Term Loans

Simple and generic, traditional term loans involve borrowing capital & repaying over a fixed period of time with interest.

At a Glance

Traditional term loans are large, flexible, installment loans that small businesses can use to achieve any number of goals. Whether it’s a major equipment purchase or an expansion project, getting that extra infusion of working capital is something that nearly every business needs at some point during its life cycle.

Loan Amount $25,000 - $500,000
Interest Rates 7 - 30%
Loan Term 1 - 5 years
Time to Funding As little as 48 hours

Advantages & Disadvantages

  • Set payment structure
  • Few usage restrictions
  • Relatively low interest rates
  • Relatively long payment terms
  • Appropriate for a variety of business purposes
  • Amortization schedule
  • Lengthy application process
  • Potential prepayment penalties
  • Variable interest rates may increase

What Is A Term Loan?

Term loans are fairly simple to understand. They follow the same basic structure as common loan products like an auto loan or a mortgage on your home.

It doesn’t matter whether you’re a small start up or an established company that’s been around for years.

Even with a strong cash flow, it doesn’t always make sense to deplete your balance sheet when you can qualify for a small business term loan.

Take some time to familiarize yourself with everything a term loan entails.

As a small business owner, it’s important to hold off making financial decisions until you have all the relevant information on hand.

When to Use a Term Loan

You can get a business loan for any variety of reasons as a small business owner, usage restrictions are few.

Still, it’s important to evaluate whether or not your company will benefit before you take out that loan.

In a (Temporary) Pinch

One common reason to use a term loan is simply to finance your day-to-day operations.

Maybe you’re young company needs some start up cash, or perhaps your busy season is a few months away and you need temporary cash to pay your employees.

To Push Your Business to the Next Level

Maybe you could scrape by without it, but an increase in working capital could mean the difference between landing a major account and losing the opportunity to scale.

Inventory financing is another popular option, since it’s common for a small business to have to buy product or supplies in advance of being paid for a large order.

Large Expenditures

Many companies also utilize term loans to finance a major purchase, whether it’s new technology or updated equipment to replace older models.

All of these scenarios are extremely typical of any small business, and in most cases, are a normal way to grow your company.

However, it would be unwise to apply for a term loan when your company is in dire financial straits.

Ideally, the lender’s vetting process would pick up on any instability, but it’s also important for you as a business owner to be honest with yourself.

Will you be able to make your payments?

Do you have a plan as to how exactly you’ll bring in growth with the money you’re borrowing?

Small business loans should always contribute to the financial success of your company and you should feel comfortable with your repayment plan.

Best Types of Term Loans for Business

Term Loan
Amount
$25,000 - $500,000
Cost
7 - 30% APR
Terms
1 - 5 years
Time to Funding
As little as 48 hours
Short-Term Business Loan
Amount
$2,500 - $250,000
Cost
14% APR and up
Terms
3 - 12 months
Time to Funding
As little as 48 hours
Equipment Financing
Amount
Up to 100% of equipment value
Cost
8 - 30 %
Terms
Estimated life of equipment
Time to Funding
As little as 48 hours

How a Traditional Term Loan Works

There are a few different types of term loans available to small business owners.

Besides traditional financial institutions like banks, this common loan product is available through alternative lenders and even the Small Business Administration.

They aren’t actually originated by the SBA, but instead are backed by the government, making them a popular choice for small businesses and lenders alike.

With a term loan, your lender sends you a deposit of the approved funding amount.

According to the Small Business Administration, the average size loan from a bank for a small business ranges between $130,000 and $140,000 but the exact amount you qualify for depends on your own company’s financial condition and business needs.

Once you receive your funds, you’ll begin making payments to your lender on either a monthly or weekly basis.

Payments include both the principal amount you borrowed as well as interest.

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Secured vs. Unsecured

A red flag to look out for is getting a secured business loan rather than an unsecured term loan.

A secured business loan requires you to provide the lender with some type of collateral, which serves as a second way to repay your loan in case you default on your payments.

Equipment, buildings, accounts receivable, and even inventory can be used as collateral when required.

It can be helpful in getting qualified, but it does add an extra degree of risk when taking out a term loan for your small business.

Learn more about The Relationship Between Collateral & Small Business Loans

How Much Does It Cost?

The cost largely depends on your interest rate, but is also affected by any fees charged by your lender.

Many charge an origination fee for the loan, which is deducted from your funds before they are distributed.

If you’re late making a payment, you’ll likely pay an additional fee for that as well.

Advantages

Qualifying for a traditional term loan comes with a number of advantages.

Low APR and Low Payments

First of all, interest rates are much lower compared to those of short term business loans.

Depending on your business history and needs, you could see rates ranging between 6% and 30%.

Short term loans, on the other hand, can have APRs as high as the triple digits in some cases.

2) Term Loans Are Generally Larger

You can get approved for higher amounts in order to take care of larger business needs, with many lenders offering between $500,000 and $1 million.

So while short term loans are designed for smaller expenses over a short span, long term loans allow you to put a more substantial investment into your company without worrying as much about the timeline.

