Business Term Loans in 2022: What Are Your Best Options?
What Is a Business Term Loan?
A business term loan is a lump sum of capital which is repaid with periodical repayments at a fixed interest rate. It is the most common type of loan that people think of when they think of small business loans.
The “term” in “term loan” refers to the length of the loan’s payback period, which can vary from a few months to several years depending on the type of loan. As a result, while term loans can be any duration, the term “business term loan” is most commonly used to refer to loans with maturities ranging from one to five years.
Term loans are typically used by business owners to fund one-time investments in their small businesses, such as real estate purchases, business expansions, debt refinancing, and more.
Banks, credit unions, and online lenders all offer business term loans.
What Are Business Term Loans and How Do They Work?
As briefly indicated above, when it comes to commercial (or even personal) financing, business term loans are likely what first to mind. A term loan allows you to borrow a large sum of money from a small business lender, which you then repay over time with interest and fees.
You’ll make equal installments over the course of your loan term, however your payment schedule may vary depending on the type of business term loan and the lender you’re dealing with.
Business term loans can be obtained from a variety of sources, including banks, credit unions, and online lenders. Banks and credit unions, on the whole, will give the best rates and terms, but they will also require top qualifications and be longer to finance. On the other hand, online lenders will provide more flexibility and faster funding periods, but they will likely be more expensive and have shorter terms.
Overall, one of the advantages of business term loans is that they may be utilized for a range of business finance needs in addition to having a regular payment schedule. As a result, you’ll find that medium- and long-term loans (as opposed to short-term loans) are frequently utilized for:
- Purchasing inventory or equipment
- Working capital
- Refinancing other business debts
- Hiring staff \ meeting payroll or tax obligations
- Financing the expansion of a business
- Real-estate acquisition
- Funding long-term investments in general
Rates and Terms for Business Term Loans
Business term loans typically have repayment durations of one to five years.
Short-term loans with periods of one year or less, as well as longer-term loans (such SBA loans) with terms of up to 25 years, are available. Loans with terms of one to five years are sometimes referred to as “medium-term loans” in this context.
In light of this, most business term loans have weekly or monthly payback schedules, however some short-term loans may have daily repayment schedules. Furthermore, while most short-term loan amounts are around $500,000 (or even $250,000), longer-term business term loans are available in bigger quantities.
Although interest rates on business term loans vary depending on the lender and your business’s credentials, you can expect rates to range from 7% to 30% in most cases. Bank and SBA loans, on the other hand, may have interest rates that are lower than 7%, especially if you’re a highly qualified borrower.
Example of a Business Term Loan
Let’s look at an example to better understand how business term loans function.
Let’s imagine you’re offered a $250,000 term loan with monthly installments and a two-year repayment period. The interest rate on this loan is 8%, and you’ll have to pay a 2% origination fee to the lender.
You may use this information to estimate your monthly payments and figure how much this loan will cost your business by plugging the numbers into a term loan calculator.
With a total payback of $271,363.75, you’ll make monthly payments of $11,306.82 to the lender. As a result, the total cost of this loan is $26,363.75. In addition, instead of using the standard interest rate, you can apply these methods to calculate your APR. If your interest rate is 8% but you additionally have a 2% origination fee, your APR will be greater than the 8% advertised.
Types of Business Term Loans
As previously stated, the term “business term loan” can refer to a range of financial products that all have the same term structure.
As a result, it’s critical to understand the many sorts of business term loans. The most typical way to differentiate business term loans is by the duration of their repayment period—short-term, medium-term, or long-term—as we’ve seen so far in this topic.
Short-term loans are those with a one-year repayment duration or less (sometimes up to 18 months). These loans are typically given by online lenders and have the most flexible eligibility and funding times. Short-term loans, on the other hand, are usually the most costly sort of business term loan. Get more information on short-term business financing.
- Loans with a medium-term maturity: One to five years is the repayment period for medium-term loans. Online lenders, as well as banks and credit unions, offer these loans. Despite the fact that these products have more strict standards and take longer to finance than short-term loans, they are frequently significantly more affordable. Learn more about the benefits of medium-term loans.
- Long-term loans: Although the phrases medium-term and long-term are sometimes interchanged, long-term loans are defined as those with periods of more than five years. SBA loans, which have maturities of up to 25 years, are among the most prominent long-term loans. Long-term loans are more difficult to obtain and take longer to finance, but they have the lowest interest rates. Traditional lenders, such as banks and credit unions, nearly usually issue these term loans. Get more information on long-term business loans. Although business term loans are frequently divided into these categories, keep in mind that they can also be distinguished by the issuer—bank loans, credit union loans, online loans, and so on.
