When an entrepreneur or prospective business owner seeks to start a business, that individual often seeks out small business loans in order to help them manage the business startup and operating expenses. It is important to note that taking out a small business loan may also be referred to as debt financing by those in the finance industry.
The reason behind a small business loan is because business owners and entrepreneurs cannot typically afford to self-fund their business from the business’ inception. As such, small business loans are becoming more popular and commonplace as more entrepreneurs and prospective business owners are seeking to start their own businesses instead of working for others.
It is important to note that business loans differ vastly from receiving financial assistance through individual investors. When financing a business through individual investors, which is commonly referred to as financing through equity investments, a prospective business owner makes no guarantee that they will fully repay the investors.
Instead, the investors purchase a portion of the business that they are investing in and take a risk on the business to succeed. Then, if the business does end up being a success, that investor will be repaid on their investment, oftentimes through profit sharing and dividends.
In addition to small business loans, there are also other forms of loans that fall under the umbrella of small loans.
Other examples of personal loans that are issued in smaller amounts to consumers include:
- Small loans that offer an advance on an individual’s pay.
- Payday loans, also known as “cash-advance” loans, are often for a small amount of money, generally $500 or less, that is lent to an individual under a high interest rate on the condition that both the money and the interest will be repaid out of the borrower’s next paycheck;
- Small loans that provide finances for an emergency expense.
- Emergency loans are issued by financial institutions for the purposes of covering an individual’s emergency expenses, such as an emergency medical or dental surgery;
- Small loans issued for a vacation
- Vacation loans are often offered by a company that offers vacations or retreats, but they may also be issued by an individual’s bank for purposes of a vacation or trip; and/or
- Small loans issued for home improvement purposes.
- Home improvement loans are sometimes considered to be a type of second mortgage, but are different from mortgage loans in that the loan amounts are smaller and used for labor and materials, rather than the ownership aspects of the home.
As can be seen, small loans can often be obtained in a short amount of time and may be subject to less rigorous approval steps than that of a larger more traditional loan. However, small loans are not always the ideal loans for consumers.
This is because many lenders take advantage of the demand for small loans and seek larger interest rates than that of a traditional loan. In response to the demand for small loans, many banks and other more reputable financial institutions have begun issuing more competitive small dollar loans for consumers.