Business term loans are used to purchase the assets needed by a business, such as equipment, inventory, or land. Assets often secure these term loans, but other conditions can apply. While other types of loans are more familiar to borrowers, many business owners need to realize that a business term loan could be a valuable financial tool to help them succeed. If you want to know about a business term loan and how it can help you, here are a few things to know.
What Is a Business Term Loan?
These business loans are called term loans because the amount will need to be paid back over a specific amount of time. Some business term loans could have an amortizing term, meaning the balance will be zero at the end of the period. Other loans may require a balloon, or lump sum, payment at the term’s end. While term loans are usually used to purchase equipment or real estate, business owners can use them for short-term purchases to boost working capital. Many of these business term loans will have a repayment period of less than a year, but long-term loans could have a repayment term of up to 10 years.
There are three main types of business term loans: conventional, government-guaranteed, or hard money.
A conventional business term loan is typically found at traditional banks. Many business owners can walk into a local bank and apply for a term loan. However, these loans have stringent credit requirements. Often, the business owner will need to back the loan with collateral and ensure there is plenty of reliable cash flow to repay the borrowed amount.
Another type of business term loan is a government-guaranteed one. The most common is a Small Business Administration (SBA) loan. These loans allow businesses to qualify for funding, even if they don’t meet the requirement established by a traditional lender. A government-guaranteed loan is available to most companies as long as they meet a few conditions.
Hard money loans are based on the business’s collateral. The lender will place a value on the collateral and lend around half the amount. These loans often have high interest and higher payments. If the business cannot repay the loan, the lender can repossess the collateral to recoup their losses. These types of loans should only be used as a last resort. Generally, hard money loans do not have favorable terms for the business and could lead to serious financial consequences.
Getting approval can be challenging for some business owners. Usually, working with an online lender is more accessible than those traditional banks or financial institutions. An online lender offers more convenient and flexible terms than your local bank.
Secured vs. Unsecured
Business term loans can be either secured or unsecured. Any secured term loan will require some form of collateral. If the borrower defaults on the repayment, the lender will repossess the collateral and use it to cover any of the loan’s debts. With collateral, there is less risk to the lender. In many cases, getting approval for a secured loan is harder, especially for those with less-than-good credit. Also, the application can be more complicated than applying for an unsecured term loan.
On the opposite end, an unsecured term loan does not require any collateral. Instead, business owners must meet the requirement established by the lender for creditworthiness and income. Once the lender analyzes the borrower’s creditworthiness, they will determine the risk for the loan. During risk analysis, the lender will either approve or deny the application. The interest rate, loan amount, and fees will also be outlined. Like any loan, a great credit score means the likelihood of approval with lower interest rates.
Many lenders will require borrowers to have a minimum credit score. Sometimes, business owners can get a short-term loan with bad credit, but that will depend on the specific lender. Typically, these term loans require a credit score of at least 680. However, lenders will determine the time in business, revenue streams, and monthly transaction activity. Always review the specific requirements of a lender before submitting an application.
Choose a Business Term Loan for Financing
There are several reasons a business might want to choose a term loan for its financing. It allows the company to match cash payments with its asset use. When a big asset is purchased, all the cash is depleted at one time. Term loans can spread out the costs over a specific term, helping many businesses keep available money. These types of loans also allow companies to make bigger purchases than they might not be able to do with a traditional loan. Business term loans provide leverage, which can help grow a business in the long term.
What Is the Difference Between a Term Loan and a Line of Credit?
Many business owners may have to choose between a line of credit and a term loan. The answer depends on whether the business needs the total amount immediately or over a set period of time. With a line of credit, the company has access to a lump sum of money that can be withdrawn when needed. The borrower must pay interest on the withdrawn amount. The business can save money if it needs only a limited amount of funding. A business line of credit requires monetary payments to keep the line current. In some situations, the line of credit could have a set draw time when the business can withdraw funds. After that, the line of credit enters a repayment period and acts like a term loan.
A term loan provides the total amount of the funds immediately. A business can use all those funds at once or spread them out over time. With these loans, the interest rate charges will begin at the moment of disbursement. After that, the business will have to make payments on a fixed schedule until the loan is paid. Choosing the right loan will depend on how a company wants to use the additional funding.
Consider These Options for a Term Loan
When you need to make a large purchase for your business, consider a business term loan. You could be well-suited to apply for these loans if you meet specific requirements and have reliable revenue. These loans often give you the right leverage to grow your business.
Get Approval from a Commercial Business Lender
At New Bridge Merchant Capital, we have become a trusted leader in the finance industry. We will work with you to find suitable funding options for your business. Contact us if you need help selecting the right loan or line of credit for your business.