How Do Business Term Loans Work?
A business term loan is a right option when you need some cash to finance your business activities, such as purchasing inventories, paying employees, repair of equipment, and many more.
It is crucial to note that the size of a term loan ranges between $1, 000 to $4million. Also, you can get this facility at an annual percentage rate of 5% to 99%.
Although banks offer these facilities at low-interest rates, they impose stringent conditions, and they take a long time to approve and disburse the money into the customers’ account.
In case you need instant credit, you may try online lenders because their qualifications are more comfortable to meet.
An excellent example of a business term loan is the Small Business Administration (SBA) Loans. Both online lenders and banks offer these loans. It is vital to note that SBA loans are guaranteed by the federal agency – SBA.
The repayment of a business term loan is based on an amortization schedule. This implies that most of your initial payments go towards servicing the interest, and the final payments are meant to clear the principal.
In case you want to pay off your outstanding balance early, you can do so to save on interest, even though some lenders charge penalties for early payment.
A number of small business owners find it challenging to raise working capital for the growth of their businesses because of several reasons. If you want to build your credit score and get adequate funds for your company, then a business term loan is an ideal solution for you.
How Business Terms Loans Are Defined
A business term loan is a credit facility you obtain from lenders and regularly pay at a fixed rate of interest. The repayment period for this product varies across financial institutions, and it can range from a few months to more than five years.
Note that the majority of lenders are willing to give you a more extended repayment period for term loans that are secured by collateral. As a business person, you can use a term loan to finance your projects, such as opening a new location and replenishing your inventory.
Types of Business Term Loans
There are different types of term loans, as explained below.
Equipment term loans
With an equipment term loan, you can access up to 100% of the value of an asset. Note that the equipment you get through the loan acts as collateral, and because of this, equipment term loans are characterized by low monthly installments.
Asset-based term loan
An asset-based term loan refers to a credit facility secured by your business equipment, especially when your cash flows are not sufficient to meet the lender’s requirements.
The amount of loan you are eligible for depends on the collateral you intend to put up for the facility. The majority of banks require guarantees, such as equipment, real estate, account receivables, and marketable securities.
Before you get an asset-based term loan, you have to fill in the loan application form and then submit vital documents to your lender. These documents include bank statements, business tax returns, and financial statements.
SBA term loans
SBA term loans are credit facilities that are guaranteed by the Small Business Administration and offered by approved lenders to business people. SBA loans are characterized by a long repayment period and low-interest rates. Because the federal agency guarantees these loans, the majority of financial institutions don’t impose stringent restrictions on them.
SBA loans are suitable for almost all industries, and any business person can apply it as long as they meet the requirements. However, some sectors are not eligible for these facilities, such as gambling and religious training.
It is essential to note that applying for an SBA term loan is a challenging task because it takes time and requires a lot of documentation.
If you want to shorten the approval time, you should beware of all the requirements before you start the application process. Some of the mandatory documents required include business tax returns, driving license, financial statements, bank statements, and many more.
Small business bridge loans
A bridge loan is a credit product offered to business people to meet particular requirements, such as investing in a profitable venture, paying unexpected bills, or catering for inadequate cash flows.
For you to apply for a bridge loan, ensure that you have adequate cash flows that you can use to repay your credit over a short time. Moreover, note that applying for a bridge loan is a straightforward thing.
What you are supposed to do is to fill up a loan form, attach all the relevant documents, submit the application, and then wait for the approval. Also, note that this facility is considered in a short period, usually less than two days.
Multi-year term loans
A multi-year term loan is a credit facility that is advanced to you in lump sums, and it is usually paid between two to five years. With a multi-year term loan, you can enjoy low monthly repayments, hence leaving you with adequate cash for your business requirements.
For you to qualify for a multi-year loan, you must have a good credit rating and excellent financial records. Also, other documents, such as bank statements, tax returns, and annual financial statements, are necessary while making the application.
What is the Cost of a Business Term Loan?
The cost for a business term loan may include interest rate, loan application fees, legal fees, valuation fees, and prepayment fees. Make sure that you read the offer letter to familiarize yourself with the loan terms just before you sign it.
Qualifications for a Business Term Loan
In order to qualify for a business term loan, there are the mandatory requirements that you have to meet. The following is a highlight of some of the essentials you need to have to get a business term loan.
