A Business Term Loan provides borrowers with set quantities of cash to be paid back over predetermined periods. Like traditional loans, Business term loans require applicants to pay interest on the principal advance, and usually involve smaller cash sums and shorter repayment periods. In fact, most business term loans reach maturity in less than a year, compared with long-term loans that may last for decades.
If your business has a cyclical or uneven sales structure, business term loans may be ideal for resolving cash-flow shortages. For example, many new businesses struggle to find the funding for supplier bills and other expenses. By taking out business term loans, companies can avoid running up their credit cards while waiting for the next revenue stream. Additionally, business term loans can help businesses pay upcoming taxes so they don’t run into issues with the IRS.
Any savvy business owner can easily access business term loans. Besides traditional financial institutions like banks, this common loan product is available through alternative lenders and even the Small Business Administration. They aren’t actually originated by the SBA, but instead are backed by the government, making them a popular choice for small businesses and lenders alike. With a term loan, your lender sends you a deposit of the approved funding amount.
The extended repayment period that comes with business term loans typically last anywhere between one and five years. Keep in mind, that number can be even higher depending on your specific circumstances. A longer repayment term can be extremely helpful in making payments more affordable because the expense is spread out over an extended period. It also gives you more time to turn that new expense (or investment) into a profitable venture.
The cost largely depends on your interest rate, but is also affected by any fees charged by your lender. Many charge an origination fee for the loan, which is deducted from your funds before they are distributed. If you’re late making a payment, you’ll likely pay an additional fee for that as well.
You should have certain documents ready before applying for a business term loan. Here’s what you’ll need to apply for a business term loan:
- Driver’s License
- Voided Business Check
- Bank Statements
- Balance Sheet
- Profit & Loss Statements
- Credit Score
- Business Tax Returns
- Personal Tax Returns
- Business Plan
You can get approved for higher amounts in order to take care of larger business needs, with many lenders offering between $500,000 and $1 million. So while Business term loans are designed for smaller expenses over a short span, long term loans allow you to put a more substantial investment into your company without worrying as much about the timeline.
One huge consideration is the cost of repaying your loan. Business term loans typically amortize, meaning most of your payment goes towards interest at the beginning of the loan. As you continue to make payments, a larger portion goes towards principal over the life of your loan. Paying off your loan early isn’t always beneficial since most of your initial payments went towards interest anyway.
Business term loans are large, flexible, installment loans that businesses can use to achieve any number of goals. Whether it’s a major equipment purchase or an expansion project, getting that extra infusion of working capital is something that nearly every business needs at some point during its life cycle.