What is a Business Term Loan?
Everyone loves a classic because it’s tested – and it’ll work considerably. It’s the same with a business term loan: a steady, flexible way to get a lump sum of capital to repay in regular monthly repayments at a fixed interest rate – helping you grow your business and build credit.
The “term” in a “business term loan” is set repayment term length of one to five years. The maximum loan amount you can secure with a term loan is up to $500K with typical interest rates of 7% to 30% in as quickly as two business days.
In simple words, you can use a business term loan for, oh, just about anything from financing a specific project to purchase new equipment or hire workforce and much more!
A business term loan offers many benefits including fixed payment structure, available for almost any business purposes, lower monthly payments and longer payment terms than short-term loans. The only drawback is the possible prepayment penalties.
If you’re in business for some time and have a good credit score and generating revenue, you’re a solid contender of a traditional term loan. Not all business term loans are the same, nevertheless, the term length, loan size, and interest rates depend on your business revenues and credit rating.
Requirements for Business Term Loans
Business term loans are traditionally a bank product that involves a longer application process with a lot of paperwork. With the advancement in the lending industry, various online lenders have emerged, like Lending Club and Funding Circle that are offering business term loans at reasonable rates via quick online applications and process.
The following is required to qualify for business term loans:
- Employer Identification Number (EIN)
- Business Plan
- Bank Statements
- Financial Statements
- Credit Score
- Business and Personal Tax Returns
- Personal Debt-To-Credit Ratio
- Potential Collateral
- Loan Purpose
- Business Debt Schedule
How Do Business Term Loans Work?
You can always use some extra cash whether it’s for working capital, equipment purchase or new hire. But getting financing that your business can afford is the real deal. Here is everything you need to know about how term loans work and what you’ll need to qualify.
The Essentials of Term Loans
A term loan is a common type of business loan where you get predetermined funds with a fixed or variable interest rate with repayment terms of regular monthly installments. Based on your business’s growth, capital requirements, credit rating, cash flow, and revenue, there are different types of term loans available.
Actually, you can get a business term loan with term lengths and payment structures as varied as 1 to 5 years with daily and monthly payments—and everything in between.
Likewise, you can get varying loan amounts and interest rates at higher or lower rates as per your business’s needs and history. The traditional business term loan structure will always stay the same, whereas the definite details of your term loan based on your business’s financials.
Qualifying for traditional business term loans from banks and specific alternative lenders is hard, especially when you don’t have collateral and a low credit score.
Actually, collateral is the major requirement for a term loan. While many lenders might not require collateral but, in its place, put a “blanket lien” on your business, the same risk still applies.
Before applying for a business term loan, ask the lender for any prepayment penalties or other fees involved. Review the exact terms with the lender so you can figure out affordable monthly repayments.
When Should You Use a Term Loan?
A term loan can be used for almost any business purpose including equipment upgrades, inventory purchase, refinancing other debts, tax or payroll, or simply working capital to help you through the hard times.
If a term loan is used properly, it can help your business grows beyond your boarders—adding new products, services, locations, or marketing campaigns into your toolbox.
With the predictable nature of term loans, you can assess how it will influence your business overall. The key is to discern the calculations earlier and create a spending strategy for the coming months or years.
What is a Short-Term Business Loan?
Short-term business loans are lump sum cash that is designed to finance short-term needs with repayment terms from 3 months to 18 months. The loans can be used to manage cash flow, cover an unexpected expense, pay off existing debt or leverage a business opportunity.
The maximum loan amount you can secure with a short-term loan is up to $250K for terms up to 18 months with typical interest rates starting at 10% in as quickly as 24 hours.
A short-term loan offers many benefits including a fixed payment structure, suitable for many business purposes, with limited paperwork and bad credit is accepted. The drawbacks include higher annual costs than long-term loans and weekly payments for businesses generating sporadic revenue.
Who Qualifies for Short-Term Loans?
Short-term lenders focus more on business cash flow. A strong business cash flow can sometimes prevail with other financial factors in loan qualification criteria. The loan amount and interest rate will depend on your annual revenue, business history, and personal credit rating.
Short-term business loans are typically applied online making the loan application process faster and easier.
