Here are 5 Things You Should Know Before Applying for a Business Term Loan
Many entrepreneurs are always on the lookout for the best funding option available for their business. Small business term loans are one way of obtaining funding for your company. A lot of entrepreneurs eventually apply for one so they can increase their working capital, buy equipment, or expand their business.
Entrepreneurs know better than to wait until they run out of funds before they apply for business loans. As a good rule of thumb, it’s best you consider the different funding options that are available to you prior to opening your company.
As you go about your business, you will eventually need to apply for additional financing that supports your plans for growth. Most, if not all business owners know that cash flow is a vital factor that determines the success of their business. Although others may advise you against it, applying for term loans can be the best thing you’ll ever do for your business.
The process is simple, and it’s easy to do. If you want your business to grow, applying for business term loans is a wise decision.
How Do Business Term Loans Work?
Business term loans are the most straightforward business loan option. The bank or alternative lending companies allow entrepreneurs to take out a lump sum of money which they can repay within a specified time. That is why it’s called a “term” loan.
The interest rates for term loans can either be fixed or floating. Moreover, the repayment period can stretch up to 25 years or more depending on the bank or lending company.
A business term loan can be also taken out for a variety of reasons. But mainly entrepreneurs use it to obtain equipment, add an additional location, or to cover monthly expenses. A lot of lending companies design term loans so they fit the current needs of a customer’s company.
Here are 5 additional insights you need to learn about term loans if you’re planning to apply for one:
They May Not be Ideal for Start-Ups
In regards to term loans, any type of business can qualify. But if you’re a start-up business, this might not be a good option for you. Here’s why.
Lenders need assurance that you can pay back the loan within the specified period. However, since your company doesn’t have enough of a credit history or background, lenders view that as a level of risk they are unwilling to assume. Because of that, they may be compelled to reject your term loan application.
It’s a Secured Loan
Term loans typically need collateral or a personal guarantee. Collateral is an asset-based guarantee that the bank can seize in the event your miss out or default on payments. Depending on the lending company, your collateral could be a real estate property, equipment, or any asset wherein the value is more or less equivalent to the amount of loan you took out.
A personal guarantee, on the other hand, is a legal agreement made by an entrepreneur or associated person. This guarantees that if their business fails to pay the loan, the person will be responsible for the repayment of it. However, this may be omitted if your company brings in at least $20 million in revenue per year.
It’s Harder to Qualify For
Compared to other types of loans, business term loans are the hardest to qualify for. Depending on the lender, the requirements can be rigid. Since the repayment terms are long, the lenders face bigger risks by letting a business owner borrow funds. Because of this, lending companies may impose stricter guidelines that borrowers need to follow in order to qualify.
Term Loans can be Short, Intermediate, or Long-term
Term loans can be divided into three categories: short-term, intermediate-term, and long-term loans. Each reflects the length of time the loan has to be repaid.
- Short Term Loans. This type of loan is usually offered to businesses that do not qualify for a business line of credit. The repayment period for short-term loans is usually less than a year. But other lending companies have been known to extend the repayment period up to 18 months.
- Intermediate-Term Loans. This is usually used by businesses that are planning on expanding to another location or refinancing existing debt. The loan repayment period can run up to 1 to 3 years and is paid monthly with interest.
- Long Term Loans. This term loan option typically runs for 5 to 25 years. This may limit a company’s ability to take on other financial commitments. It’s usually paid monthly or quarterly and is perfect for purchasing large machinery, real estate, or investing in other businesses.
Low-Interest Rates
One of the benefits that make term loans ideal for small businesses is because of their low-interest rates. Compared to other business loans like merchant cash advances and lines of credit, interest rates for term loans may go as low as 5.25%.
But this can vary depending on your collateral or credit history. Essentially, the better your credit is, the lower your rate of interest and the better your repayment terms will be.
Does Business Term Loan Sound Right for Your Business?
Without a doubt, small business term loans are a great funding option you can use to achieve your business goals. While start-up businesses may not find this option best for them at the moment, other established small businesses can apply for term loans and use the funds to grow and succeed in their venture.
