Business Term Loans: Fixed Payments For Long Term & Short Term Loans

A business term loan is what most small business owners think of when they hear the words “small business loan.” The repayment terms and fee structure are straightforward. Borrowers receive this money and agree to pay it back in regularly scheduled payments over a set period. The period is known as a loan term. In most cases, you make fixed payments every month for a set repayment term.

In addition to the loan amount, known as the principal, borrowers agree to pay interest, which is the fee lenders charge for borrowing that money. The percentage rate determines the amount of your payments. This percentage also determines the total amount you’ll be paying back over the loan term.

Business term loans come with fixed interest rates or variable rates. A fixed interest rate means lenders won’t change the rate during the term, while variable rates change with the WSJ Prime Rate in most cases. Many small business owners prefer the stability of fixed interest rate business loans.

Small business term loans generally carry lower costs and higher borrowing amounts than other small business financing products. However, they are also the hardest to qualify for. SBA Loans (Small Business Administration) are prime examples of long-term loans that are hard to qualify for.

Funding Amount 10K – $5M

Funding Term 3 months – 10 years

Rates Starting at 5%

Speed 1-3 Business days

All business term loans carry monthly payments, interest rates, and a set term. However, there are many different types of interest systems. Each variation has its pros and cons. Depending on your type, your interest could stay the same or change throughout your term. And though your monthly payment might stay the same, the portion of it that goes to interest (as opposed to your borrowing amount) could change as well.

Your type of interest will also determine whether it makes sense to pay the entire loan off before your scheduled due date. Some loans carry prepayment penalties, while others allow you to pay less interest if you pay early.

Business term loans often make sense for companies ready to invest in large and expensive capital business assets. These are the things that will help your company grow. They could include equipment or inventory. SBA loans or equipment financing are term loans that would be perfect for this scenario.

Other companies use term loans to provide working capital. Some might use one of these term loans to consolidate higher-interest debt to lower their overall rate and payments by stretching out their debt over a more extended period. Businesses might also apply for a business term loan to help pay off taxes or meet payroll obligations.

Let’s say you want to purchase a large one-time inventory order for $100,000. This would let you expand your in-store product offerings to meet your existing customers’ demand and reach new customers. Yet you don’t have $100,000 in your bank account.

So you apply for a small business loan. You negotiate a five-year term at a fixed interest rate of 8% with monthly repayments. You get the money and buy your inventory now. And the cost of purchasing that inventory gets spread over sixty months – this type of term loan is easier on your cash flow than, say, a merchant cash advance with a factor rate that is due within six months to one year.

According to the Consumer Financial Protection Bureau, 70 percent of small businesses seek loans of less than $250,000.52.

Data from the 2019 Small Business Credit Survey shows that 43% of American small businesses sought external funding for their companies. This means they went to an outside lender, such as a bank, to borrow money for business purposes. Of those small business owners that applied, 53% got less money than they requested.

According to data from the most recent Joint Federal Reserve Small Business Credit Survey, about 21 percent of surveyed small businesses that applied for financing and had been operating for under two years didn’t get any financing. And only 42 percent of applicants got the full amount they requested.

Term business loans carry more advantages than most other financing products. Term loans are the cheapest products due to their low fixed interest rates and carry a longer term. They offer the highest borrowing amounts as well.

Another major advantage is the simplicity of the fee and repayment structure. Most entrepreneurs know how business term loans work. For this reason, they don’t have to take the time to research unfamiliar products and decide which one would have the least impact on their operating capital. This might even seem like a waste of time since there’s no doubt about which product carries the lowest interest rates and payments. The repayment structure also makes term loans very easy to budget for.

And though the best business term loan products carry strict requirements, at least these requirements are clear-cut. If you have excellent credit, at least one year in business, and your company is doing very well, you will most likely qualify with most online lenders for a term loan. In other words, there’s no grey area from lenders when it comes to the requirements. Your company either meets these criteria, or it doesn’t. You either have an excellent credit history, or you don’t.

For other products, it’s often unclear how well your company must be doing to qualify. Some online lenders offer long-term loans without an excellent credit score. Some online lenders might also allow the use of real estate as collateral if your personal credit score is less than perfect.

It’s prevalent for entrepreneurs to have poor credit, often for reasons beyond their control. But for term loans, the credit score is by far the most important requirement. If you have a poor credit history, all the world’s revenue probably won’t help you get approved. In comparison, most other products provided by online lenders are much more accessible for borrowers with poor credit.

You may have also heard that the best loan options are reserved for people who don’t actually “need” the money. This is almost true. The lowest loan rates and longest repayment terms typically go to people with so much money in the bank that they can basically cover their desired investment independently.

Unlike other loan products, business term loans are designed exclusively for significant, long-term revenue-generating investments. To clarify, this option is not meant for shorter-term needs like covering expenses during a rough patch or purchasing an extra order of inventory. With other loan options like a business line of credit, you can generally use the funds in any way you like. It isn’t easy to get approved for bank loans without a plan that shows you’ll be able to pay it back.

Lastly, the aforementioned interest systems can be very confusing. Two business lenders that offer the same product can have completely different interest systems. Other products tend to carry the same fee structure, regardless of where you get them.