Term business loans are the most common type of loan. But is a term loan the right one for me?
Get clear easy to understand information on:
- Term loans
- How to apply for a small business loan
- Types of term loan
Term Loan Highlights
What is a term loan?
What type of loan should I get?
Your first priority for additional financing for your business is to get the right type of loan. Most business owners choose the term loan because it is the most familiar. The term loan is the most common type of business loan, and where most businesses go to first when they need financing.
This type of loan is popular because it is one of the oldest forms of financing and as such the basics are well understood by most people. But like most things this type of financing has evolved over time and now there are a number of options that can be customized to meet unique situations.
There are many different types of loans and understanding how each works is the key to selecting the right one.
A term loan is just what the name describes, a loan with a term that describes how the loan will be repaid. It starts with an application to a financial institution.
When you are approved for funds they will be dispersed to you with a schedule of payments. To receive the funds you will have to agree to an interest rate payment that is added to the principal of the loan.
The amount of interest that you will pay for the loan is determined by a formula the lender uses. This formula usually takes into account your business’s strength, credit history, what your plans for the loan are, and the relationship you have with the lender
Business term financing is often used to purchase large items, like:
- additional manufacturing equipment,
- real estate
- acquire another business.
Complex and Common Term Loans
Funding for amounts below 100k look very straight forward. But as the loan amount gets larger, terms and conditions can become quite complex and complicated.
Large corporations will use this type of funding, and can modify them with stock purchases/options and a host of other customizations that go with multi-million dollar loan packages.
Three types of common business term loans:
Which Term Loan Should I Get?
We will look at each of the common business term loan types
- Short term business loans click for more information
- Intermediate term Click for more information
- Long term click for more information
The short term loans can be for as little as three months and are usually not more than one year.
The intermediate term loans start at a year and are typically less than three years.
Long term loans can go from 3 to 25 years.
In all cases the term loan delivers a lump sum payment that is required to be repaid at a certain date.
Ways to repay the loan
- Amortization means payments can be amortized for the life of the loan. The loan is set up with a repayment schedule that takes into account the interest owed. The schedule will front load the interest so that it is paid at the beginning and as the loan matures more of the payment goes to principal.
- Hybrid of amortization and balloon payments. This type of loan uses amortization and balloon payments. Balloon payments mean that at the end of the loan period there is a remaining balance that must be paid in full.
- Interest only payments with a balloon at the term of the loan. This means for the term of the loan only interest is paid on a regular schedule. At the end of the loan period the entire principal must be repaid.
Term financing has the following characteristics
- Fixed interest rates
- Interest and principal will be repaid at the maturity of the loan
- Secured most term loans require some type of collateral to secure the loan
- These types of loans tend to have restrictive covenants ( this means that you will likely find statements in the loan agreement relating to what the business owner can and cannot do. These differ in accordance with each financial institution’s policies)
- Convertible this means that the loan may be set up to convert to equity. This is usually done when a company is going public or may be looking for large funding sources. Often this is done with what is known as a Loan Note.
What is needed to apply for a business term loan?
You will need some basic information related to your business that includes:
- Bank statements
- Identification
- Void business checks
- Profit and loss statements
- Business tax returns
- Possibly personal tax returns
You need to have been in business no less than 6 months, the longer the better.
Generally to get a business term loan, your business will need a good credit rating.
Business Term Loan Frequently Asked Questions
If a business applies for a short term loan is there a credit check required?
As a rule, most institutions that offer term financing will require a credit check, exceptions are when the asset being purchased can act as collateral, or the business has a strong positive cash flow history that will support the loan.
What are the terms and conditions for funding?
The terms are short less than one year, medium one to three years, and long which is up to 30 years. Generally the longer the term the greater the loan amount. Conditions on how the loan is offered vary with the institution, and the loan type. But you should expect fixed interest rates, and a fixed repayment schedule.
Are business term loans secured?
They can be, but it depends on the term of the loan, your relationship with the institution providing the loan and the business credit rating.
Can a term loan be revolving?
Term loans are fixed for a fixed period of time, for a fixed amount, and can not be restarted when the loan is paid off.
Which business term loan is the best?
This depends on your needs. In general the larger the loan the longer the term so that the payments can be smaller and spread out over a longer period. If you are looking to purchase equipment that will pay itself off in one year then short term loans are the way to go. Also the longer the payback period, and the larger the amount the more conditions will be placed on the loan.
Which loan company is best?
This again depends on your needs. If you need to get access to capital right away, then the online route is probably the best option, but speed comes at a cost. If you can go with a local bank it is usually cheaper and it is always a good idea to develop local relationships.
Why a business term loan?
Term loans are usually a good fit when you are able to go for low cost, and would like a fixed payment schedule. To qualify for term funding your business needs to have strong financials, a good use case for the funding that shows how it will help the business over the term of the loan. If you can meet these requirements the term type of financing can be the lowest cost and give the best return.
How does a business term loan work?
It is like a mortgage or car loan. You’ll apply define the period of time you would like to pay the loan back in, agree to conditions, and then the funds will be dispersed. Once everything has been signed and agreed to funds should be available within 48 to 72 hours. The whole process can take as long as 3 months.
Can I get a long term loan with bad credit?
If the bad credit is related to personal accounts and not the business then that will not be a problem. If the bad credit is related to the business, then most likely the funding institution will require collateral and the interest rate will most likely be higher.
Are term loans secured or unsecured?
They can be secured or unsecured. Each type will have tradeoffs, review and look for what is the overall lowest cost to the business.