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Intro To Business Term Loans
When people talk about business loans, they are usually referring to Business Term Loans. This is the most traditional and well-known type of business loan. The borrower receives a lump sum that is paid back with interest via monthly payments. Despite the inconveniences of this structure, many businesses still prefer it over alternative products. This is because when it comes to growth and significant investments, no product may be as conducive to your cash flow than a Business Term Loan.
In this guide, we’ll answer the following questions and more:
- What Is a Business Term Loan?
- How Do Business Term Loans Work?
- What Are The Advantages of Business Term Loans?
- What Are The Disadvantages of Business Term Loans?
- How Do You Apply For Business Term Loans?
- What If I’m Declined For a Business Term Loan?
- Is a Business Loan a Term Loan?
- Are Microloans The Same As Business Term Loans?
- Can I Pay Off My Loan Early?
- What’s The Difference Between Business Term Loans And Business Credit Lines?
- How Much Does a Business Term Loan Cost?
- Is Collateral Necessary For Business Term Loans?
What Is a Business Term Loan?
A Business Term Loan is what most business owners think of when they hear the words “business loan.” The repayment and fee structure is 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 term. In most cases, you make fixed payments every month for a set term.
In addition to the money borrowed, known as the principal, borrowers agree to pay interest, which is the fee the lender charges to borrow that money. The interest rate determines the amount of your monthly payments. This percentage also determines the total amount you’ll be paying back.
Term loans come with fixed interest rates or variable rates. A fixed-rate means the rate won’t change during the term, while variable rates change with the WSJ Prime Rate in most cases. Many business owners prefer the stability of fixed-rate business loans.
Compared to other business financing products, Business Term Loans generally carry lower costs and higher borrowing amounts. However, they are also the hardest to qualify for.
Funding Amount
10K – $5M
Funding Term
3 months – 10 years
Rates
Starting at 5%
Speed
1-3 Business days
How Do Business Term Loans Work?
All Business Term Loans carry monthly payments, interest rates, and set terms. 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 businesses ready to invest in large and expensive capital assets. These are the things that will help your business grow. They could include equipment or inventory.
Other businesses use term loans to provide working capital. Some might use one of these 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 term loan to help pay off taxes or meet payroll obligations.
Example of a Business Term Loan:
Let’s say you want to purchase a large inventory order for $100,000. This would let you expand your in-store product offerings to meet the demand of your existing customers and reach new customers. Yet you don’t have $100,000 in your bank account.
So you apply for a business loan. You negotiate a five-year term at a fixed 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 – it’s easier on your cash flow.
Business Term Loans – Facts, Research & Reports
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 businesses. This means they went to an outside lender, such as a bank, to borrow money for business purposes. Of those 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.
What Are The Advantages of Term Business Loans?
Term Business Loans carry more advantages than most other financing products. They are the cheapest products, due to their low interest rates and long terms. 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 cash flow. This might even seem like a waste of time since there’s no doubt as to which product carries the lowest interest rates and monthly payments. The repayment structure also makes Business Term Loans very easy to budget for.
And though Business Term Loans carry strict requirements, at least these requirements are clear-cut. If you have excellent credit, at least one year in business, and your business is doing very well, you will most likely qualify for this product. In other words, there’s no grey area when it comes to the requirements. Your business is either meets these criteria, or it doesn’t. You either have excellent credit, or you don’t. For other products, it’s often unclear how well your business must be doing in order to qualify.
What Are The Disadvantages of Term Business Loans?
It’s extremely common for entrepreneurs to have poor credit, often for reasons beyond their control. But for Business Term Loans, the credit score is by far the most important requirement. If you have poor credit, all the revenue in the world probably won’t help you get approved. In comparison, most other products are much more accessible for borrowers with poor credit.
Also, you may have heard that the best business loans are reserved for people who don’t actually “need” the money. This is almost true. The lowest rates and longest terms typically go to people with so much money in the bank that they can basically cover their desired investment on their own.
