How term loans work and how can they can help my business
A term loan is what most people think of when they think of business lending. They are loans with a set repayment time, set number of payments, and have a fixed or variable interest rate. There is a great number of term loans available for small businesses depending on the business needs, credit rating, cash flows, and many other factors. The terms of the loans vary greatly from 1 year with daily payments to 5 years with monthly payments, and everything in between. Term loans are provided by both traditional banks and non-bank alternative lenders.
You can use a small business term loan to meet virtually any business need, including specific purchases such as equipment or inventory, working capital, paying back other debts, meeting tax obligations, or meeting pretty much any other small business need.
Collateral usually is requirement for a term loan and you risk losing your collateral if you don’t pay back the loan.
Let’s say you borrow $25,000 with a 6% interest rate that needs to be paid back in 3 years. That means you’d pay back the loan with monthly payments of about $760, which will stay the same over the life of the loan. This structure means you will have predictable monthly payments and know exactly when the loan will be paid back.
Note: To Calculate a loan payment visits our calculators site here
When it comes to rates they are all over the board depending on who the lender is. If you work with a bank you are looking at rates between 4-6% as long as the loan is fully collateralized. If your loan inst fully collateralized rates will be higher. Be careful with lenders who will do it quickly because there rates are usually higher as well (your paying for convenience).
Most businesses can qualify for a traditional term loan, but the interest rate, length of the term, and maximum loan size depends on your business revenues and credit rating. Since traditional term loans have longer repayment periods than, say, a short-term loan, your credit score will be a more important factor.
Equity Contribution (If purchasing hard assets)
If you are purchasing Equipment or Vehicles most banks looks for some sort of “Cash down” usually 20% for business loans. The more you usually put down the lower your interest rate is due to the amount of risk that the bank will take.
- Predictable monthly payments.
- Fixed rates.
- Suitable for a wide range of business purposes.
- Less flexible terms and rates.
- Usually requires collateral.
- Potential prepayment penalties.