Loans

What Is a Term Loan and How Can it Fund Your Business?

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Are you looking for new business funding? If you are, then a term loan might be the best option for you to choose from.

Term loans can be convenient options for borrowers with good credit history. However, no two term loans are alike. 

If you want to learn more about term loans, keep reading here. You’ll find out what their pros and cons are and which lending package will work for you. 

What Is a Term Loan?

Term loans are offered through banks as well as through private lending companies.

When a company or individual is approved for a loan, they pay either monthly or quarterly payments for a specified period of time. A term loan offers either a fixed or floating interest rate. 

Traditional banks, online lenders, and credit unions all offer term loans. Each lender has its own loan terms and fees for each of its different loan types.  

Term loans are categorized as either short, intermediate, or long term. A short-term loan can be paid off before a year and a half.

Intermediate-term loan reimbursement periods last between one to three years and long-term loans last around three years or more. 

Here’s a more in-depth review of each of the different term loan types, each with its own benefits and disadvantages. 

Short Term Loans

Short-term loans are considered “adaptable” and can cover a company’s short-term needs. 

These needs might include covering costs for an unplanned emergency or temporarily supporting their cash flow. 

Short-term loan applications have a quick application process. You can complete an online application from any bank or other business lender. Borrowers provide their credit scores, bank statements, and tax returns. 

Borrowers usually hear back between one and two days if they do qualify. If they qualify, borrowers receive a lump sum of funds immediately that should be repaid in 18 months. 

Short-term loans are usually around $5,000 or less. Their repayment schedules are also shorter. Borrowers should plan on making daily or weekly repayments throughout the repayment schedule. 

Short-term loans also come with higher interest rates. Higher interest rates are the “price” a borrower pays for a quick loan resource. 

Lenders won’t have much time to review a potential borrower’s information to confirm whether they are a credit risk or not. A higher interest rate can protect the lender from a risky borrower. 

Intermediate-Term Loans

Intermediate-term loan periods last up to around three years. They also have fixed interest rates. This allows lenders to project payment terms and what the loan can pay for over a specified period of time. 

Intermediate-term loans have a unique quality to them.

You can pay off an intermediate-term loan with the profits you receive from what the loan was meant to pay for. For example, you might need the loan to pay for new equipment. 

Intermediate loans require waiting periods for the borrower’s new assets to gain momentum before they start making their repayments.

When that new equipment starts to increase their profits, they can use their revenues to pay down their original loan.  

An intermediate-term loan is a difficult loan product to qualify for. If you can’t demonstrate a strong cash flow or high FICO score, you might be considered a safety risk. 

Application periods for Intermediate-term loans also take longer than a short-term loan period. A borrower might be asked to guarantee their property or other collateral in order to secure any loan repayments.  

You can secure intermediate-term loans through credit unions, banks, or traditional online lenders. Loan amounts for borrowers are usually around $1 million. 

Long Term Loans

Long-term loans have affordable rates and are roughly six to seven times less expensive than a short-term or intermediate-term loan.

Long-term loans have fixed interest rates. As a result, your monthly loan repayment won’t change all that much during the life of the loan.  

Long term loan types also have repayment schedules that allow for monthly payments, unlike short-term loans that require daily or weekly repayments.

Long-term loan repayments are usually smaller than a short-term or intermediate loan repayment amount. This could mean less stress on your cash flow or bank account. 

A long-term loan repayment period depends on how a borrower wants to use their loan. These periods usually range anywhere from 10 to 25 years. 

Long-term loans are often difficult to qualify for. It’s also hard to get a long-term loan for amounts less than $250,000.

You can also secure a long-term loan from the US Government. The US Government doesn’t directly loan money to the borrower. They actually guarantee loans that can be repaid to any lender. 

One example of a government-backed loan program that’s managed by the US government is the Small Business Administration

The Small Business Administration (SBA) creates methods for a lender to negotiate with small companies to manage their business loans. 

The SBA defines a business that employs less than 250 people and generates less than $750,000 in revenue as a “small company.”

Not all business models fit this “small business” definition. You can find companies categorized by industry that fit this definition on the US Census Bureau website. Check out this website to see if your company can qualify for an SBA long-term loan.

What Are Your Next Steps?

Are you ready to apply for a term loan for your new enterprise? You can start by collecting your personal credit history and company financial statements right now. This applies regardless of which loan you apply for. 

Look over your current cash flow management status. Can you handle a repayment schedule for a short-term loan? If you have immediate purchases to make, like new equipment or repairs, a short-term loan might be right for you. 

Want to know more business funding? Then head on over to our website. We’ll help you find ways to set your business dreams in motion right away.

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