Unlike other products, Term Business Loans are designed exclusively for significant, revenue-generating investments. To clarify, this product is not meant for covering expenses during a rough patch or purchasing an extra order of inventory. With other products, you can use the funds in any way you like. It’s difficult to get approved for conventional financing 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.
Pros
- Fixed monthly payments
- Longer loan terms
- Less than perfect credit accepted
- Use for a variety of business purposes
Cons
- Same payment even when business is slow
- Possible prepayment penalties
Business Term Loans Compared To Other Products
| Loan types | Max Amounts | Rates | Speed |
|---|---|---|---|
| Merchant Cash Advance | $7.5k – $1m | Starting at 1.09 | 1-2 business days |
| SBA Loan | $50k-$10m | Starting at 5% | 3-5 weeks |
| Business Term Loan | $10k to $5m | Starting at 5% | 1-3 business days |
| Business Line of Credit | $10k to $250k | Starting at 8% | 1-3 business days |
| Receivables/Invoice Factoring | $50k-$10m | Starting at 5.8% | 1-2 weeks |
| Equipment Financing | Up to $5m per piece | Starting at 5% | 3-10 business days |
| Revenue Based Business Loans | $10K – $5m | Starting at 9% | 1-3 business days |
Who Qualifies For Business Term Loans?
Approved businesses generally met the following criteria:
Annual Revenue
$75K+
Credit Score
550+
Time in Business
6 months+
How To Apply For Business Term Loans:
If you have the required information on-hand, the application takes just a few minutes. Upon approval, funds can appear in your bank account in 1-3 business days. Here’s how to get started:
Step 1: Consider Your Needs
Before you begin the application process, take some time to make sure this is indeed the right product for your individual needs. Will you be able to access your desired funding amount? Will you be able to fulfill the repayment structure? Answering these questions ahead of time will ensure that you don’t run into cash flow issues when making payments.
Step 2: Gather Your Documents
The application requires the following documents and information:
- Driver’s license
- Voided business check
- Bank statements from the past three months
Step 3: Fill Out Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive Approval
If and when you’re approved, funds should then appear in your bank account in 1-2 business days.
Your Business Term Loan Gets Set Up – Now What?
Your business loan isn’t just a way to get financing for your business. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of business loan you get, make all of your required payments on time and in full. If you get a business credit line or another form of revolving credit, keep your balance below the credit limit.
Consistently making your business financing payments on time and in full will have a positive impact on your credit. And that means preferred rates and terms when you next need business financing.
What If I’m Declined For a Business Term Loan?
Applications can get declined for a host of reasons. Maybe your credit score or annual revenue wasn’t up to par. Maybe your cash flow wasn’t strong enough to sustain fixed monthly payments. But this doesn’t mean you won’t qualify for other, highly beneficial business financing products.
No, they may not have the borrowing power, interest rates, or terms you had in mind. But if you pay off the debt without trouble, your second loan will likely have lower rates and more favorable terms. Your dream loan is never out of reach; it might just take a little longer than expected to obtain.
In this case, we might recommend a different business loan program or other types of products altogether. Possible examples include business credit cards or even personal loans. These alternatives are usually easier to qualify for than business loans. At UCS, we can help you explore your options and point you in the direction of the most sensible choices.
People Also Ask:
Is a Business Loan The Same As a Term Loan?
Initially, the words “business loan” were only used to describe conventional loans. Today, however, these two words can refer to any business financing product. But when you contact a company about financing, they will most likely assume that you’re looking for a Business Term Loan.
Are Microloans the Same as Business Term Loans?
A microloan is a special type of small, short-term business loan. Microloans often help new and young businesses by providing funding to get them started, especially when the business owners don’t qualify for traditional business financing.
Non-profit organizations, such as the SBA, provide eligible businesses with microloans for a variety of uses, such as buying inventory, production equipment or machinery, office equipment, and supplies, and even for paying staff members.
