Are you one of those start-up freaks and want to have a business of your own but worried about finances? No more worries because a small business loan will have you covered.
Small business loans enable you to kickstart your very own venture. And not just that, they also help existing businesses manage their cash flow issues. The finance sector has several options; therefore, we have put together answers to all your questions – so you can decide your preference for business loans and financing.
What Is A Business Term Loan?
A business term loan is similar to a standard loan where you apply for a loan at a bank or a money lending firm that gives you an amount of money which you can use as your capital. It usually ages between one to five years – this can, however, vary depending on whether it is a long, medium, or short-term loan.
You will be expected to make regular repayments to pay the loan off and will be given a fixed time to do so; the repayments will also include a fixed amount of interest on the loan that you’ll have to pay. But the best part of business term loans is that you will have to pay a lower interest rate and benefit from a longer repayment timeline as an additional benefit. Usually, banks, credit unions, and online lenders issue business term loans.
Business Term Loan Details
You must know a few key details about business term loans before applying for them. First of all, the maximum loan amount is normally up to $600,000, and with the average loan term for repayment being between one to five years. Interest rates usually fluctuate between 7% and 30% depending on your credit score and the lender's policy.
To help you decide where to go for business term loans, we have compiled a list of the top 3 business term loan lenders.
TAB Bank is one of the best money lenders in terms of medium-term loans. It offers loans for amounts up to $200,000 with fixed interest rates. Their application process is fairly simple and straightforward as compared to other lenders in the market. In addition to business term loans, they also offer financing for all sorts of business needs, such as debt refinancing. You know why TAB Bank stands out? It is because they have no repayment penalties.
For short-term loans, Credibly is the way to go. Credibly is an online lending company which offers both working capital loans and business expansion loans. Credibly lends amounts up to $400,000 with a term length of 6 to 18 months. Their application process is also very simple, and you will receive an approval within 24 hours of submitting your application. Isn’t that cool?
If you wish to acquire a smaller loan to start your venture or plan to revamp it in any way, Opportunity Fund is the ideal option for you. Opportunity fund finances up to $250,000 with a repayment timeline between one to five years. For new business owners, this is an easy way to improve their credit score because of its convenient repayment timeline.
How Do Business Term Loans Work?
To acquire a Business Term Loan, you would have to apply to get one at any of the options mentioned above or any other financial institution offering these loans.
Once the loan is approved, you’ll receive the amount. Both parties will seek an agreement to decide interest rates and repayment timelines. After which, you will start repaying your loan with equal installments throughout the loan age.
Business Term Loan Rates and Terms
Generally, business term loans have repayment periods that range from one to five years. Regardless of the term length and payment schedule, repayments for business term loans are equal throughout the loan term. And you'll find that the longer the repayment period, the more lenders are willing to finance.
Business Term Loan Example
For a better idea of how business term loans work, let’s look at an example.
A small business owner applies for a business term loan where they receive an offer for a loan of $100,000 with bi-monthly payments for a one-year term. Consider the interest rate for this loan as 10%. After using a loan calculator, the owner found that the payment they would be making every two weeks is equal to $4395.80, and the overall cost at the end of the year is $105,499.06. Which means that they paid the additional $5,499.06 as interest over the course of one year.
Types of Business Term Loans
- Long Term Business Loans: Terms for such loans can extend up to 25 years. Borrowers are expected to have a clean credit history since these are heavy amounts and require credibility and trust between the parties
- Medium-Term Business Loans: Repayment terms for this type of loan are generally 1 to 5 years. Medium-term loans are available from online lenders, banks, and credit unions. They also have strict requirements but not as much as long-term loans
- Short Term Business Loans: These loans are usually available from online lenders only; hence they have the most flexible requirements. But they also have the highest interest rates
Pros And Cons Of Business Term Loans
- Can cater to a range of business needs
- Constant repayment structure
- Quick funding from online lenders
- Helps increase business credit score
- Requires collateral or a personal guarantee
- Potential prepayment penalties
- May have higher fees than other small-business financing options
How To Get A Business Term Loan
While requirements may vary between lenders, here are the general expectations lenders have from borrowers.
Credit History: Minimum credit score of 600
Time in Business: At least one year in business
Financial statements: A minimum annual revenue of $100,000
Applying For A Business Term Loan
While applying for a business term loan, it is crucial to double-check whether you have submitted all the required documentation. We have made a checklist for you to facilitate you:
- Business loan application
- Extensive documentation
- Basic personal and business information, including a driver's license, proof of ownership, business license, etc.
- Personal and business bank statements
- Financial statements such as your balance sheet and profit and loss statement
- Personal and business credit score
- Personal and business tax returns
- Proof of collateral or UCC
- May require a personal guarantee
- Review all the details of the terms, fee, and liabilities
The Bottom Line
With the wide variety of business term loans and financing options available, it's no wonder that this is the most popular method of small business financing. With this information, we hope you can choose the best option for your business and its needs.