A business term loan is another name for a loan that provides cash upfront to a business in exchange for regular monthly payments over a set period of time. The lender who provides the loan charges interest to profit from the loan. Business term loans can be short-term, intermediate-term, or long-term loans with repayment periods anywhere from 12 months to 25 years. The amount of interest that needs to be paid by a business in exchange for the convenience of receiving the large upfront payment of the requested funds is determined by the lender, the loan type, and general market conditions.
Some term loans can come with a fixed rate, and some can be variable-rate loans. A fixed-rate loan has an APR that is unwavering throughout the life of the loan. That means when you sign the loan agreement, you should know exactly how much interest you will need to pay, how much your monthly payments will be, and how long you will need to make monthly payments to pay the loan in full. With a variable-rate loan, the interest rate can fluctuate throughout the life of the loan, causing your monthly payment to change accordingly.
Most businesses use business term loans to purchase commercial real estate, finance large equipment or machinery purchases, and provide working capital. When it comes to purchasing commercial real estate, often long-term loans with terms of up to 25 years are used, and the property being financed is used as collateral to secure the loan. For other expenses, business owners can seek short-term or intermediate-term loans.
Term loans are available through traditional lending institutions like banks and credit unions, online lenders, and the Small Business Administration and its network of SBA-approved lending institutions.
A business term loan is quite simple. When you are ready to seek business financing, you must determine how much money you will need. If you are looking for a business term loan to provide working capital, you may want to determine how much you can afford to borrow to ensure the monthly payments do not detrimentally restrict your cash flow.
Once you have a ballpark figure in mind, you can start exploring your options. Before applying, you should check your SMBscore. At mySMBscore you can access insight into what might help you or hold you back when applying for a loan. With a review of your business’ credit score, mySMBscore specializes in helping small and medium-sized businesses prosper. After reviewing your SMBscore you can choose to improve your financial position before applying for a loan or let us help you find a lender that can provide the financing you need. You can also just use mySMBscore to access insights and apply them through traditional methods.
If you have been in business for quite some time, have good to excellent business and personal credit scores, and have a solid amount of revenue coming in, you may want to consider an SBA term loan. SBA term loans often come with some of the lowest interest rates and largest loan amounts. However, they can be much more difficult to qualify for. Additionally, SBA loans have a long application and approval process that requires many steps and can sometimes take up to two months or more before you see your money.
If you need the money much quicker than a conventional term loan, a bank, credit union, or online lender may be the best option.
Either way, make sure you give yourself some time to explore different lenders and loan options to find the term loan that best fits your financial situation.
When you find a lender and a term loan option that you think is right for you, then you can go ahead and begin the application process directly with the lender. The lender will review many factors of your business and personal financial situations. They may look at your personal and business credit scores, business revenue and personal income, bank statements, and balance sheet, and they may even want to have you list some business and personal assets that could be considered for use as collateral if need be.
Once the application process is complete, if you are approved, the lender can deposit the full loan amount into your designated bank account. When you have the funds in hand, you can begin purchasing real estate, machinery, equipment, inventory, and whatever else you need for your business.
If you were required to submit a detailed loan proposal or use an asset purchased with the loan as collateral to secure the loan, then you must use the funds exactly as intended. If you acquired the term loan to provide your business with some much-needed working capital, then you have a lot more flexibility on how you use the money.
Typically, after the loan has been disbursed, your first monthly payment will be due approximately one month from the disbursement date. Go ahead and make the payment on time and in full and continue to make the monthly payments until the end of the predetermined loan term. At the end of the loan repayment period, the entire principal and all added interest should be completely repaid.
The main types of term loans come from banks, credit unions, online lenders, and SBA-approved lenders. Conventional business loans and SBA loans are the two most common types of business term loans. An example of one of the most sought-after business term loans is a term loan through the SBA 7(a) loan program.
