TERM LOAN
WHAT IS A TERM LOAN?
A term loan is a bank loan for a set amount with a predetermined repayment schedule and a fixed or fluctuating interest rate. A term loan is frequently the best option for a well-established small firm with solid financials. However, a term loan may also need a large down payment to lower the monthly payments and the total cost of the loan.
HOW DOES IT WORK?
When it comes to commercial (or even personal) funding, you’re probably thinking of business term loans. A term loan allows you to borrow a large sum of money from a small business lender, which you then repay over time with interest and fees.
You’ll make equal installments over the course of your loan term; however, your payment schedule may vary depending on the type of business term loan and the lender you’re dealing with.
Business term loans can be obtained from various sources, including banks, credit unions, and online lenders. Banks and credit unions, on the whole, will give the best rates and terms, but they will also require top qualifications and be longer to finance. On the other hand, online lenders will provide more flexibility and faster funding periods, but they will likely be more expensive and have shorter terms.
Overall, one of the advantages of business term loans is that they may be utilized for a range of business finance needs in addition to having a regular payment schedule.
As a result, these loans are frequently used for the following purposes:
- Purchasing equipment or inventory
- Working capital
- Refinancing other commercial obligations
- Recruiting staff
- Keeping up with payroll and tax obligations
- Investing in business expansion
- Real estate acquisition
- Funding long-term investments in general
Term Loans Types
Term loans come in various types, with the term usually indicating the length of the loan.
- A short-term loan is one that lasts less than a year; however, it can also refer to a loan that lasts up to 18 months. It’s commonly given to businesses that don’t qualify for a line of credit.
- An intermediate-term loan is one that lasts more than one year but less than three years and is repaid monthly from a company’s cash flow.
- A long-term loan lasts three to 25 years, requiring monthly or quarterly payments from earnings or cash flow, and is secured by firm assets. The loan restricts the company’s other financial commitments, such as other loans, dividends, or principals’ salaries, and may require a portion of profit to be set aside for loan repayment.
Both intermediate-term and shorter-term loans can be balloon loans with balloon payments, which are so-called because the last installment swells or “balloons” into a significantly larger amount than any of the preceding ones.
A TERM LOAN AN EXAMPLE
A small apparel business has had a lot of success and is looking to expand to a new location in a neighboring town. Even though they have lots of cash flow, saving enough money to open a new store would take a long time. A term loan allows the apparel company to open that store right away, allowing them to capitalize on the additional revenue.
A company loan is similar to a short-term personal loan, such as the one used to purchase a car, in certain ways. A moving company with good credit, for example, could use the upfront cash from a loan to meet increased demand by purchasing additional vehicles. Other forms of business-related machinery could also be purchased with a short-term loan.
Business loans, on the other hand, aren’t just for big-ticket items. A small loan with a short term can help refill the shelves just in time for the ski or snorkel rush if a sports equipment company needs to expand its inventory for a new season swiftly.
The Advantages of a Term Loan
- Take out substantial loans to meet emergency demands.
- Improve your company’s credit score by making timely loan payments
- Interest rates that are lower
- Create a payment plan.
- Adaptable to a variety of business needs.