A business term loan is an excellent option for business owners who want to invest and expand their commerce but lack the necessary funds. Depending on their needs, borrowers have various options to choose from to find the right loan that helps their business grow.
What is a Business Term Loan?
A business term loan is a type of loan for business owners who wish to finance their business needs.
These loans are issued by banks, credit unions, and online lenders. Borrowers can use the money for various purposes such as purchasing office equipment, boosting working capital, or expanding and renovating the business. Business term loans are repaid in regular payments at a fixed interest rate over a set period of time. It is a secured loan that requires collateral.
Up to $500,000
Up to 5 years
7% to 30%
In as little as seven business days
What Are the Different Types of Business Term Loans?
There are three types of business term loans for different necessities. Business owners have the option to borrow a short-term loan if their business is experiencing seasonal revenue fluctuations and require a small loan to cover their expenses. The borrower may repay the amount in up to 12 months.
Borrowers who want to expand their business or purchase new equipment can borrow a medium-term loan. The repayment period varies between one and three years; however, some lenders may extend the term up to five years.
Business owners can also borrow a long-term loan to undertake massive construction projects that require a large amount of money and time. However, it may be quite hard to qualify for a long-term loan because borrowers must have an excellent borrowing history without any past negative marks. Qualified borrowers may repay the borrowed money between three and 10 years. Depending on the project, some lenders may extend the term up to 25 years.
An SBA loan is a small business loan backed by the U.S. Small Business Administration. The SBA has several loan programs to help the growth and expansion of small businesses. The SBA microloan is the smallest loan program and most beneficial for small business owners because they may qualify for term financing up to $50,000. Meanwhile, the SBA 504 loan is the largest loan program, and business owners may be eligible for up to $5.5 million to purchase fixed assets. The repayment schedule varies by program. You can request this type of loan via a lending institution such as a bank or credit union.
Commercial Real Estate Loan
A commercial real estate loan is a mortgage that is secured by a lien on commercial property. This type of loan is meant to finance income-producing real estate that is used for business purposes. Income-producing real estate can include hotels, malls, medical centers, and warehouses. A commercial loan requires a down payment of 20% to 30% of the total amount, while interest rates range between 10% and 20%. Interest rates for the SBA 504 loan are slightly lower at about 7% to 10%.
Startup Business Loan
Starting a new business requires a bit of capital, and that’s where startup business loans can come in handy. A startup business loan can help cover expenses associated with operating a new business, such as purchasing fixed assets or hiring employees. However, obtaining this type of financing from a bank or credit union could be difficult because of the higher risk associated with the loan. However, if you have a solid business plan and a high credit score, you could increase the likelihood of getting a startup business loan. The repayment term is around five years.
If a business has a lot of unpaid invoices from customers, they can leverage them for capital through invoice factoring. Also referred to as accounts receivable financing or invoice financing, business owners can get an advance on their unpaid invoices. Advances on unpaid invoices range around 90% of the total amount. In return, the business pays a small weekly fee for borrowing the money. Invoices act as collateral. The customers can either pay their outstanding invoices to the business, and the business will repay the lender. Or the factoring company could take charge of collecting the money directly from the consumer and remit the remaining 10% of the invoice amount to the business.
Businesses that are searching for ways to finance new equipment purchases may consider applying for equipment financing. Instead of buying the machinery outright, businesses can pay for their investment in installments over five years. It can be any equipment, from heavy machinery to IT equipment. The equipment itself acts as collateral. If the borrower defaults, the lender can repossess the equipment back. When the loan is paid in full, the business gains full ownership of the equipment.
Business Line of Credit
Even though a business line of credit is not technically a loan, it is a popular flexible financing option for businesses needing cash. Instead of receiving money upfront, you may qualify for a maximum amount and draw funds as needed. You will only pay interest on the amount used, not the total amount available. As you repay the line of credit, you will have access to those funds again. This type of financing is beneficial in addressing unexpected expenses or covering seasonal cash flow shortages.
Business Credit Card
A business credit card is more effective in managing business finances than a personal credit card by allowing you to separate your business and personal expenses. Business credit cards can be used for any business-related expense. When timely payments are made, it can help build your business credit. However, business credit cards usually carry a higher interest rate because they are unsecured and pose a higher risk for lenders. Business owners can request a business credit card with an EIN or use their social security number.
Merchant Cash Advance
Business owners searching for an easy business loan could consider requesting a merchant cash advance. This alternative financing option is great for businesses that need quick capital. If approved, the lender advances an upfront lump sum of cash. In exchange, the lender receives a percentage of future debit and credit card sales. The repayment term varies and is not based on set payments. Alternative lenders may ask for collateral. However, the sum can be used to finance any business need.
Costs and Regulations of Business Term Loans
Costs and regulations for business term loans may vary by lender. The provider will let the borrower know the maximum funding amount they can offer. Borrowers can request a loan up to $500,000 with a maximum term of 25 years. Business term loan interest rates range between 7% and 30%. If qualified, business owners may receive the desired amount in up to seven days.
Business Term Loan Requirements
Business owners wishing to qualify for business term loans must have a good credit score. Their business must be in operation for more than three years and have an excellent annual revenue. Alongside the loan application form, borrowers may also be asked to present the following:
- Personal and business information
- Proof of ownership
- Business license
- Personal and business bank statements
- Financial statements
- Personal and business credit score
- Personal and business tax returns
Advantages of Business Term Loans
One of the most significant advantages of business term loans is their fixed payment schedule. This allows borrowers to establish a solid money management plan.
Borrowers seeking a quicker application process may request a loan from online lenders. In comparison to banks, online lenders may offer faster applications and more flexible requirements.
Another advantage is that these loans can be used for various purposes that help borrowers invest in their businesses.
Business term loans allow business owners to build and improve their credit score by paying back the borrowed amount on time.
Disadvantages of Business Term Loans
One of the disadvantages is that business term loan lenders require collateral or a guarantor to advance the desired amount. If the borrower fails to repay the loan, the collateral may be repossessed by the lender.
According to the agreed terms and rates, some lenders may also penalize borrowers who fail to repay their loans.
Another disadvantage is that borrowers must start paying back their loans as soon as they receive the money, even if they didn’t start making a profit.
Even though business term loans are an excellent option to help businesses grow, it is essential for the borrower to wisely decide which company to borrow the amount from because the application process and the business term loan rates will depend largely on the lender.
Frequently Asked Questions
Business loans from banks may be beneficial for some borrowers. A bank loan may offer more favorable terms if you seek a large amount and have good credit. However, if you do not meet the strict requirements for a bank loan, you may opt for a business loan from an alternative lender. Additionally, alternative lenders may offer smaller loan amounts and quicker funding. Although, alternative lenders typically charge much higher interest.
Typically, most lenders will require a minimum score of 600 for a traditional business loan.
The amount you are approved for may depend, in part, on the lender and your business’s annual gross sales, outstanding debt, and creditworthiness. As such, the amount you get will vary.
The principal amount plus interest is repaid in equal monthly installments. The length of the loan term may depend on factors such as the lender, your eligibility, and loan amount.
In most cases, yes. If your lender reports your timely payments to the credit bureaus, it can help boost your business credit. However, if you fail to make payments or default on the loan, your credit can suffer.