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Term Loans
What is A Term Loan?
Term loan for businesses can be a boon for small businesses. A business might need funds to invest in its growth and make the most of trending opportunities. A term loan can be helpful for a business in a time of need. Term loan for businesses is a financing facility where you borrow money from a lender and agree to repay it on a fixed schedule. Most of the time this is a short-term loan used to purchase an asset.
However, many businesses borrow this money for financing their monthly operations. There are loan programs to specifically help in financing a business. These features might sound lucrative, however, you need to understand how a term loan works. This short term loan for businesses usually has specific repayment terms and comes with its pros and cons. Let’s understand more about small business loans to make an informed decision on whether you should opt for a term loan.
Who Qualifies for a Term Loan?
A lot of factors can affect eligibility for a term loan or other business loans:
- For small business loans, the business plan is evaluated for the financial viability of a new or existing business.
- If an existing business applies, the lender evaluates their operational efficiency and past financials before approving a term loan.
- The lender often evaluates the balance of the business to ensure the term loan can be recovered by selling the assets in case the business cannot repay the loan.
- Credit repayment track record is analyzed by the lender. The better your credit score the more favorable your repayment terms will be.
- Term loans work for businesses in most industries. The strength of your balance sheet and cash flow will determine eligibility including amount, the cost of the loan, and how long you have to repay it.
How does a Term Loan work?
A term loan application process is similar to other business loan. Let’s understand the steps involved:
Step 1 – You approach a lender with your requirements. For example, you may need a term loan for the amount of $200,000. For this, you must contact the potential lender and tell them that this is the amount you need and specify what you need it for. The lender will request that you complete an application and provide some insight into your business. This means they will ask to see your balance sheet, profit and loss statement, and possibly your last few months of bank statements.
Step 2 – The lender analyzes your requirements to define their repayment terms. The lender calculates the tenure and interest rate they can offer you based on your guarantee to repay the loan. If the term loan is for buying an asset, then the useful life of that asset impacts the tenure. The credit risk involved in the purpose of a loan has a direct impact on the rate of interest.
Step 3 – You analyze all the offers you have received and select the most suitable offer. You must consider the interest rate and repayment terms offered by each lender and choose one that meets your needs best. Make sure the lending practices of your financier are suitable to you.
Step 4 – Your term loan is processed. Once you finalize your lender and complete the necessary documentation, your loan will be processed and the amount will be available to you.
A term loan is a secure loan. The assets a business purchases using the term loan funds is kept with the lender as a guarantee along with other assets of the business. This is a guarantee that the business will repay the loan amount to the lender. If they default, the lender can acquire these assets from the business to recover the loan amount.
benefits of Term Loans
Let’s begin with some of the top benefits of a term loan for businesses:
- Great for short-term financing needs such as purchasing a fixed asset.
- Many term loans offer lower rates of interest compared to personal loans.
- Many financial institutions offer flexible options to repay the money you borrow.
- An online lender is known for financing your loan quickly.
- You can build a solid credit history for your business by obtaining short-term loans and making timely repayments
disadvantages of Term Loans
While term loans offer several benefits, it’s also important to consider their drawbacks. Here are some of the cons of term loans:
- The lender may have strict qualification requirements such as a high credit score.
- The lender may require collateral and personal guarantees .
- The lender may have additional costs such as processing fees or hefty foreclosure charges in the event of a default.
- The available amount will be determined by cash flow and strength of your balance sheet.
How much does a Term Loan cost?
The cost of a term loan depends on a few key business metrics.
- Strength of your business financials.
- Size of the loan.
- Repayment schedule.
Since it is considered an actual loan, and not a cash advance, the prices typically range from prime rate plus 2 up to about 18% per annum. You will find the lower cost loans available from regular banks. However, if a bank is not offering enough capital you can explore non-bank lenders that may provide a larger loan but the costs will be more expensive.
What are they three main types of term loans?
Term loans have three loan types you can choose from, based on what suits your business the most. It is important to analyze your needs, and evaluating options before proceeding with a loan:
- Short term loan: this type of loan is for a small amount and is usually a short term loan for one or two years. They are perfect for recurring requirements like working capital. However, you might have to pay higher interest rates since they offer convenience and are easily approved by the lender.
- Intermediate-term loans: the tenure for these loans is typically between two and five years with amounts higher than a short term loan. They are good for operational funding such as investing in a new location or hiring more staff.
- Long-term loans: these loans typically offer the highest amounts and longest tenure. The rates of interest for such loans may be lower than a short term loan, too. However, these loans can also be the most difficult to qualify for and are best for established companies with strong credit histories. They are great for financing long-term business growth strategies.
What is an example of a term loan?
A great example of a term loan is the loan facility provided by the Small Business Administration. You could be approved for up to $5 million if you apply for a Small Business Administration standard 7(a) term loan. Your rates will be set by your lender, but they cannot be higher than what the Small Business Administration will allow.
Naturally, not all companies require that level of financing. Therefore, the Small Business Administration also provides 7(a) small business loans. These is usually a short-term loan. The maximum loan amount is $350,000 for them. Small Business Administration loans always come with a fixed interest rate and a predetermined term.
Key Points
Low Cost
Term loans are typically considered a more affordable loan option. Reserved for businesses with better credit, more favorable options are available if you qualify.
Easy Repayment
Term loans are repaid over time by making regular payments to the lender. There are no surprise or balloon payments as long as payments are made on time.
Easy to Obtain
Qualifying for a term loan is based on strength of business financials. Qualifying is usually very straightforward and can be as quick as 72 hours in most cases.
Contact us now to get a term loan for businesses, quickly and easily! Our process to apply for a term loan for businesses is fast and our criteria are less expansive than most banks. We would love to help you grow your business by financing your operations with low cost easy to use business term loans and financing.
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Frequently Asked Questions
If you’re worried that you may not qualify for term loans offered by banks, you can always consider alternative financing options like a new lender. Online lenders of term loans usually have fewer criteria and offer faster processing, too.
While banks may not offer loans to businesses with bad or no credit histories, an online or private lender is a good option. They may also offer a more flexible repayment term.
Banks may be your best option if you have a strong credit history and an established business, as they offer longer tenures and lower interest rates. However, for newer businesses or startups, an online lender might be better.
Most people believe that the most important factor in a loan of any kind is the rate of interest. However, you must consider other crucial factors, too, such as the tenure and repayment policy. You must also ensure the terms of the loan allow you to use it for what you need like marketing investments.
The tenure of your term loan can be anywhere between a few months to several years, depending on the amount and the repayment policies of your lender.
No. If you make sufficient profits and can do so, it’s a good idea to pre-close your loan. However, make sure you don’t pay hefty pre-closure fees as they can sometimes be higher than the amount you would repay in installments.
Usually, the amount of a short term loan for businesses is very less compared to a long-term loan. Hence, short-term loans seem cheaper.
It depends on the financing institution and its loan facility. They might ask you not to borrow any other business loan unless you repay the current business loan.