What are term loans? – business.com


Whether you are looking to finance expensive equipment or borrow money to finance your operations, a term loan can be a good option. These are business loans that you pay back over a specified period, such as 18 months. Some business owners prefer them because the repayment amounts stay the same every month and interest often doesn’t fluctuate.

“Term loans encompass a wide range of loans,” Melissa Wylie, senior small business writer at LendingTree told business.com. “There are working capital loans, inventory loans, and more general financing for business owners. Term loans can be a great place to start.”

[Check out our best picks and buying guide if you’re looking for a small business loan.]

What is a term loan?

When you take out a term loan, you receive a lump sum that you have to repay over a specified period. Payments are due weekly, biweekly, monthly or quarterly. The interest rate you pay on a term loan is either fixed or variable. If it’s fixed, you’ll pay the same interest over the life of the loan. If it is variable, the interest may fluctuate. Mortgages, SBA loans, and auto loans are common term loans.

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How does a term loan work?

Term loans work like any other loan product. You apply for term loans from a lender, who will approve or reject your application. If you are approved, you will receive a lump sum up front and loan repayment terms, which include interest. It is up to you to meet the payment obligations.

Term loans can be secured or unsecured. With a secured loan, you have to provide collateral. If you are in default on the loan, the lender can come after that asset. An unsecured loan does not require collateral. They tend to have higher interest rates and are more difficult to obtain.

Advice: There are several types of term loans, with varying interest rates and repayment terms. You should research all of your financing options before borrowing money.

When should you use a term loan?

Small businesses use term loans for many purposes, from financing the purchase of expensive equipment to covering cash flow shortages. Here are some of the most common uses.

  • To buy new equipment: With a term loan, you can buy expensive machinery and equipment and pay them off in small installments, allowing you to save more cash for your operations.
  • To support growth: Whether you want to recruit new employees or develop new product categories, a term loan can help you grow.
  • To avoid cash flow shortages: Money is king. If you’re having short-term cash flow issues, a term loan can help you close the gap.
  • To refinance the debt: Debt can hurt profits. You can use a term loan with a lower interest rate to consolidate and refinance your unsecured debt.

There are many reasons to use a term loan, but there are also times when it doesn’t make sense. Borrowing money that you cannot afford to pay back is very important. The same goes for making risky bets or using them for non-trading expenses.

“It happens all the time: Business owners borrow money for silly things like having more cash personally or going on vacation,” said Drew Giventer, CEO of Accountable Capital. “They lose sight of the mix of their professional and personal life.”

What are the types of term loans?

Term loans can be equipment financing, working capital, or installment loans. What sets them apart is the speed at which you repay them. When choosing your terms, you need to weigh the cost of borrowing against the benefits. You don’t want to pay it back long after the asset or investment has appreciated in value. A long term loan makes sense if the equipment depreciates over a long period of time, but a 60 month term loan is not the best option to cover a short term cash flow crisis.

“Longer terms mean small payments, but you could be paying a lot longer than you want,” Wylie said. “A short-term loan is ideal if you need the loan now to get through a slow season. It’s really about balancing how much you can pay off on a regular basis with how long you want to make repayments.”

for your informationFOR YOUR INFORMATION: Small business lenders offer great flexibility in paying off your loans. Many lenders will allow you to customize your repayment terms.

Here are the main types of term loans:

  • Short-term loan: These are unsecured loans that you pay off in 12 to 18 months. Payments are generally daily or weekly. Short term loans generally have higher interest rates than long term loans. You can use them to cover your expenses until your cash flow recovers.
  • Medium term loans: These loans have repayment terms of one to three years, usually with monthly payments.
  • Long term loans: The repayment terms for these loans can range from three to 25 years. Long term loans are generally used for expensive equipment or goods. Borrowers must make monthly or quarterly payments until they have paid off the loan.

What are the advantages of using a term loan to finance your business?

Small business owners may prefer term loans over other types of financing for several reasons. A big problem is stability. You’ll know exactly how much you owe and when it’s due. This makes it easier to manage cash flow and forecast. This cannot be said of other loan products.

Term loans also tend to have lower interest rates and a simpler application process. You can write off interest on your business term loan at tax time, and it can improve your business and personal credit scores.

How to apply for a term loan?

Before applying for a term loan, compare lenders. The interest rate you pay can vary depending on the lender, the type of term loan, and your credit score. Be sure to look at the APR, or annual percentage rate, rather than the interest rate when comparing purchase. The APR tells you the total cost of the loan.

for your informationFOR YOUR INFORMATION: The quote from interest rate lenders does not tell the whole story; the APR does. It shows you the total cost of the loan including the lender’s fees.

Your credit score will play an important role in the interest rate you pay and whether you will be approved. That’s why it’s important to know your business and your personal credit scores before shopping for a loan, to help you narrow down your options. Examine your credit reports to make sure that no errors are affecting your status in the eyes of lenders.

Lenders have different underwriting criteria, but most look at your business and personal credit rating, cash flow, business and personal assets, time spent in business, annual sales, and business plan. . It’s helpful to gather all of your documents – including tax returns, income tax returns, and bank statements – before you complete the application. This will speed up the subscription process.

When looking for a small business loan, you will find that options abound, even if you have bad credit or a new business.

“Loan programs are everywhere,” said Matt Vannini, president and CEO of Restaurant Accounting Services. “Don’t assume you can’t qualify.”

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