. 

How to Get a Small Business Loan

 How does a small business loan work? The first thing that needs to be taken into account is the application process. Depending on the lender, your application may be processed in a few days, or it could take months.

For example, U.S. SBA loans are notoriously difficult to secure because of the guarantee that comes attached.

Primarily, your application will be based on your business’s numbers, credit score, business plan, and any requested collateral.

Read the lender’s terms and conditions to know how does a business loan work with them. Failure to do so means a lot of wasted time and effort.


Now that you have answers to the question “how do business loans work?” you can move forward with securing the funding your venture requires. At L3 Funding, we know how confusing it can be to find the right lender for you.

We specialize in supporting small businesses across all industries in exploring their financing options and making their applications. Alternatively, L3 Funding can supply you with different funding options, such as merchant cash advances and microloans.

Get in touch with L3 Funding and apply for financing now. We make the application process easy, fast, and secure.