The following is required to qualify for short-term loans:
- Passport, Voter’s ID or Driving License
- Proof of Ownership
- 6 months of Bank Statements
- Credit Score
- Most recent Income Tax Return
- Cash Flow History
- Income Statement
How Do Short-Term Business Loans Work?
Every business needs quick access to the capital every now and then. But do you actually obtain financing that fast? Merchant Advisors assist small business owners to secure working capital that directly deposited into your bank account immediately.
The Essentials of Short-Term Loans
Short-term loans work similarly to traditional term loans where you’ll receive upfront cash that you repay over a predetermined period of time with lender’s fees and interest. Due to smaller loan amounts, the repayment period is shorter with higher interest rates, and you often payback on a daily or weekly basis instead of a monthly schedule.
On the contrary, they’re easier to apply and qualify for, with quick funding. One thing to remember, short-term loans are among the expensive loan products available to small businesses.
Quick application process and fast access to capital make short-term business loans riskier for the lender. Because of lower amounts and repayment terms, they typically carry higher interest rates. Above all, short-term loans make the most sense for businesses, since the best loan is always the lowest-cost loan.
When Should You Use a Short-Term Loan?
One must start out with money to make more money – making quick access to working capital a game-changer for almost any business—whether you’re a startup or planning to expand.
Actually, every business requires capital every often and then and in such cases, a short-term loan is the ideal financial solution.
With a short-term loan, you can fund expansion, refinance other short-term debts, repay taxes, leverage new opportunities, or fulfill more or less any short-term financing need.
The Most Common Business Loan Repayment Terms
Let’s review the repayment term lengths of the most common types of business loans. The “term” in this context means the predetermined period within which the borrower has to pay back the loan, with the lender’s interests and fees.
- SBA Loans
SBA loans have the longest repayment terms in the industry ranging from 5 years to 25 years. The term of SBA loans depends on the SBA loan program. The most popular SBA 7(a) Loan Program has a term of 5-25 years, following SBA CDC/504 Loan with terms of 10-25 years and SBA Microloan with terms of less than 6 years.
- Traditional Bank Loans
Traditional bank loans are the second business loan type offering the longest terms from 3 to 10 years. With that said, these loans are harder to qualify for as well.
- Medium-Term Business Loans
Medium term-loans function like traditional bank loans and offer relatively lengthy business loan terms. These loans can be secured via alternative lenders with terms from 1 year to five years, with longer repayment terms than many other online business loan products.
- Business Lines of Credit
Business lines of credit offer terms from 6 months to 5 years and can be either short-term or medium-term in nature.
- Invoice Financing
Invoice financing is a short-term financing solution that allows business owners to access cash secured against their outstanding invoices. The loan term based on the time the invoiced customer takes to pay off the invoice. They typically have loan terms of three to six months.
- Equipment Financing
Equipment financing is another financing product where equipment is purchased and serves as collateral for the financing. The built-in collateral makes it less risky for lenders, allowing them to offer longer terms from two to five years long.
- Short-Term Business Loans
Short-term loans are determined by their repayment terms of a year or less. However, lenders typically offer repayment terms of three to eighteen months on short-term loans.
- Merchant Cash Advance
Because of the unique nature of merchant cash advance repayment, the loan term is undetermined. These advances are repaid via business’s daily credit/debit card sales, and since the daily payment will vary, there’s no determination of how long repayments will take. Although the daily payments are so recurrent, most borrowers will typically repay merchant cash advances in 4 to 18 months.
The Bottom Line
Every loan has its own features and eligibility criteria. Some need a short quick solution in terms of short-term loans, whereas some ask for longer repayment terms. Typically, long-term loans are more favorable than a short-term loan because of the larger loan amount, lower interest rates, and longer repayment terms. Not to mention, long-term business loans are hard to qualify for than short-term business loans.
It’s all about the timing and your needs. If you’re in dire need of quick capital, a short-term loan can be a better financing solution. On the contrary, long-term loans take time to secure, in contrast with 24 hours it can take to get cash from a short-term loan.
Eventually, the best business loan is the one that actually helps your small business grow and succeed.