According to the most recent figures from the SBA, in 2019, the average microloan was for $14,735, with an interest rate of 7.35%.
Can I Pay Off My Loan Early?
Some loans have prepayment penalties because paying early means the business lender makes less money. Others, however, allow you to save on interest by paying early.
While most business term loans can get paid off early, it doesn’t always make good financial sense to do so. That’s because it depends on the interest rate and the terms of your loan.
Many business loans come with a lower interest rate than other forms of business financing. It could make more sense to pay off a higher interest rate business credit card or credit line first.
As you can see, this is a great question to ask the business lender before starting the application.
What’s The Difference Between Business Term Loans And Business Credit Lines?
Businesses use term loans and credit lines to help finance their companies, yet they have some pretty significant differences.
With a term loan, you receive a lump sum of money all at once and start getting charged interest as soon as you receive the loan money. As you make regular payments, your loan balance, or the money you owe, decreases. And then once the loan has been paid off, your loan agreement ends.
With a business credit line, on the other hand, you get what is known as revolving credit. This means, that like a business credit card borrowers get approved to borrow up to a preset limit.
You can borrow up to that limit at any time. Borrowers only get charged interest on the amount borrowed. You pay down the balance owing and can access your credit line again and again, up to the agreed-upon limit.
Credit lines might cost more than a fixed rate business term loan. And you could find it more challenging to qualify for a credit line if you have bad credit or no credit.
Another key difference between business loans and business lines of credit is how payments work. With most loans, you’ll pay the same amount every payment. So your payment is predictable and easy to work into a regular budget.
With a credit line, your payment depends on the outstanding balance and the interest rate.
How Much Does a Business Term Loan Cost?
How much will your business term loan cost? It depends on a few factors—first, your loan amount. Second, your interest rate will alter that cost. Third, the term of the loan. With our lender network, term loan business rates start at 9%. Your regular payments for your business term loan will be smaller than they would be for other types of business loans. That’s because you pay off term loans in a matter of years, not weeks or months. If you want to get an estimate of your loan payment costs, try using our business loan quote tool at the top of this page.
Is Collateral Necessary For Business Term Loans?
Business term loans could be secured or unsecured.
Secured Business Term Loans:
A secured loan means the loan is tied to “security” or “collateral.” This is something of value that the lender has the right to seize should the borrower not make payments on the loan as agreed.
An equipment loan is an example of a secured business term loan. In the business world, a secured business term loan often gets tied to a specific item, equipment, or another capital asset. In some cases, business loans get secured with a “blanket lien” on a business. So your entire business is considered the asset that’s securing the loan.
Let’s say you take out an equipment loan of $50,000 to buy a new piece of machinery. Should you default on that loan, or not pay it back according to the terms of your loan agreement, the lender could repossess the equipment.
Lenders like secured loans because it reduces their risk of losing out on the money they lend. Borrowers like secured loans because they generally come with lower rates than unsecured business loans. And since they’re considered lower risk to the lender, borrowers with poor credit might have a better chance of qualifying than they would for an unsecured loan.
Unsecured Business Term Loans:
Borrowers use unsecured business loans for all sorts of things. The interest rate might be higher than for an unsecured business loan, but they offer flexibility when you need funding.
Can I Get a Business Term Loan with Bad Credit?
This product is available to borrowers with bad credit, but your interest rate and terms will be less convenient. However, if you can provide collateral or fulfill the other requirements with flying colors, poor credit history may have less affect on your borrowing amount, rates and terms. You could also apply for a short-term Working Capital Loan instead, which carries the same repayment structure as a Business Term Loan but is much more accessible for borrowers with bad credit. Paying off this loan on time will likely make you eligible for a larger borrowing amount, lower rates, and longer terms.
If you want to access the best possible rates and terms and don’t need money right away, you should definitely consider our credit repair services. It’s always beneficial to do whatever you can to improve your credit score before applying for products that often carry low rates and long terms.