Embarking on the journey of entrepreneurship is exhilarating and challenging, and it also requires a significant infusion of capital. That is why you are looking for how to choose the right term loan. Small business loans serve as the lifeblood of many enterprises, fueling growth, bridging cash flow gaps, and enabling strategic investments. As such, you need to know how to navigate the landscape of term loans and choose the one that will meet your unique business needs.

This comprehensive small business owner’s guide to choosing the right term loan will demystify all of that and more. Let’s get started.

Understanding Term Loans

Let’s start with the basics: What exactly is a term loan? Think of it as your business’s financial backbone. A term loan is a structured lending arrangement where you receive a lump sum of capital upfront, which you commit to repay over a predetermined period, typically with interest.

There are different kinds of term loans, which will be explained in a moment. Each loan type has unique requirements that you will need to fulfill before being approved.

Why Consider a Term Loan?

Term loans offer versatile solutions to a multitude of business needs, making them a go-to choice for entrepreneurs across various industries. Here’s a deeper dive into why term loans are an indispensable resource:

Benefits of a Term Loan

• Retain Full Control: Securing funds through term loans allows you to maintain complete control of your business. Unlike equity investments, where you might relinquish ownership or decision-making power, term loans empower you to steer your enterprise independently.
• Speedy Funding: Time is often of the essence in the business world. While securing capital from venture capitalists or angel investors can be a lengthy process, applying for a term loan from banks, credit unions, or online lenders often results in swift approvals. In fact, some online lenders can green-light your application within minutes.
• Cost-Effective Borrowing: When comparing borrowing costs, term loans tend to offer a substantial advantage over credit cards. For business owners with strong credit scores, term loan interest rates typically range from 4.9 percent to 9.83 percent, while business credit cards carry an average interest rate of 24.2 percent. It’s worth noting that your credit score plays a pivotal role in determining the cost of borrowing.

Questions to Ask Before Choosing a Small Business Loan in NJ

Before immersing yourself in the world of term loans, it’s imperative to introspect and assess your specific business requirements. These questions will assist in pinpointing your needs, getting to the root of the matter of what will work best and which option is most affordable.

Keep your answers to the following questions on paper or in the back of your mind as you sift through your term loan options:

How much do you need?

Precision is key. Determine the exact amount required to meet your business objectives. Overborrowing can result in unnecessary interest expenses, while underborrowing might leave you short of resources.

What is the purpose of the loan?

Clearly define the purpose of the loan. Are you seeking short-term working capital, financing for essential equipment, or a long-term investment in business expansion?

How long will it take to repay?

Assess the time horizon for repaying the loan. The loan term significantly impacts your financial obligations, so choose wisely.

What is your business track record?

Reflect on your business’s history. How long have you been in operation, and what’s the current financial health of your enterprise?
Have you considered collateral?

Evaluate whether you have assets to offer as collateral for the loan. Collateral can influence loan terms and interest rates.

What are your personal and business credit scores? Understand your credit score and its potential impact on loan terms and eligibility.

Do you have any other financial obligations?

Take stock of any existing loans or outstanding debts your business carries.

Have you weighed short-term vs. long-term loans in NJ?

Determine whether your needs align with a short-term loan to address immediate cash flow issues or a long-term loan for substantial investments.

Your Options for Small Business Term Loans in New Jersey

Now that you have more clarity about your business needs, it is time to explore you loan options. The financial market offers a variety of choices that fall into two categories:

Small Business Administration (SBA) loans
Conventional bank loans

Let’s look at these in more detail.

Small Business Administration (SBA) Loans

The Small Business Administration (SBA) plays a pivotal role in facilitating access to capital for entrepreneurs. While the government doesn’t directly extend loans to small businesses, it partners with banks, community development organizations, and microlending institutions to provide loans while mitigating lender risk.

Pros of SBA Loans

• Government Guarantee: One of the standout features of SBA loans is the government’s guarantee, covering a significant portion of the loan amount, usually ranging from 75 percent to 90 percent. This guarantee substantially reduces risk for lenders, making them more inclined to extend favorable terms to borrowers.
• Favorable Terms: Due to the reduced risk associated with SBA loans, borrowers often enjoy more favorable terms, including lower interest rates and extended repayment schedules.

