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Intro To Business Term Loans
When people talk about small business loans, they are usually referring to Business Term Loans. This is the most traditional and well-known type of small business loan. The borrower receives a lump sum that is paid back with interest via fixed monthly payments over a fixed loan term. Despite the inconveniences of this repayment schedule, many companies still prefer it over other financing options. This is because when it comes to growth and significant investments, no product may be as conducive to your cash flow as a business term loan.
In this guide, we’ll answer the following questions and more:
What Is a Business Term Loan?
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.
How Do Business Term Loans Work?
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.
Example of a Business Term Loan:
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.
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 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.
What Are The Advantages of Business Term Loans?
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.
What Are The Disadvantages of Business Term Loans?
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.
- Fixed monthly payments
- Longer loan terms
- Less than perfect credit accepted
- Use for a variety of business purposes
- Same payment even when business is slow
- Possible prepayment penalties
- Could require more years in business
- More requirements than most short term loans
Business Term Loans Compared To Other Products
|LOAN TYPES||MAX AMOUNTS||RATES||SPEED|
|Merchant Cash Advance||$5k – $1m||Starting at 1.09||1-2 business days|
|SBA Loans||$50k-$10m||Starting at 3.75%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Line of Credit||$1k to $450k||Starting at 1% p/mo||1-3 business days|
|Receivables/Invoice Factoring||$10k-$10m||Starting at 1% p/mo||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 3.5%||3-10 business days|
|Revenue-Based Financing||$10K – $5m||Starting at 1% p/mo||1-3 business days|
Who Qualifies For Business Term Loans?
Approved businesses generally met the following criteria:
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 Financing Needs
Before you begin the process, take some time to make sure this is the right financing option for your individual needs. Will you be able to access your desired working capital amount? Will you be able to fulfill the repayment structure? Answering these questions ahead of time will ensure that you don’t run into liquidity issues when making payments.
Step 2: Gather Your Documents
The application requires the following documents and information:
- Driver’s license
- Voided business check
- Business bank statements from the past three months
Step 3: Fill Out Application
You can begin the process by calling us or filling out our one-page online form. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to Representative
Once you apply, a representative will reach out to you to explain the repayment structure and rates 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 appear in your bank account in 1-2 business days.
Your Business Term Loan Gets Set Up – Now What?
Your business term loan isn’t just a way to get financing for your company. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of small 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 term loan payments on time and in full will positively impact your credit score. And that means preferred rates and terms when you next need small business financing.
What If I’m Declined For a Business Term Loan?
Lenders can decline loans for a host of reasons. Maybe your personal credit score or annual revenue wasn’t up to par. Maybe your cash flow wasn’t strong enough to sustain the fixed monthly payments required for a long-term loan option. But this doesn’t mean you won’t qualify for other highly beneficial small business financing products.
No, these other working capital products 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 conditions. 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 loans from traditional banks. At UCS, we can help you explore your options and point you in the direction of the most sensible option.
People Also Ask:
Is a Business Loan The Same As a Business Term Loan?
Initially, the words “small business loan” were only used to describe conventional loans. Today, however, these two words can refer to any small 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 and is one of the most popular SBA loans. Microloans often help new and young companies 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 Small Business Administration, provide eligible businesses with SBA Loans like microloans for various uses, such as buying inventory, production equipment or machinery, office equipment, supplies, and even paying staff members.
According to the SBA’s most recent figures for SBA Loans, in 2019, the average microloan was $14,735, with an interest rate of 7.35%.
Can I Pay Off My Business Term 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. That’s because it depends on the interest rate and the terms of your loan.
Many business loans come with a lower rate than other forms of business financing. It could make more sense to pay off higher interest rate business credit cards or credit lines first.
As you can see, this is a great question to ask the business lender before getting started.
What’s The Difference Between Business Term Loans And Business Credit Lines?
Small businesses use term loans and credit lines to help finance their companies, yet they have some pretty significant differences.
With a small business 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.
On the other hand, you get what is known as revolving credit with a business credit line. This means that borrowers get approved to borrow up to a preset limit like a business credit card.
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 small 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 small business loans and business lines of credit is how payments work. With most loans, you’ll pay the same amount for 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, business term loan interest rates start at 5%. Your monthly payments for your business term loan will be smaller than they would be for other types of small business loans. That’s because you pay off business term loans in a matter of years, not weeks or months. If you want to estimate your loan payment costs, try using our small business loan quote tool at the top of this page.
Is Collateral Necessary For Business Term Loans?
Collateral isn’t always necessary. 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 like real estate 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, small business loans get secured with a “blanket lien” on a business. So your entire company 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. According to your loan agreement’s terms, the lender could repossess the equipment if you default on that loan or do not pay it back.
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 history 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?
Online lenders have made 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, personal guarantee, or fulfill the other requirements with flying colors, poor business credit history may have less effect on your borrowing amount, rates, and terms. You could also apply for a short-term loan instead, which carries the same repayment structure as a long-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 loan rates, and a longer term.
If you want to access the best possible loan 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 a longer term.