Business Term Loans: Everything You Need to Know

Business Term Loans: Everything You Need to Know

Business Term Loans: Everything You Need to Know

Most small businesses have trouble keeping cash flow steady at some point. That’s where business loan financing, like a term loan, can come in handy: taking out a loan can help you have working capital for business expenses so you don’t jeopardize your hard work.

What is a Business Term Loan?

A term loan is a type of financing that provides a lump sum of money to a borrower. The funds are repaid over a period of time at an agreed-upon interest rate.

What Are the 3 Types of Business Term Loans?

When it comes to business term loans, there are three primary types:

  • Short-term loans
  • Intermediate-term loans
  • Long-term loans

Short-term loans are typically paid back over a year or two. A payday loan or invoice financing from an online lender is a good example. These loans tend to have higher interest rates, though you don’t necessarily need great credit to qualify.

Loans with an intermediate term have longer repayment periods, usually up to three years. These may be for larger loan amounts and might be secured loans, like equipment financing.

A long-term small business loan will have a repayment term of five to 10 years, typically. This is the kind of loan that traditional banks and credit unions will offer, though you will also find some online lenders offering them. SBA loans are a good example of long-term loans.

Pros and Cons of Business Term Loans

A business loan is great for many companies, but not all. Depending on your needs, you might be better off with a line of credit or one or more business credit cards.

Pros 

  • Help keep cash flow steady
  • A wide range of interest rates and terms available
  • Options from different types of lenders

Cons 

  • Those with bad credit won’t qualify for the best rates
  • Debt may keep you from other opportunities
  • There may be other fees involved

Pros of Business Term Loans

The first benefit of term loans is that they afford you the ability to manage your cash flow. Just because you have funds in your bank account doesn’t mean you necessarily have to spend them on, say, heavy machinery, and leave your account dry. By financing a purchase, you still have cash on hand should an emergency occur.

Today’s lenders are vastly different from what they were even a few years ago. Banks aren’t your only option, and it’s a good idea to shop around for the lender who offers you exactly what you need. If you don’t qualify for a bank loan, you likely will qualify for a loan with an alternate lender, so there’s something for everyone.

Cons of Business Term Loans

Unfortunately, if you don’t have excellent credit as a borrower, you won’t qualify for the lowest interest rates. You’ll pay more for the privilege of having access to capital, but if you need it, it’s probably a price you’re willing to pay.

Having debt on your credit report might impair you from taking out future financing or attracting investors, so that’s something to keep in mind. 

And be aware that in addition to the interest you’ll pay on your debt, you may also be required to pay an origination fee or other fees that add to the cost.

Best Business Term Loan Options

Not sure where to start in terms of shopping for a term loan? Here are some lenders that offer different types of business term loans:

Short-Term Loans

Intermediate-Term Loans

Long-Term Loans

How Does a Business Term Loan Work?

With a term loan, you borrow a specified amount of money and agree to pay a fixed amount each month over the loan period. You may have a variable interest rate or a fixed rate, and your loan may be secured, meaning it requires collateral, or unsecured. All these factors will depend on who you apply for a loan with and what your loan terms are.

Each month, you will make both principal and interest payments. You might send a physical check to your lender for your repayments or set up autopay. If you miss a payment, you may be charged a late fee. If you miss multiple payments on your bank loan, the lender may put you in default.

What Can a Business Term Loan Be Used For?

Business loans can be used for a variety of purposes in your business, from maintaining cash flow to purchasing equipment, making payroll, expanding your business, or consolidating debt.

Note that some loans will require the funds to be used for specific purposes, so see what parameters are involved before applying.

Term Lengths for Business Term Loans

Earlier we covered the three types of small business loans, or business term loans. Each has its own term lengths:

  • Short-term business loans: 3 months to two years
  • Intermediate-term business loans: two to three years
  • Long-term business loans: five to 10 years. For real estate loans, up to 25 years

Business Term Loan Rates

The amount you pay in interest for your loan will depend on what type of loan you got, your qualifications, and the lender.

There are two types of annual percentage interest rates:

  • Fixed – You pay the same interest rate for the duration of your loan.
  • Variable – Interest may fluctuate, depending on market conditions.

Small business owners looking at short-term business loans may pay more in interest, because these loans may carry more risk for lenders. You may see rates as high as 25-100%, or even more in some cases. It’s imperative that you pay a loan with high interest rates back quickly to minimize those costs.

Business lenders that offer long-term business loans tend to entice those that qualify with lower interest rates. Some lenders may offer loans with rates as low as 2%. Keep in mind that even for loans with longer terms and lower interest rates, you will pay more in interest simply because the loan duration is so long.

In addition to interest, you may pay other fees on a term loan, such as origination fees and prepayment penalties.

What Does It Take To Qualify For a Loan?

Qualifications will vary from one lender to another. Each bank, credit union, or online lender will have different data points it uses to determine whether you qualify for a business term loan, at what interest rate, and with what repayment terms.

More than likely, your business and personal credit scores will be a part of that equation. These, along with your credit history, help lenders determine your creditworthiness. Some lenders require high scores, while others use different factors, like your ability to repay the loan, your accounts receivable, or your income to debt ratio. (Learn how to establish business credit before you apply.) Lenders may also look at your annual revenue. You may be asked to provide your tax returns and bank statements as part of the application.

For secured loans that require collateral, you may be able to get a lower interest rate and therefore lower monthly payment, since if you default on the loan, the lender can seize the asset and therefore has less risk. Consider what business assets you have available to put up against the loan. This can include equipment or commercial real estate.

Choosing the Right Term Loan for Your Business

When it comes to financing options, you have a variety of lenders and types of loans to choose from. Beyond term loans, you can also explore business financing like commercial real estate loans, a business line of credit, and loans backed by the Small Business Administration. Which you choose depends on what your business needs. 

Start by determining what your specific financing needs are. How much do you need to borrow, and how will you use the money? Create a budget for the funds to make sure you use them wisely.

How much can you afford? It may be tempting to borrow more than you need, but you’ll have a heftier monthly loan payment that you may struggle to make, so only borrow what you can afford to pay back.

Explore financing partners in the next section to find the loan and lender that’s right for your business.

How To Apply For a Business Term Loan

Term loans work like other types of business bank loans: you start by applying through a lender. You’ll need to specify how much money you want. A short-term loan application may require no more details than borrower contact details, how much revenue you generate, and your expenses.

For a long-term loan, the application may be more involved. You may need to provide credit references and financial reports, and the application process may take a few weeks.

Just like with personal loans, once you complete your application, the lender might ask for additional documentation before making you an offer. Once you sign your loan agreement, the funds will be deposited into your business bank account. Repayment will begin the next month.

Nav’s Verdict: Business Term Loans

When it comes to business loans for small business, there’s a wealth of options for term loans. No matter what your credit situation or what kind of loan payment terms you’re looking for, there is something for you.

This article was originally written on October 21, 2020 and updated on March 17, 2022.

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