The Benefits and Drawbacks of Business Term Loans
When it comes down to it, term loans aren’t the only way for small businesses to get money. There are many different forms of small business loans to consider, from lines of credit to asset-based financing—how do you know if a term loan is best for you?
You can use the following pros and cons list to assist you in making that decision:
- Set payment schedule: As previously stated, one of the most appealing features of term loans is their predictable payment schedule. You’ll get a set payment schedule and know exactly how much you owe with each payment, regardless of how long your loan takes to repay. Term loans are one of the most predictable forms of business financing since they make the overall cost of the debt, as well as the payments, clear to understand. It’s also a lot easier to monitor your cash flow and other business finances with these consistent payments.
- Suitable for a variety of business needs: Another significant advantage of business term loans is that they can be utilized for a wide range of reasons. Most term loan lenders will place few restrictions on how you can use your loan in general. However, the length of your term will have an impact on how you can use your loan—a medium-term loan is better for significant equipment purchases, whereas a short-term loan is ideal for small working capital needs.
- Online lenders can fund term loans rapidly and with fewer conditions than traditional lenders: Although banks and credit unions, as well as online lenders, can provide business term loans, online term loans might be a good option for businesses looking for speed and flexibility. In comparison to banks, online lenders can provide simplified applications, more flexible conditions, and faster funding times—and while online business loans often have higher interest rates than bank loans, medium-term loans from online lenders can still be very reasonable.
- Longer-term loans are ideal for funding bigger purchases: There is no better method to fund a major business investment than with a medium- or long-term loan. Overall, term loans—especially bank and SBA loans—are some of the most affordable financing solutions on the market, and they provide you with substantial sums of capital to fund larger investments over time.
- Prepayment penalties: One of the most significant disadvantages of business term loans is the possibility of prepayment penalties. Although not all lenders impose prepayment penalties, some do so to guarantee that they earn the interest they are promised, even if you repay your loan early. Always inquire about a term loan lender’s prepayment procedures before agreeing to work with them.
- Loans for a shorter period of time can be costly: Online term loans are almost usually more expensive than their bank counterparts, as we’ve discussed. Of course, this isn’t to suggest that you won’t be able to obtain reasonable business term loans. Instead, it’s vital to note that short-term loans, in particular, can be costly—especially for borrowers who aren’t well-qualified. As a result, as you consider your business term loan options, you should always consider the whole cost of the debt and make sure it’s something your business can afford.
- Collateral or a personal guarantee is frequently required: Finally, while asset-based loans may provide for more flexibility in terms of collateral and guarantees, practically all business term loans are secured, requiring physical collateral or a personal guarantee. As an additional type of security, some lenders will place a UCC-lien on your business assets. In general, the stronger your business’s credentials are, the more leeway you’ll have when it comes to negotiating collateral requirements.
How to Get a Term Loan for Your Business
As you can see, there are a variety of viable options to consider when looking for a term loan for your business
As a result, as you examine different lenders, you’ll want to evaluate your business first to see what products you can truly qualify for.
Although business loan criteria differ by lender, most products demand a minimum credit score of 600, at least one year in operation, and $100,000 in yearly revenue.
As previously said, bank and SBA loans will necessitate the highest level of credentials, whilst short-term loans will provide more flexibility. The better your qualifications, though, the better the rates and terms you’ll be able to get with your loan.
Obtaining a Business Term Loan
With this in mind, you’ll be ready to start drafting your business loan application once you’ve identified where you’re likely to qualify.
Alternative lenders often offer online-based, streamlined applications with minimum documentation, whereas banks are more likely to require substantial documentation and an in-person or paper application. When applying for a business term loan, you should anticipate to give some (if not all) of the following information:
- A driver’s license, a voided business check, evidence of ownership, a business license, and other basic personal and business details are required
- Bank statements, both personal and business
- Your balance sheet and profit and loss statement are examples of financial statements
- Credit score for individuals and businesses
- Evidence of collateral
- Personal and business tax returns
Furthermore, as previously stated, many lenders will need you to sign a personal guarantee for your loan, while others will place a UCC-lien on your business’s assets. As a result, before signing any contract, you should carefully check all of the specifics to verify that you understand all of the terms, costs, and obligations.
After all, business term loans are one of the most frequent types of commercial financing—and for good reason. You have a range of alternatives to pick from, including short-term and long-term loans, online loans, and bank loans, to discover the best answer for your business’s needs.
With all of these alternatives, keep in mind that the ideal loan for your business is the most cheap one—so don’t be hesitant to shop around and evaluate offers from a variety of lenders before making a final decision.
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