Cons of SBA Loans

• Approval Duration: The approval process for SBA loans can be more time-consuming than other lending alternatives, often due to the meticulous evaluation process. This often takes anywhere from 30 to 90 days.
• Extra Fees: Borrowers should be prepared for additional fees associated with SBA loans.
• Additional Paperwork: Compared to alternative lenders, SBA loans require far more documentation and paperwork.

The Different Types of SBA Loans

SBA loans encompass a range of programs tailored to meet diverse financing needs. These programs facilitate access to capital by partnering with lenders and reducing their risk through government guarantees. The most common SBA loan programs include:

7(a) Loan Program

The 7(a) loan is the SBA’s flagship program and offers versatile financing solutions for various purposes, such as working capital, equipment acquisition, debt consolidation, and more. Loan amounts can reach a maximum of $5 million, with flexible maturity terms. Usually maturities are up to 10 years for working capital and generally up to 25 years for fixed assets.

Microloan Program

Geared toward new or growing small businesses, the Microloan program offers smaller amounts, typically up to $50,000, to fund working capital, inventory, supplies, furniture, fixtures, machinery, or equipment. Microloan terms vary depending on factors such as the loan amount, planned use of funds, and requirements set by intermediary lenders.

Disaster Loans

In times of disaster declarations, the SBA provides low-interest disaster loans to businesses, helping them repair or replace real estate, machinery, equipment, inventory, and business assets damaged or destroyed by disasters. These loans can go up to $2 million for qualified businesses.

Real Estate and Equipment Loans

The CDC/504 Loan Program is ideal for businesses seeking long-term, fixed-rate financing for significant assets like equipment and real estate. This program operates with a structure where the SBA covers 40 percent of total project costs, a participating lender finances up to 50 percent, and the borrower contributes the remaining 10 percent. Loan amounts can reach $5.5 million, with 10- or 20-year maturity terms.

Conventional Bank Loans

Getting a conventional bank loan continues to be a reliable source of business financing that offers both advantages and challenges for businesses to consider.

Pros of Conventional Bank Loans

• Fast Approval: Due to the absence of federal agency involvement, the approval process for conventional bank loans can often be expedited.
• Low Interest Rates: Conventional bank loans are typically associated with low-interest rates, making them an attractive option for cost-conscious borrowers.

Cons of Conventional Bank Loans

• Stringent Approval: Getting approved is a challenge. Approval rates can vary significantly among different banks, and large banks approved only 13.8 percent of funding requests in March 2023, according to the Biz2Credit Small Business Lending Index. Small banks had a slightly higher approval rate at 19.1 percent, while alternative lenders approved 28.4 percent of requests.
• Balloon Payments: Some conventional bank loans may include balloon payments, which require borrowers to make a substantial lump-sum payment at the end of the loan term.
• Shorter Repayment Terms: Bank loans generally come with shorter repayment periods compared to SBA loans.

Alternative Lenders: When You Have No or Poor Credit

Alternative lenders have gained prominence for their ability to cater to small businesses with varying credit histories. They offer online applications, quick approval decisions, and funding in a matter of days.

Pros of Alternative Lenders

• Credit Flexibility: Alternative lenders are more accommodating when it comes to credit histories, making them a viable option for businesses with less-than-stellar credit.
• Quick Approvals: Approvals from alternative lenders can be almost instantaneous, allowing businesses to access funds swiftly.
• Less Use Restrictions: Few restrictions exist on how businesses can utilize the borrowed funds, providing flexibility in meeting various financial needs.

Cons of Alternative Lenders

• Higher Interest Rates: Interest rates from alternative lenders can be higher compared to those from traditional banks.
• Exercise Caution: Due to the nature of these loans, borrowers must exercise caution and carefully scrutinize the terms and conditions to ensure they align with their business’s financial objectives.

The Different Types of Conventional Bank and Alternative Lender Loans in NJ

Through the conventional bank or an alternative lender, you have different kinds of term loans to choose. Let’s explore the various options:

Working Capital Loans

Working capital loans are short-term financing solutions for businesses in need of immediate cash flow support. Banks and alternative lenders offer working capital loans, enabling small businesses to keep operations running smoothly while they explore additional revenue avenues. However, it’s worth noting that working capital loans often come with higher interest rates and shorter repayment terms.

Merchant Cash Advance (MCA)

Merchant cash advances are a unique type of loan where businesses receive capital based on their monthly credit card transactions. Typically, businesses can access an advance of up to twice their monthly transaction volume. Repayment terms vary by lender, with some deducting a fixed daily amount from the business’s merchant account, while others take a percentage of daily credit card sales.

