Applying for a term loan if you’re looking for ways to invest in your business’s future will benefit both short-term and long-term business strategies.
Read on to learn how they work, what they can do for your business, and how you can get started on your application today.
|Table of Contents|
|1. What is a term loan?|
|2. Pros and cons of a term loan|
|3. Types of term loans|
|4. When to consider term loans for businesses|
|5. How to apply for a term loan|
|6. Best uses for a term loan|
What Is a Term Loan?
It is an agreement between a borrower and a lender. In this case, the borrower is typically a business needing a large sum of money.
The lender may be a credit union, bank, or online provider.
The business receives the lump sum it needs from the lender in exchange for repayment of the original amount with interest.
How Do Term Loans Work?
At its core, a term loan works similarly to a personal loan or a mortgage.
The lender provides a one-time, upfront payment to the borrower. It’s then up to the borrower to pay back that sum in smaller increments over time.
Financing in different situations may call for shorter or longer repayment periods.
Depending on the lender, term loan interest rates will either be fixed or variable.
The interest rate stays the same with a fixed-rate loan throughout the entire repayment period.
A variable rate, on the other hand, fluctuates and may end up higher or lower than the starting rate by the end of repayment.
Pros and Cons of a Term Loan
Pros of term loans:
- Cover large immediate costs.
- Improve your business’s credit score by making faithful payments.
- Lower interest rates compared to credit cards.
- Flexible repayment periods.
Cons of term loans:
- Application approval may take a while.
- Additional fees like origination and early repayment.
- Qualifying may be difficult.
- May have to provide collateral in some cases.
Types Of Term Loans
The different terms of loans are mainly separated by the length of the loan’s lifespan.
- Short-term loans. These cover a smaller amount to be repaid over a shorter period of time. It may last less than a year or up to 2 years.
- Intermediate-term loans. This is the middle ground between the short and long term. It may last anywhere from 2 to 5 years, often paid monthly.
- Long-term loans. These provide access to much larger sums to be repaid over a longer period of time and may last up to 25 years, usually paid either monthly or quarterly.
Short-Term Loans Vs. Long-Term Loans: Which One To Choose
Short-term and long-term loans are two of the most common types of terms of a loan available.
- Short-term loans are a good fit for businesses that need help covering smaller daily expenses.
- Because of their convenience, they typically have higher interest rates compared to long-term loans.
If your business is well-established and has a good financial record, you may want to consider long-term business loans.
- A long-term loan, while a larger commitment, offers much more capital than a short-term loan.
- You can use these larger sums to finance business strategies and support long-term growth.
- Either way, making monthly payments consistently and on time helps build business credit scores, which can help you get better rates in the future.
When To Consider Term Loans For Businesses
Here are some of the situations in which you might want to consider taking out business-term loans.
Expand your business
Expanding your business might mean different things depending on your situation.
Whether you want to open a second location, hire more staff, remodel your existing space, buy more space, or even purchase new equipment, a term loan helps you front the cost of investment.
Cover inventory costs
In some cases, you might experience a sudden influx of demand for your product that you weren’t prepared to handle.
Term loans allow you to purchase enough stock to meet that demand, then repay the original amount once you’ve gained revenue.
Fund a project or a new product
Say you have an idea for a new product line but don’t quite have the extra capital to fund it yet.
Taking out a term loan lets you invest in creating the new product without sacrificing cash set aside for emergencies and daily expenses.
Better your marketing strategy
Purchasing ads for your business or hiring marketing staff is a worthwhile investment in your business’s future.
A term loan helps you cover the often daunting cost of advertising, allowing you to get ahead of local competition.
Learn all about the types of business loans.
Benefits of Term Loans
- Invest in the future of your business.
- Boost your business’s credit score by making on-time loan payments.
- Term loan interest is tax deductible.
- Reliable payment schedule for easy budget planning.
- Be prepared for emergencies with extra cash.
How to Apply For a Term Loan
If you’re looking to apply for a term loan, you’ll need to follow these steps.