The right credit score
A credit score demonstrates your loan history and proves to your lender your trustworthiness. Most financial institutions require you to have a credit score of at least 600 to qualify for the facility.
A business plan describes your enterprise to your financiers. When preparing this document, ensure that you indicate your proposed revenue. Also, include vital details, such as the age of your firm and average annual income.
A balance sheet shows details of assets and liabilities over a particular period. Lenders use this document to evaluate the strength of your enterprise before advancing your credit.
Cash flow statement
A cash flow statement shows the inflow and outflow of money. It is essential to note that this document reveals the sources of your income and your expenditure. An excellent cash flow statement confirms to lenders that your company has adequate funds, and you are able to repay the loan you are applying for.
Business tax returns
Before your loan is approved, lenders check your tax compliance through your business tax returns.
Types of Collateral Used for Business Term Loans
There are many types of collateral that you use for a business term loan, as highlighted below.
Equipment, such as machinery, can be considered as collateral during your loan application. Note that lenders value the machine based on its condition, year of manufacture, and model specifications.
Usually, for new equipment, lenders can advance you up to 100%, and for the used one, you are eligible for an amount not exceeding 75% of the value of the asset.
Real estate is a physical asset that is suitable to guarantee your business term loan. With real estate, you can only get the first mortgage from traditional lenders, such as banks, but alternative lenders can offer you a second mortgage.
Like other assets, you can use inventory as collateral for a business term loan. The amount of credit you can get against this asset is based on its nature, location, and its ease of liquidation. Note that an inventory is assigned a higher value based on how faster it can be converted into cash.
A purchase order is a business document originating from your customer requesting you to supply them with goods. Once you receive it, you are supposed to accept or reject it.
Note that a purchase order has very vital particulars relating to the terms of your business transactions. These details include price, quantity, conditions of sale, and delivery date. You can use a purchase order to secure a business term loan.
Advantages of Business Term Loans
The following are the pros of business term loans.
You can apply large credit facilities to enhance your business expansion
Some products under business term loans have more extended repayment periods; hence their monthly installments are affordable.
Timely payment of term loan can help you have an excellent credit rating
Applying a term loan via online lenders can be approved within a short time
Getting term loans from online lenders is more comfortable because they have looser conditions than traditional lenders.
Disadvantages of Business Term Loans
Unlike a business line of credit, repayments for this loan start once you get the money.
Term loans paid over a shorter period are expensive since they have higher monthly installments
Although SBA loans are less costly, they are characterized by strict requirements, and they take so long to be approved.
Business term loans may require collateral that you might not have. In case you fail to repay your credit, your asset may be disposed of to clear the outstanding balance.
Reasons Why You Need a Business term Loan
A business term loan can help you grow your business without spending your normal cash flows.
Business expansion may entail investing in a new opportunity, hiring more workers, or renting a new business premises.
Purchase of Inventory
As an entrepreneur, you must have adequate inventory to meet the demand of your customers.
Sometimes, you may not have sufficient cash to replenish your stock; hence the need to opt for a business term loan.
Cash flow is a very critical aspect when it comes to managing your business.
Sometimes, your customers may delay paying their debts, and this may make you have a shortage of cash.
In such a scenario, you will have no choice other than to apply for a business term loan. To buy business equipment. Business equipment is vital in your normal operations.
Every enterprise requires a different type of machine based on the service it offers. For instance, if you are in cyber business, your assets will include computers, printers, and photocopiers.
Sometimes, equipment may breakdown or become dysfunctional, and you may lack immediate cash to replace it with a new one.
In such a circumstance, you may need a business term loan to purchase the asset.
To enhance your credit rating in preparation for a larger loan
It is crucial to note that the majority of lenders can only give you a big loan based on your credit history.
Therefore, if you want to boost your credit rating, you may borrow a small business term loan and then repay it quickly to qualify for a more significant credit.
Final Thoughts on Business Term Loans
A business term loan refers to credit that you obtain from lenders and regularly pay at a fixed rate of interest. With this product, you can pay up to five years.
However, if you want to pay for an extended period, then you must secure your facility.
For you to qualify for a business term loan, you must have an excellent credit score, a detailed business plan, a sound balance sheet, business tax returns, and cash flow statement.
With a business term loan, you can secure it using any collateral, such as inventory, commercial real estate, equipment, and marketable securities. The amount of credit you qualify for is based on the value of the collateral.