Loans are ubiquitous in the business world, but there are still a lot of business owners that don’t fully understand how business financing works.
If you didn’t need a little help when you were getting started, count your blessings!
Eventually, the time will come when you do need financial help.
Perhaps you’re thinking about upgrading your equipment or software.
Or maybe things are going so well that you’re wondering if it’s time to expand.
Whatever the motivation, you are now looking at the prospect of getting a loan.
Now, the million-dollar question is…
What type of small business loan should you get?
The term of a loan refers to how long it will be between when you took it out and when you pay it back.
In the lending industry, there are short, medium and long term loans.
Depending on what type of business you have and what your goals are, you may want to strategically seek one type over the other.
Let’s look at each of them in turn.
Short Term Business Loans
Generally, short term loans for business will need to be repaid in a year or less.
Perhaps sales are slow, but you want to get your holiday goods in stock.
A short term loan is ideal for a business that needs fast cash now, and can repay the loan within a 12-month span.
Knowing that your fall sales traditionally pick up significantly, it’s a pretty safe bet that you can supply the lenders with their cash and interest in a timely fashion.
Once you do, your credit will improve and you will become a stronger candidate for longer term loans in the future.
Construction businesses, and seasonal companies do well with short term business loans, since work is cyclical and supplies are crucial in order to keep the enterprise running.
Medium Term Loans for Small Business
Also called intermediate term loans, medium term business loans generally last one to three years.
Most business owners take them out when they need capital assets such as computers or office equipment that will only last for a few years.
When taking out medium term loans, the loan amount available is larger, but the approval process is more rigorous.
Unlike flexible short term business loans, a medium term will almost always require collateral and a personal guarantee.
Import/export businesses do well with these lending vehicles, since they often endure political or economic uncertainty and frequently need money to tide them over.
Long Term Loans for Business
As the name implies, long term business loans are greater in duration– usually not maturing for 3 – 10 years.
Collateral must be pledged in virtually all long term loans in the form of buildings, vehicles, equipment or a combination thereof.
These loans are among the most difficult to get approved for.
Often, they require you to agree to restrictive covenants which are specifications regarding how you will conduct your business during the duration of the loan.
Common restrictions include prohibiting you from borrowing from another lender and requiring you to regularly submit financial documentation.
In most cases, you are expected to pay a large down payment of 20 to 25 percent on the loan in the beginning.
Each month, you pay back the principal and interest at a specified amount for several years, with a final “balloon payment” of the rest of what you owe at the date of the loan’s maturation.
Medical, legal, and accounting practices are just some types of business that would benefit from long term loans.
Deciding on which type of loan to apply for involves understanding the nature of your business and its realistic future success.
Never borrow more than you think you can pay back, but don’t be so conservative as to deprive yourself of the financial benefits a loan can provide.
Let your new infusion of cash go to work to promote your business success.