MCAs are relatively easy to obtain, and funding can be secured within days. However, it’s important to note that interest rates for MCAs can be as high as 30 percent monthly, depending on the lender and the amount borrowed.

Lines of Credit

Business lines of credit provide small businesses with flexible financing options for day-to-day cash flow needs. They are not recommended for significant purchases but are valuable for managing working capital fluctuations. Lines of credit can have short-term durations as brief as 90 days or extend over several years. With a line of credit, you only draw the funds you need and pay interest solely on the amount used, offering flexibility.

These loans are typically unsecured, meaning they do not require collateral. They often have longer repayment terms and can help businesses build their credit ratings if interest payments are made punctually. However, be cautious about additional fees and the potential for accumulating significant debt.

Equipment Loans

In addition to SBA loans, banks and alternative lenders provide equipment loans. These loans and leases allow businesses to acquire office equipment like copiers and computers, as well as machinery, tools, and vehicles. Rather than making upfront payments for significant purchases, business owners make manageable monthly payments. Equipment loans are relatively accessible because the equipment being purchased or leased serves as collateral, preserving cash flow by requiring minimal down payments and offering potential tax benefits.

Franchise Startup Loans

Franchise business loans cater to entrepreneurs seeking financing to open a franchise. Banks and alternative lenders offer these loans, which can be utilized for working capital, franchise fees, equipment acquisition, and establishment of franchise locations.

Invoice Factoring

Invoice factoring loans involve an alternative lender advancing money to small businesses against their outstanding invoices. As invoices are collected, the lender receives the funds along with a fee. This option is suitable for businesses looking to access funding upfront for unpaid invoices.

How to Choose The Correct Term Loan For Your Business

Now that you know more about SBA loans, conventional bank loans, and alternative lenders, it is time to choose which term loans are right for you. Think back first to the questions you asked yourself. Next, look at these tips to choosing the term loan that will help your small NJ business to succeed:

Think About Interest Rates

While the interest rate is undeniably a pivotal factor, it should not be your sole determiner when selecting a loan. Consider this: a mere two-percentage-point difference on a $100,000 loan with a five-year term may not be highly consequential. However, that same difference becomes magnified when applied to a $1 million loan spread over 20 years. Exercise prudence in comparing interest rates and assign more weight to this metric when dealing with larger loan terms.

Short, Medium, or Long Term

Short term loans (2 years or less) are ideal for covering immediate expenses, short-term loans offer quick access to funds. They’re best when you need to bridge cash flow gaps, handle emergencies, or capitalize on sudden opportunities. However, they often come with higher monthly payments and may not be suitable for substantial, long-term investments.

Medium term loans (2-5 years) provide a bit more breathing room for repayment, making them suitable for equipment purchases, expansion, or projects with a moderate timeline. Monthly payments are manageable, and interest rates are often competitive.

Lastly, long term loans (5+ years) are useful for real estate, large-scale expansions, or business acquisitions. They offer lower monthly payments but accumulate more interest over time. Consider these when you have a well-planned, long-term strategy in place.

Uncover Application Fees

Some lenders demand upfront payments for the application itself, while others extend their fees to encompass items related to the application process, such as the cost of running a credit report or appraising collateral. Be diligent in inquiring about any associated fees and factor them into your decision-making process.

Create a Robust Business Plan

Lenders often scrutinize your business plan to assess your ability to repay the loan. Craft a comprehensive business plan that showcases your company’s strengths, market potential, and financial stability.

Seek Professional Advice

Don’t hesitate to consult financial advisors, accountants, or business consultants. Their expertise can provide valuable insights into your financial situation, loan options, and strategies for optimizing your loan’s impact on your business.

Finding The Right Small Business Loan in New Jersey Today

When you are looking for a term loan, you want to make the right choice. After all, securing the right term loan is a critical step in the journey of business ownership. Your choice of financing can significantly impact your business’s trajectory, influencing its growth, resilience, and profitability. By assessing your needs, understanding lender options, and considering the various types of term loans, you’re equipped to make an informed decision that propels your business toward success.

At New Bridge Merchant Capital, we specialize in providing tailored financing solutions to small businesses. Our team of experts is ready to discuss your unique loan needs, explore financing options, and guide you through the application process. Contact us today by filling out the contact form or calling 844-228-0593 to take the next step in securing the funding your business deserves.