Start looking for lenders
It’s important to research all the lending options at your disposal.
Banks and credit unions often have lower interest rates, but their application processes may be lengthy or tedious.
Online lenders may provide a faster, easier application process.
Their trade-off, though, will be higher interest rates. Compare choices to find the best fit for your situation.
Make sure you have the right documents
The lender may ask you to provide different records depending on which lender you choose.
Here is an overview of the documents you should prepare in advance, just in case.
- Bank statements.
- Tax returns.
- Credit history (personal or business credit score)
- Business plan.
- Employee identification number (EIN).
Evaluate your offers
The business loan terms will be different according to each lender.
As you review your term loan offers, you must consider several factors.
- Repayment details. If the rates are too high or the repayment period doesn’t fit your schedule, you may want to select a different offer. Be realistic about what you can afford.
- Fees. Fees vary by lender. You might pay an origination or prepayment fee with one provider but not another. Fees tack on thousands of dollars to even the lowest rate plans, so pay close attention to them.
- Annual percentage rate (APR). The APR of your loan refers to its total annual cost. This includes the interest rate and fees. Knowing the APR helps you determine the actual cost of taking out the loan.
Once you have a clear understanding of all your offers, select the one that best fits your budget, immediate needs, and future repayment schedule.
Using tools like a term loan calculator as you make your decision may be helpful.
Submit the application
Once you have found a lender complete the application process.
This often involves submitting personal information and financial documents such as bank statements and income tax returns.
Once you submit the application and all the required documentation, some lenders may request additional information or verification before approving the loan.
Once the lender is satisfied with all the information provided in the application, they finalize the loan application and transfer the money to you.
Here are some examples of the business loan requirements they may ask you to provide during the application.
- A sound business plan.
- A history of your business.
- Your financial record, including assets and cash flow.
- Your annual revenue.
Best Uses For a Term Loan
You can use a term loan to cover anything from daily expenses to large investments.
Here are some ways to make the most of a term loan.
- Invest in a marketing strategy.
- Open a new location.
- Hire more staff.
- Expand your inventory.
- Improve your equipment.
- Buy a second business.
- Have extra cash for emergencies and strategic decisions.
Get The Financing You Need
When it comes to getting the best funds, Camino Financial is the greatest option.
Our small business loan allows you to grow and is the best small business financing tool to invest in your business and goals.
- Amount: $5,100 – $53,000
- The credit score is required
- APR: 31.55% – 57%
- Term: 24 – 36 months
- Fixed interest rate
- Fees: 6.99% origination fee
- Necessary operating time: Min. 9 months registered and operating
- Minimum annual income: $30,000
- The business is located in the USA, except in New Jersey, Hawaii, and Puerto Rico
- Have an SSN; if you don’t, you can apply with your ITIN.
- Own at least 20% of the business
What is a loan?
A loan is a sum of money that someone borrows with the expectation of repayment.
How do loans work?
A lender provides a borrower with a sum of money upfront. Over time, the borrower repays the sum with interest.
How long are student loan terms?
For federal loans, the repayment term is 10 years. Private loans may be anywhere between 5 and 15 years.
What is meant by a term loan?
It is a specific type of loan borrowed by businesses to finance expenses.
What are the 3 types of term loans?
The three types are based on business loan lengths and are short-term, intermediate-term, and long-term.
What is an example of a term loan?
The Small Business Administration (SBA) loan is a low-interest term loan provided to small businesses.
What are the benefits of a term loan?
Build business credit, cover expenses, and invest in the future of your business.
How to negotiate business loan terms?
Prepare the necessary paperwork and apply with multiple lenders to find the term loan with the best terms to meet your needs.
Are term loans good?
They are a great way to fund your business, as they immediately provide access to the capital and can tailor to fit the needs of your specific business.
However, it is important to consider all of the pros and cons before taking out a term loan.
What is meant by fixed-term loans?
A fixed-term loan is a type of borrowing involving a set repayment amount each month over a fixed period.
This means that the borrower knows exactly what they are expected to pay back each month and for how long.