Term Loans in Business Lending

Term loans are a lending option that can provide incredible benefits to suit a wide variety of business needs. In this post, we’ll review the basics of term loans, what you will need to obtain a term loan, and discuss how a term loan can benefit you and your business.

What is a term-loan?

“A traditional business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The ‘term’ in ‘term loan’ comes from its set repayment term length. Most business owners use the proceeds of term loans to finance a specific, one-off investment for their small business (Fundera.com).” Here are the basic facts:

  • Short (less than 1 year), intermediate (1-3 years), and long-term loans (3-25 years)
  • Interest rate: 7-30%. Variable interest rates are also available
  • Total loan amounts can vary widely
  • Applicant businesses have typically been around for more than 2 years and possess sound financial statements
  • Generally, carry no penalties for early repayment

Of course, not all lenders have the same requirements, and not all applicants have the same backstory. Just like shopping for insurance, the best practices while reviewing lending options, is to evaluate several lenders, and find the one who offers the best fit for your individual needs. Keep in mind that depending on those needs, you might be able to manipulate the loan term to either pay it off more quickly (if you are able to handle a higher monthly payment); or more gradually, if you need an injection of cash without the burden of a hefty loan payment.

What do you need for this type of loan?

  • Complete business plan. Lenders will want to know you have a concrete plan of how you plan to use their money.
  • Prepare all of your cash flow information and financial statements.
  • Again, have a solid plan and let the lender know how you plan to use the money to grow your business. *Some banks use these loans in hopes of the small businesses becoming profitable customers. This should be a part of your pitch (you’re growing, hopefully).
  • Identify any assets that you might have available to use as collateral (if required by the lender).

Term and “Micro Loans” can suit a wide variety of business needs

  • Purchasing new inventory
  • Buying or servicing expensive machinery
  • New office supplies and equipment
  • Employee’s wages to spur growth
  • Financing an expansion

If your business is in need of any of the aforementioned items without a clear idea of how to fund them, a term loan might be a good fit for you. Since these can be expensive loans to underwrite, some of the bigger banks are taking a conservative line and sticking to traditional loans. So it would benefit you and your business to target private lenders, community banks, or credit unions when researching this type of loan. As always, Bellwether Funding is there to answer any questions you might have about the wide array of funding options available.

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