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What is a Term Loan?
Any normal functioning business term loan is a lump sum of capital that you need to pay back with regular repayments at a fixed interest rate. The “term” in “term loan” comes from refers to repayment term length, which can typically be one to five years long. Most business owners use the proceeds of term loans to fund a specific, one-off investment for their small or medium business.
What business qualifies?
Several types of businesses can qualify for a traditional term loan—as long as you’ve been in business for a little bit of time, have a good credit rating and constantly generating revenue.
(See more on term loan’s minimum criteria below.)
Not every term loan are the same, though: the interest rate, length of the term, and loan amount depends on your business revenues and credit score as well.
Since traditional term loans have longer repayment periods than short-term loans, your business’s financial condition along with credit rating are really important.
How it functions?
Every business could use some extra cash from time to time. Whether it’s for an equipment upgrade and replacement, an order of inventory, or for a new employee, a business loan can always help out.
But how can you find proper funding that your business can afford to pay as well?
We deal with all sorts of businesses here at Best Option Funding, and we’ve got some insight into which applications lead to which loans.
Take a look at how any “term loan” works - & what you’ll require to qualify for one. That will help you in understanding whether a term loan is the right choice for you or not.
Term Loans: The Basics
Quick—think about a business loan.
You probably thought of a term loan, since it’s one of the most common kinds of business loan out there.
And in simple terms, they’re all about consistency.
You get a fixed amount of money with a specific interest rate, which can be fixed or variable. Then you pay that cash back within an agreed-upon amount of time in regular intervals and installments.
When it comes to term loans, there’s nothing unusual here. You know exactly what you’re getting into and what you are paying.
The Various Kinds of Term Loans Available
That doesn’t mean all term loans are exactly the same in characteristics.
Depending on your business’s expansion needs, credit score, cash flow, revenue generation, and more, there are plenty of different types of loans available.
In fact, you can get good term loans with lengths and payment structures as varied as 1 year with daily payments to 5 years with monthly installments—and everything in between.
Similarly, loan amounts and interest rates can vary according to your business’s needs and past. You can get more or less money—at maximum or minimum rates.
The exact details of your term loan depending on your business’s financial condition, but the structure will always stay the same.
Traditional term loans consist of wide categories of business financing, available both from traditional banks and alternative non-bank lenders.
Request for a Term Loan
Term loans from traditional banks and certain online lenders can be the hardest term loan products to qualify for.
Getting a traditional term loan isn’t easy if you’ve got a low credit rating and little to no collateral to secure that fund with.
In fact, collateral might be an essential for a term loan—depending on the rest of your business’s condition— you risk losing that collateral if you can’t repay your liability.
And while many of these lenders might not ask for a specific piece of collateral but, instead, put a “blanket lien” on your business, the same risk applies here as well.
Don’t forget: when you apply for a small business term loan, make sure to ask if there are any prepayment penalties or other fees and fines which you should be aware of. Go over the exact terms and conditions along with the lender so that you can arrive at a monthly payment you know you can pay.
When Should You Opt for a Term Loan?
The point of a term loan: is to help you finance something considerable for your business.
Whether you need to make a specific equipment purchase or inventory overhaul, want more working capital for your business, need to refinance other business debts, are looking to meet tax or payroll obligations, or something else entirely, a small business term loan can help your business in a big way.
And as it turns out, there are few loan use restrictions, if any—though, generally speaking, the best practice would be to spend that money on creating more profit avenues for your business.
Since borrowing isn’t free from liability, you want to come out of a loan with more money than you began with.
If used the right way, traditional term loans can help you push your business to the next level—introducing new equipments into the mix, locations, products, or marketing campaigns for your business.
Plus, remember that a term loan is still consistent.
You should be surely able to figure out whether any term loan would help or actually hurt your entire business from the get-go. Just understand the calculations beforehand and plan the coming months or years in a careful manner.
What Will A Term Loan Cost You?
You should know how much financing will cost you in the future no matter what type of financing you’re applying for.
Thankfully, the price of a term loan is can be easily, and it tends to be pretty affordable as well.
Let’s take a glance at a cost example.
Sample of a Term Loan
Let’s say you’ve been selected for a term loan.
In this term loan offer, you’re borrowing $25K from a lender which is available at 12% interest rate and a 5-year term.
Given the longer length of that traditional term loan, you’ll most likely have to pay about $556. (Term loans also comes with weekly payments option as well.)
That’s a predictable expense you can easily understand and plan your financials around this loan.
Term loans, like other business loans, can also come with fees attached to them. These fees could be origination fees, packaging fees, prepayment fees, and so on.
Don’t overlook these fees on your loan offer—be sure to factor any and all minor fees which you might have to pay in order to understand the true cost of your total liability.
Break Down of Each Term Loan Payment or Installment
Here’s the thing with the term loans: not every payment generated goes towards the same thing.
Traditional term loans amortized, which means you don’t have to pay equal parts interest and principal (or the amount you borrowed) from month to month. Instead, lenders usually stack interest payments early on your loan and leave your principal payments for the later life of your loan term.
That way, even if you pay off your loan early and get the rest of the interest forgiven, you’ve still managed to pay almost all of it to the lender.
This means that you might save less than you’d originally thought by paying your term loan off before it’s due date.
However, your monthly payment is still the same amount—it’s just the proportion of interest in respect to the principal that changes in accordance.
In order to understand your loan completely, make sure to ask for an amortization schedule from your lender.