Term loans are about as traditional, and popular, as it gets in terms of business funding. If, as an individual, you have student loans or a mortgage, then you have a term loan. As a business, term loans work along these same lines. The stipulations – requirements, interest rates, and terms – vary between banks and online lenders. Online lenders offer convenience and fewer stipulations, but shorter terms and higher interest rates. Banks are slower and have higher qualifications, but offer longer terms and lower interest rates.
A business term loan refers to any sum of money paid back with regular payments for a set term length. They have a fixed interest rate and the term is usually one to five years. They’re typically used for one-time, larger investments – like real estate or large projects.
Business Term Loans: Do You Qualify?
Many businesses can qualify for term loans, but it depends on your credit score, financials and how long you’ve been in business what your terms will be. Your loan length, size, and interest rate will vary based on these important factors. They also might require collateral to secure the loan, and you could lose that collateral if you can’t repay it. Depending on the provider, it’s often harder for startups to get larger term loans, but there are options out there.
How to Apply
Term loans, traditionally, come from a bank. The application process from a bank will be longer and require several physical documents. They’ll usually require a meeting or two. For an online lender, like Kabbage or Funding Circle, the application process is much easier and convenient. They all require the same information, but online lenders off a more streamlined input process. Some lenders may charge prepayment penalties or other fees, so make sure you ask about them before you commit.
What you’ll need:
- Drivers license
- Voided business check
- Bank statements
- Profit & loss statements
- Credit score
- Business tax returns
- Personal tax returns
What are the Different Types?
Your only options for business terms loans come from either banks or online lenders. They each offer different tradeoffs, depending on what you’re looking for and your credit health.
- Banks offer the lowest rates, but you need to have good credit and a strong financial history. These traditional loans also take longer to apply for and receive. Getting these traditional business term loans is also hard if you have no collateral to secure them with.
- Online lenders offer quick access to funds. They’re very easy to apply for and have looser credit and business financial history requirements, but typically have higher interest rates.
Business Term Loan Uses
Business term loans are usually used for large business investments – things that would be pretty difficult to shell out the cash for upfront, or would cut into your cash flow. Term loans are a great option for large purchases because they spread out the payments and make them easier to handle. They’re best suited for things like:
- Equipment – computers, industrial kitchens, etc.
- Real estate – such as a new business location.
- Production – building a new product or beta-testing software.
The goal of getting a business term loan is to come out of it with more money than you spent on it, so it takes a lot of planning and calculation to make sure you’re going in the right direction for your business. For a term loan, like any loan, you’ll end up paying more than your purchase because of interest, but if you play your cards right, it’s almost always worth it.
What Will They Cost You?
Business term loans are one of the simpler funding methods to figure out when it comes to total repayment, but they can still have very complex terms. Here’s a run-down of how the repayment works:
If you’re trying to build an expansion onto your restaurant, you need a loan to make that large, one-time purchase happen. After you’re approved for and receive a $100,000 business term loan and after you purchase the equipment and materials and hire a contractor, you’ll most likely have to start paying monthly payments. Those monthly payments will include a 12% interest over a 10-year period. If the interest is on the principal amount borrowed and not compounded, your monthly payments will be about $933 per month. This all depends on the loan stipulations and how the interest is compounded, but it can give you a basis of how business term loans work.
What Is Amortization?
Term loans are paid in a very complicated way – they amortize. This means that each loan payment doesn’t go equally toward interest and principal amount. Early on in repayment, lenders stack on interest payments and leave payment toward your principal for later on. Through the course of the loan, these payments will start to equalize and eventually the amount to pay toward your principal will surpass the amount you pay in interest. Your monthly payment is still the same amount, only the proportion of interest to principal changes.
Lenders do this so that just in case you pay off your loan early, you’ve still paid most of your interest to the lender. This means you save less than you’d think by paying off a loan before the term is over.
At FaaSfunds, we’ll figure out if a term loan works for your business, and we’ll quickly match you up with a lender that fits your needs. We’ll connect you to the top business term loan lenders, and get you approved in as little as a day. When you sign up with FaasFunds, we analyze your business needs and finances and figure out if a term loan is the best option for you. We’ll also link you up with an industry expert to help you through tough financial decisions. Navigating the financial world is tough, so make it easier with FaasFunds.