Term loans help established companies pay for large expenses that they either cannot pay for with cash or which would substantially drain their company resources to do so. They are often used for major expansion, capital improvements, new equipment, or to provide working capital to grow the business. Although lenders may consider a term loan’s intended purpose before approval, the money can be used for whatever the borrower chooses.
Typical small business loan terms include fixed-rate interest and predictable fees, making them relatively easy to budget for as payments remain consistent for the life of the loan. It’s possible to find adjustable-rate loans, which usually start off at a lower rate, then vary with the marketplace thereafter. Either way, the specifics of what you’re expected to pay, how much of each payment is interest and how much goes towards the principle, and any other potential fees or charges, should all be spelled out in clear terms before you sign. Reputable business term loan lenders are happy to be clear and honest about their terms. Don’t hesitate to ask about anything you find unclear.
Traditional term business loans are sometimes categorized by the length of time allotted for repayment – short-term, intermediate-term, or long-term.
Short term business loans can have terms from 6 – 18 months. Because they’re of shorter duration, many lenders consider them lower risk. Newer businesses or entrepreneurs with imperfect credit histories may find it easier to qualify for short-term loans when starting out. The approval process can be less complicated, but lenders are likely to charge higher interest rates to offset the shorter time period. Payments may be required monthly, bi-weekly, or weekly, and can be relatively high even on small loan amounts due to the compressed time frame for repayment. If your business has seasonal income or other natural ebbs and flows, or if an opportunity arises which can’t wait for the next influx of capital, a short-term business loan may be the way to go.
An intermediate-term business loan has a repayment schedule of 12 – 36 months. These are typically used to refinance debt, open new locations, hire new people, or add or replace essential equipment. Intermediate-length small business term loans are slightly harder to qualify for but normally have better interest rates than short-term loans. Payments are usually scheduled monthly and tend to be slightly more manageable even on higher amounts due to the extended repayment period compared to short-term loans.
Long term small business loans can be set up for anywhere from 3 years to 25 years or more. The most common long-term business loans are 5 or 10 year loans, with payments due either monthly or quarterly. Longer terms usually translate to better interest rates and lower monthly payments. Because of the amounts involved and lengthy terms, there are few if any restrictions on how the money can be used to support the business, although standard contracts often prohibit using the loan to pay off other debts, issue dividends, or pay some salaries.
A traditional long-term business loan can be a powerful tool for growing and strengthening your business. At the same time, it’s a major long-term commitment and timely repayment is essential for your business to maintain or strengthen its credit history and future financial opportunities. If you have a well-established business, or a new business with a strong personal credit history, you’ll have many options both with local traditional lenders and reputable online business loan companies. Even if you have bad credit business loans may still be available to you at terms you can live with, although your options may be narrowed to online lenders specializing in such things.