Small Business Financing Education Center

Get the information you need to make the right financing decisions for your small business

Frequently Asked Questions

Understanding Your Business Loan

Q. What are loan “terms”?

A. The phrase “loan terms” usually refers to the term length of your loan (however it is sometimes also used to describe other loan conditions). For example, loan terms can range from 6 months, 12 months, 24 months, 4 years, 5 years, 10 years, or longer—depending upon the nature of the loan.

Q. What is a personal guarantee on a business loan?

A. A personal guarantee gives your lender the right to pursue your (the guarantor’s) personal assets if your business defaults on a business loan.

Q. Can I get a business loan after a bankruptcy?

A. Qualifying for a small business loan will be more difficult during the 10 years the bankruptcy appears on your credit report, but some lenders will work with your businesses if the bankruptcy has been discharged typically for at least two years. By agreeing to a personal guarantee, you (the guarantor) are agreeing to be 100% personally responsible for the entire loan amount, in addition to any collection, legal or other costs related to the loan.

Q. What is loan stacking?

A. Loan stacking is where a short-term loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics with no consideration of the borrowers ability to manage the debt. It often happens when a lender, who you don’t know and likely have never spoken to before, sees the UCC filing for your first loan (because it’s part of the public record), and contacts you to inform you that you now qualify for an additional loan. Loan stacking could put a business at risk of default and bankruptcy. See “Loan Stacking is Bad For Your Business.”

Q. Is business loan interest tax deductible?

A. Business loan interest may be considered a legitimate business expense and tax deductible by the IRS. You should consult with a trusted tax adviser to discuss how this applies to your business.

Different Loan Types

Q. What is a bank statement business loan?

A. A bank statement loan is a loan that is based among other things on the past 3-24 months of bank statements showing that the average monthly deposits, withdrawals/expenses and average balances will support the loan payments.

Q. What is an ACH loan?

A. The ACH designation applies to the Automated Clearing House, and a lender’s ability to withdraw an agreed upon amount directly from your checking account at agreed-upon intervals. An ACH loan is a loan where the lender collects the borrower’s periodic payments via ACH.

Q. What is a hard money loan?

A. A specific type of asset-based loan secured by real property. This type of loan is usually issued by private investors or companies, and are usually used as a bridge to more traditional financing.

Q. What is factoring?

A. Factoring is technically not a loan. A third party, known as a factor, purchases a company’s invoices or purchase orders at a discount giving the business owner access to a percentage of that invoice now, instead of waiting for the invoice or purchase order to be paid. The balance, minus the agreed upon fees are then paid to the business owner once the factor has collected payment from the business’ customer(s).

Q. What is accounts receivable financing?

A. Accounts receivable financing uses a company’s outstanding AR as collateral for a loan (see Factoring).

Q. What is invoice financing?

A. A specific type of asset-based loan secured by real property. This type of loan is usually issued by private investors or companies, and are usually used as a bridge to more traditional financing (see Factoring).

Q. What is factoring?

A. Invoice financing uses a company’s outstanding invoices as collateral for a loan (see Factoring).

Q. What is a short-term business loan?

A. A short-term business loan is typically a loan with a term of 12 months or less (see What are loan terms?).

Q. What is a long-term business loan?

A. A long-term business loan typically has a loan term of longer than 12 months or longer (see What are loan terms).

What is a small business grant?

A. Federal, state, and local governments, as well as some private groups sometimes offer grants to small business owners. Government grants are typically not available for starting a business, paying off debt, or covering operating expenses. Grants are not loans and typically do not require repayment.

Q. What is a non-bank lender?

A. A non-bank lender is any lender that is not a bank. For example non-profit lenders, online lenders, and equipment financing companies are frequently non-bank lenders. They are usually regulated as commercial lenders, but are not banks.

Finding the Right Business Loan

Q. What is the best type of business loan for my business?

A. There are many options available for most small business situations. The first questions to ask to find the best loan for your situation are 1) What is my loan purpose? 2) How much capital do I need to meet that need? 3) What type of loan can I likely qualify for? The answers to these questions will lead you to the best loan for your business and situation (see the Fundability Quiz).

What is the cheapest business loan?

A. There are non-profit micro-lenders that offer very low or zero interest loans to qualifying business owners. They are typically in the form of micro-loans (the SBA and most traditional lenders consider loan amounts of $50,000 or less to be micro-loans). Beyond those options, bank loans for established businesses with strong collateral will typically be the next cheapest option.

Q. What is the difference between a line of credit and a business loan?

A. A line of credit is a revolving loan that provides a pre-determined amount of capital that can be accessed as needed, repaid, and then used again. A business loan is a fixed amount of capital in a lump sum that is repaid over the term of the loan (see What is a line of credit?).

Q. What is the difference between an equipment lease and a loan?

A. The equipment is owned by the leasing company during the term of an equipment lease and the equipment is being purchased by the small business with an equipment loan. Many leases include an option to purchase the equipment at the conclusion of a lease, sometimes for as little as $1.

Business Line of Credit

Q. Do I need collateral to get a line of credit for my business?

A. Some lenders, including many banks, may require specific collateral to secure a business line of credit, while other lenders may apply a general lien to all the business assets – both are deemed “secured.” There are two types of business lines of credit available to business borrowers- a secured line and an unsecured line. You should ask your lender to identify the type of business line of credit you are applying for.

Q. How long does it take to apply for a business line of credit?

A. It depends upon the lender. It could take several days or weeks when applying with a traditional lender or as little as a few minutes with many online lenders.

Q. What is a business line of credit?

A. A business line of credit is a revolving loan that provides a pre-determined capital limit that can be accessed as needed. Unlike a term loan, all or part of the line can be accessed at any time up to the pre-determined limit, repaid, and used again. Interest is only paid on the amount actually used.

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Loans Subject to Lender Approval. Depending on the state where your business is located and other attributes of the loan, your business loan may be issued by Celtic Bank, a Utah-Chartered Industrial Bank, Member FDIC. Your loan agreement will identify the loan issuer prior to your signing.
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