Business Loan Basics: What Every Small Business Owner Should Know Before Applying
Getting a small business loan can feel confusing — especially if you don’t speak “banker.”
Before you start filling out applications, it helps to understand a few basics: the main types of business loans, who offers them, and what lenders tend to look for. That way you’re not guessing in the dark or surprised by terms you didn’t see coming.
This guide walks through business loan basics in plain English, so you can read offers more confidently and ask better questions before you sign anything.
Why Understanding Business Loans Matters Before You Apply
Avoiding surprises in payments and terms
Many business owners only see the headline number: “You’re approved for $50,000!”
But the details behind that number matter just as much:
- How often are payments taken — daily, weekly, or monthly?
- Is the payment fixed, or can it change?
- What happens if your cash flow slows down?
- Are there fees or penalties if you want to pay it off early?
Knowing the basics before you apply can help you avoid surprises that strain your cash flow or limit your flexibility later.
Saving time by applying to the right type of lender
Different lenders and loan types are designed for different situations. A traditional bank might have lower rates but stricter requirements. An online lender might be faster but more expensive.
When you understand the general landscape, you can:
- Focus on lenders that are more realistic for your stage of business
- Ask better questions up front
- Avoid wasting time on applications that were unlikely to be approved
The Main Types of Small Business Loans (Plain-English Overview)
Term loans
A term loan is what most people think of as a “regular” loan:
- You receive a lump sum of money up front
- You pay it back over a set time period (the “term”)
- Payments are usually fixed and made monthly
These are often used for bigger one-time needs: expansion, renovations, big purchases, or consolidating other debt.
Business lines of credit
A business line of credit works more like a credit card for your business:
- You’re approved for a maximum limit
- You can draw money, pay it back, and draw again
- You only pay interest on the amount you actually use
Lines of credit are often used for cash flow gaps, seasonal ups and downs, or smaller short-term needs.
Equipment financing
The equipment financing loan is used to buy specific items for your business — like vehicles, machines, tools, or technology.
The equipment itself often serves as collateral, and the loan terms are typically matched to the useful life of the equipment.
This type of financing is common for construction companies, manufacturers, medical and dental practices, restaurants, and other equipment-heavy businesses.
SBA-backed loans (high-level overview)
In the U.S., some loans are backed by the Small Business Administration (SBA). The SBA doesn’t usually lend directly; instead, it guarantees part of the loan made by a bank or other lender.
These loans may offer longer terms and sometimes more flexible requirements but tend to require more paperwork and take longer to process.
SBA-backed loans can be a good fit for some businesses, but they’re not the only option.
Short-term and alternative funding
There are also short-term loans and alternative funding options, such as:
- Short-term working capital loans
- Daily debit loans (where payments are taken from your bank account every business day)
- Revenue-based funding or merchant cash advances
These can sometimes be faster and easier to qualify for, but they can also be more expensive and put more pressure on daily cash flow. It’s especially important to understand the true cost and how payments will affect your business before using them.
Who Are You Really Borrowing From? Types of Lenders
Traditional banks and credit unions
Banks and credit unions are what most people think of first:
- Often offer lower interest rates
- Tend to have stricter approval standards
- May require more documentation and a longer review process
These can be a good fit for established businesses with steady revenue, stronger credit, and time to wait for approval.
Online lenders and fintech companies
Online lenders and financial technology (fintech) companies have grown quickly in recent years:
- Applications are usually online
- Decisions can be faster — sometimes in days or even hours
- Requirements may be somewhat more flexible, but costs may be higher
These lenders often focus more heavily on your recent bank activity and revenue, and less on traditional paperwork.
Specialty and niche lenders
Some lenders focus on specific industries or types of funding:
- Equipment financing specialists
- Medical or dental practice lenders
- Franchise or real estate–focused lenders
These can be helpful if your business fits their niche, because they understand your industry’s typical cash flow, risks, and needs.
Key Terms You’ll See in Business Loan Offers
Interest rate vs. APR
The interest rate is the percentage charged on the amount you borrow.
The APR (Annual Percentage Rate) includes interest plus certain fees, expressed as a yearly rate.
APR can give a more complete picture of the total cost, especially when fees are involved.
Fixed vs. variable rate
A fixed rate stays the same over the life of the loan.
A variable rate can go up or down based on a reference rate or index.
Fixed rates are more predictable. Variable rates may start lower but could rise over time.
Term length and amortization
The term is how long you have to repay the loan (for example, 3 years, 5 years, 10 years).
Shorter terms usually mean higher payments but less total interest over time. Longer terms mean lower payments but more interest overall.
Fees to watch for
- Origination fees – charged for creating and processing the loan
- Packaging or document fees – sometimes charged by intermediaries
- Prepayment penalties – fees if you pay off the loan early
- Late payment fees – charged if payments are missed or late
What Lenders Usually Look At When You Apply
Revenue and bank statements
Lenders often want to see your average monthly revenue and your bank statements for the last few months.
They want to know whether your business has consistent deposits and manageable expenses.
Time in business
Many lenders have minimum requirements for the number of years your business has been in operation.
Personal and/or business credit
Even if your business has its own credit profile, many lenders will also look at your personal credit, especially for smaller businesses.
Collateral and guarantees (high-level)
Some loans may be secured with collateral, such as equipment or vehicles. Others may require a personal guarantee.
Simple Checklist Before You Apply for a Business Loan
- Know why you’re borrowing
- Estimate how much you really need
- Review your business bank statements
- Separate business and personal finances
- Gather basic documents
- Prepare a few questions to ask lenders
Going in prepared can help you feel more in control and make more informed decisions.
Important Reminder: Education Only
ChicagoBusinessLoans.com is an educational blog. This article is meant to give you a general, plain-English overview of business loan basics — it is not personal financial, legal, or tax advice.
Every business is different, and lenders have their own requirements and policies. Before you sign any agreement, consider:
- Reviewing the terms directly with the lender
- Asking questions until you feel comfortable
- Talking with qualified professionals who understand your specific situation
The more you understand up front, the easier it becomes to choose funding options that fit your business — instead of feeling rushed or pressured into something that doesn’t.