Navigating the world of financing for your business can be daunting. There are many different options to work through — and many companies to "help" you through the process.
Where do you even start? And how do you know you’re choosing the right option for you?
This guide will help you understand business term loans so you are better able to make a financial decision with confidence. Here’s what you’ll learn:
A business term loan is a traditional lending product that offers a lump sum of capital that you pay back on a set schedule with regular payments at a fixed interest rate.
Short-term business loans provide the borrower with a one-time, lump sum to be paid out in full, plus interest and fees over a short time period (typically a few months to a few years).
The SmartBiz® network of banks offers bank term loans with 2-5 year repayment terms.
Long-term business loans typically have a life of at least 10 years, paid down in monthly installments. Long-term loans give you the benefit of smaller monthly payments and are most useful when you’re planning for steady growth over time, as opposed to addressing immediate needs.
Short-term loans can be an excellent source of capital for a business, but they do come with drawbacks. Here are some of the pros and cons.
When your business qualifies for a term loan, you’ll typically receive an agreed-upon sum of money to be paid back plus interest, with scheduled monthly payments over a set repayment term.
Loan amounts for term loans can range anywhere from $25,000 to $500,000.
Term loans generally have interest rates on the lower side. The interest rates on bank term loans depend on the repayment term and the applicant's credit and financial profile.
The use of funds from a bank term loan from a bank in the SmartBiz network may help a small business owner focus, rebuild, or grow. Funds can range anywhere from $30,000-$500,000 and be used for a variety of needs.
Below are some common ways to use the funds from your term loan, but always check with your lender to determine if you are able to use the funds the way you want.
Working capital is used to cover a company's short-term expenses like inventory, equipment, marketing, payroll, hiring, and payments on short-term debt.
Many entrepreneurs accumulate debt when launching or in the early stages of their business. If those debt obligations are cutting into cash flow, refinancing with a loan that has better rates and terms may help you save.
A bank term loan may help cover costs related to hiring like recruitment, training, salary, and benefits.
Business equipment includes tangible property (other than land or buildings) used for operations. Examples include computers, machines, tools, and vehicles.
A bank term loan can finance marketing efforts that may help to build your brand, attract customers, and increase sales.
If you need to increase inventory or expand your product line, funds from a business term loan may help cover the costs.
If you need funds for remodeling or renovations, consider a business term loan from a bank in the SmartBiz network.
A buyout is where one party purchases shares of a business to acquire a controlling interest in that company. Funds from a term loan may help with that expense.
Term loan funds may be used to purchase an additional business. However, funds cannot be used for a new business purchase. If you have questions, please ask your SmartBiz relationship manager for specifics.
When applying for a small business term loan, you’ll generally want to keep a few things in mind. Remember, every lender has specific requirements for qualification and approval.
Lenders will ask your reason for seeking funding and you should be ready to give a clear answer. Your purpose for seeking a loan will help you identify whether you’re trying to fill a short-term or a long-term financial need.
SmartBiz does not require borrowers to present a business plan. However, some financial institutions or other lenders won’t invest in your company unless you present a business plan that demonstrates how you’ll achieve success and growth.
Determine if you meet the score requirements for both business and personal credit.
Learn where you can check your credit score.
It’s always a good idea to have a financial professional help you crunch the numbers before you seek financing. This may help you avoid costly mistakes and ultimately secure a small business loan that’s best for you.
As with most partners for your business, make sure you’re working with a lender you can trust and always read the fine print. The last thing you want is to end up paying more than you expected because of some confusing language. Ask all of your questions and make sure you are getting clear and direct answers.
Because they guarantee a portion of your loan, the SBA typically needs more information for their lending products than a term loan application might require. However, by partnering with a loan facilitator who has extensive SBA experience, loans may be completed easily and swiftly.
The other advantage of SBA loans is longer terms, which typically makes for lower monthly payments for business owners. SBA 7(a) loans have terms that range from 10 to 25 years, have low monthly payments, and may help you avoid a cash flow crunch.