Term Loans Are Generally Larger

You can get approved for higher amounts in order to take care of larger business needs, with many lenders offering between $500,000 and $1 million.

So while short term loans are designed for smaller expenses over a short span, long term loans allow you to put a more substantial investment into your company without worrying as much about the timeline.

Long Repayment Period

The extended repayment period that comes with business term loans typically last anywhere between one and five years.

Keep in mind, that number can be even higher depending on your specific circumstances.

A longer repayment term can be extremely helpful in making payments more affordable because the expense is spread out over an extended period.

It also gives you more time to turn that new expense (or investment) into a profitable venture.

Disadvantages

While term loans come with several perks, there are some disadvantages to be aware of as well.

Early Repayment Won’t Save You Much

One huge consideration is the cost of prepaying your loan. Business term loans typically amortize, meaning most of your payment goes towards interest at the beginning of the loan.

As you continue to make payments, a larger portion goes towards principal over the life of your loan.

Paying off your loan early isn’t always beneficial since most of your initial payments went towards interest anyway.

If you’ve been making payments for a long period, you’ve probably been putting most of your money towards interest.

The amount you could save by paying off the remainder depends on your amortization schedule.

An amortization schedule is a document that outlines how much of each scheduled payment is distributed between principal interest.

Avoid only paying interest at the beginning of the loan by making extra payments.

And be sure to specifically request that the additional amount is applied to your loan principal.

Variable Interest Rates

Variable rates can also affect your repayment plan.

Depending on your loan, your interest rate, and consequently your monthly payments, could change based on how market rates perform.

This typically occurs on a monthly or quarterly basis.

Your lender chooses a base rate, such as the prime rate or LIBOR, then adds a fixed percentage to determine your interest rate.

So if the prime rate is at 3.5% and your lenders adds 2% as your variable rate, then your interest rate for that payment would be 5.5%.

If the prime rate were to increase, your interest rate would also increase correspondingly.

Make sure you are financially prepared for such fluctuations when choosing a variable rate for your business term loan.

How To Qualify

Small business lending from banks is down 20% since the 2008 financial crisis, so it’s vital that you make your application as strong as possible in order to qualify for funding.

Whether you’re looking for a traditional bank loan or an alternative lender, there are several steps you can take to ensure your application is strong.

1
Demonstrate Fiscal Soundness

Each lender has different eligibility requirements, but usually they’ll have a revenue minimum along with a requisite number of years you’ve been in business.

GENIUS TIP: You don’t necessarily have to be profitable yet in order to qualify for a term loan, so don’t let this discourage you from applying.

2
Have Decent Credit

Lenders also look at your personal credit score in addition to your business financials, with most requiring a minimum around a 680.

That’s just below the average score in the U.S. so don’t feel too intimidated by that standard. However, it is always smart to take a look at your credit report and make sure everything is accurate and up to date.

3
Produce a Robust Business Plan

Develop a business plan to demonstrate how funds will be used and how you’ll be able to repay them. Provide some background on the company and your executive leadership to prove that you have the expertise to handle a growing business.

Include an Industry Analysis

Lenders want to see an industry analysis because it shows that both your own business and your general field are on a positive trajectory. Give further confidence with a robust marketing and sales strategy, as well as an operations plan. These show that you’re on top of your business everywhere it matters.

Identify Strengths, Weaknesses, Opportunities, and Threats

Finally, perform a SWOT analysis for your lender; that is, an evaluation of your strengths, weaknesses, opportunities, and threats.

A SWOT analysis will indicate to lenders that you have a realistic self-awareness of your business.

This exercise will also prepare you to meet challenges head-on, both financially and strategically.

A well-crafted business plan can add a lot of heft to your business loan application so take the time to do it right.

Learn more about Planning Your Small Business

Choosing the Right Traditional Term Lender

When looking at small business loans, don’t forget that it’s your duty as the customer to shop around for your loan.

What Kind of Lenders Offer Traditional Term Loans?

There are many different types of small business lenders, including banks, credit unions, online lenders, and SBA preferred lenders.

Each one has different requirements and underwriting guidelines, and you’re likely to receive different offers from each one.

Do You Meet Their Minimum Requirements?

Start off by reviewing a few different lenders’ minimum requirement.

For example, you ought to confirm that your revenue is in the acceptable range for the lender in question.

This is a good place to start so you don’t waste any time filling out applications when you don’t even meet their basic qualifications.

Who Has The Best Offer?

You can then compare offers to determine which lender has the best terms for you.

Maybe one has a lower interest rate, but another offers more capital that you could really use.

You need to fully weigh your goals and your budget to make the right decision.

Taking out a traditional term loan can be a great business move for your company.

As long as you’re strategic with your use of funds and realistic about how you will make your payments, a term loan could be the fuel your small business needs to reach the next level of success.

How to Apply

In order to expedite the process, you should have certain documents ready before applying for a term loan.

Here’s what you’ll need to apply for a term loan:

  • Driver's License
  • Voided Business Check
  • Bank Statements
  • Balance Sheet
  • Profit & Loss Statements
  • Credit Score
  • Business Tax Returns
  • Personal Tax Returns
  • Business Plan