Business loans come in many forms, ranging from term loans, microloans, and merchant cash advances to SBA loans and business lines of credit. If your business needs to borrow money to fuel its growth, it’s a good thing to familiarize yourself with the types of business loans to determine which one is right for you.
In this article, we explore the basics of term loans for businesses, looking at what they are, how they work, and the different types of term loans out there.
What Is a Business Term Loan?
A term loan provides a business with a one-time lump sum “loan amount” that is then paid back in increments over a fixed period of time. These loans are offered at fixed or adjustable rates of interest. And can be used for a variety of needs, such as purchasing inventory or equipment, refinancing debt, or capital improvements. Business term loans are usually offered through banks, online lenders, and credit unions.
Types of Business Term Loan
Here are three types of term loans you can consider when looking to finance your business:
Although not as common as the next two types of term loans, short-term loans are usually unsecured and generally target businesses that don’t qualify for a line of credit. They typically run up to eighteen months and can be as short as six to three months, depending on the amount the business took out. They are commonly offered through alternative lenders, i.e., online lenders.
Because short-term loans are usually unsecured, they’re considered riskier by many lenders, so their interest rates and fees are generally higher than other types of business term loans. Also, sometimes they may require daily or weekly payments.
Intermediate terms are terms that are less than three years in duration. Medium-term loans can be used to take care of specific business initiatives such as purchasing equipment, renovations, and debt refinancing. They also require weekly, biweekly, or monthly payments from a business’s cash flow.
These loans are typically more affordable than shorter-term loans, but they’re more difficult to get approved than short-term loans. Generally, you need a good credit score to qualify for these loans, and your business must be at least a year old or more.
These loan products have a typical repayment period of more than three years and offer much larger loan amounts than intermediate-term loans. They may also have lower interest rates and fees.
Unlike short and medium-term loans, long-term loans require the use of business assets as collateral. Repayments are also made from profits or cash flow. Furthermore, the borrowing company may also be required to set aside a specific amount of profit for loan repayment.
It’s worth noting that medium and short-term loans may also require balloon payments. What are balloon payments? A balloon payment is a lump sum or larger-than-usual one-time payment typically paid at the end of a loan’s term.
Benefits and Downsides of Term Loans for Business Owners
- Lower interest rates
- Predictable repayment
- Lump-sum cash
- Simple application process
- Prepayment penalty
- Loans with variable fees and interest rates can become expensive over time
Before applying for a term loan, take some time to find out which term loan suits your situation and needs, both current and future. Once you identify the term loan that suits you, make sure you work with a lender with favorable terms and interest rates.