Term loans through the SBA 7(a) loan program are more difficult to qualify for. However, they can come with loan amounts of up to $5,000,000 with terms of up to 25 years. The main reason that SBA loans are more difficult to qualify for includes the fact that SBA guarantees up to 85% of the loan amount for loans under $150,000 and 75% of loans greater than $150,000. This does not mean, however, that if you default on the loan, the SBA will forgive up to 85% or 75% of the loan amount. It means that the SBA-approved lender will be compensated for the loan for up to that amount. The SBA then can recoup their losses by seizing any collateral that you used to secure the loan, including personal assets that you may have if you signed a personal guarantee as well.
SBA loans have capped interest rates, larger loan amounts, and longer loan terms. Typically, term loans of up to 25 years are given for real estate purchases, and business term loans of up to 10 years are given for working capital and equipment financing.
The repayment structure for SBA loans is the same as other conventional business term loans. Once the borrower is approved and receives the funds, they are responsible for paying back the principal plus interest by making each monthly payment on time and in full.
Three main types of conventional business term loans can be acquired through a bank, credit union, or online lender. The three main types include short-term, intermediate-term, and long-business term loans. Here is a breakdown of each type in a bit more detail.
Not all business owners may be able to qualify for an SBA or conventional business term loan, however, those who do, typically meet the following criteria. Businesses that have a minimum of 6 months in business, a strong revenue stream, and owners who have good to excellent credit scores, typically have the best chances of qualifying for business term loans. For newer businesses or business owners with less than perfect credit, other types of financing may need to be considered first to build up the credit history and time in business to later qualify for business term loans.
If you obtained a conventional or SBA business term loan, then at the end of the term, there is nothing more to do. Your debt is completely absolved if you make all your payments on time and in full. If you obtained a business term loan that contains a balloon payment, then at the end of the loan term, you may have to pay off a larger chunk of the loan.
The main benefit of a balloon payment is that when you first receive the funds, you can put them to good use to build or expand your business while holding on to more of your cash flow by having smaller monthly payments. The idea is, that when you start to see some good return on your investment, you can prepare to make a much larger payment on the loan at the end of the loan term.
Business term loans are needed when a business wants to purchase commercial real estate, large machinery, or equipment or acquire some much-needed working capital to cover operating expenses. Thanks to their flexibility, term loans can be a solution under many circumstances.
There are several advantages and disadvantages to using a business term loan as a source of business financing. Here are some of the most common pros and cons of business term loans.
Before applying for a business term loan you should know what you’re looking for in terms of the loan amount, monthly payment, and total loan costs. These factors can vary depending on your eligibility. By understanding how you compare to other businesses and how lenders will assess eligibility, you can more confidently choose a term loan offer. Before submitting a final application, you can sometimes get prequalified. At mySMBscore you can review your credit score to determine what you might qualify for or how you can improve. Using this information, you can opt to be connected to lenders that can assist you or set out in search of a term loan with a bank, credit union, or online lender.
The SMBscore was developed to create an industry-specific, tailor-made risk assessment that can be used to determine the financial stability of small and medium-sized businesses (SMBs). It allows business owners to review their finances through a similar lens that a lender will. At mySMBscore you can view insights that lenders look at to approve your financing. Our platform can help you determine areas of improvement so that you can be as prepared as possible before applying for a loan. We can even help connect you to lenders that you have the best chance of qualifying for. Our goal is simple - to help businesses prosper.
For smaller business loans, online can be a convenient option that meets your needs. For large-term loans, though, you may want to seek personalized financial advice to make sure you make sound financial decisions.
Can a term loan help your business? Unlock your SMBscore today to find out if you qualify!
Business Term Loan Vs Line of Credit
A business term loan and a line of credit are two types of financing options available to businesses. Here are some key differences between the two:
A term loan is a good option for businesses with a specific financing need, while a line of credit is a more flexible option that can be used for various purposes. Both options have their pros and cons, so it's important to consider your business's unique needs and financial situation when choosing between the two.