The world of modern finance has made the lending system extremely complicated. There are a range of different loans available to you as a business owner, and these loans vary in complexity. If you’re thinking of starting a business, or if you already own one, there is a high chance that you’re constantly on the lookout for the best ways to fund your business. The different forms of finance available in modern day finance can make the entire process confusing.
While this variety and choice has improved the ability for businesses to fund themselves, it doesn’t mean that the old-fashioned way isn’t just as good. Term loans for business are still a massive part of the small business financing industry. Their simple approach has made them a customer favorite – more lenders than ever are offering prospective clients the ability to get term loans.
Even if you do not have much knowledge on business loans, you must have already heard about term loans. This is probably the most popular type of loan simply because it applies traditional processes and methods. Thankfully, a loan as simple as this is no longer just found in banks. Today, there are many online lenders making this loan product readily available for many business owners.
Term loans are very easy to explain and understand. You have to identify a specific purchase or purpose for your business, loan an amount from $25,000 to $500,000, get assigned a fixed interest rate that ranges anywhere between 7 to 30%, and pay it off within 1 to 5 years. You can get a term loan approved in as fast as 2 days. This may seem too good to be true but we have seen many of our past clients have an easy and quick time applying for a good deal for a term loan.
A term loan is traditionally applied for from a bank. However, there are many online lenders who are more than happy to offer term loans to entrepreneurs with businesses that are in operation for at least two years or so. It is important to have a good credit score though. Most of the time, those with credit scores above 620 and have annual business revenues of over $75,000 have an easier time getting approved.
What’s good about term loans is that you have a set payment structure. We’ve seen and heard horror stories of how some business have crashed due to hidden fees and complex loan structures that they failed to understand from the beginning. If you hate surprises, you’ll love term loans. Even better, term loans can offer lower monthly payments and longer payment terms. In addition, it can be used for a wide variety of purposes for your business.
The only downside is that there are potential penalties should you decide to prepay your loan. This basically means that if you set to pay back a loan through monthly payments over 5 years and for some reason you have the entire amount ready within a year or two, you will be penalized for making the full payment earlier. We can give you more information about this should you decide to get a term loan.
Are You Qualified to Get a Term Loan?
Some small business owners, especially new business owners, think twice about trying to apply for a term loan in the first place because they feel they won’t get approved. Truth be told, there are many businesses that get approved for this type of loan. The qualifications are pretty simple but not everyone meets the criteria. Basically, you need to have a good credit score, your business needs to already be generating revenue, and you need to be in operations for quite a while.
We mentioned earlier that a two year old business with $75,000 revenue matched with a 620+ credit score meets the standards. However, based on data we’ve gathered from our customers, you will most likely get instantly approved with a credit score of 680, a 3-year running business or longer and annual revenue of more than $300,000.
You have to remember though that while traditional term loans are very similar to each other, they differ in many ways too. You can get varied interest rates, longer or shorter payment terms and loan amounts. Your rate of approval depends primarily on your credit score and your business revenue. Obviously, the higher your score and revenue, the better deal you can come up with.
It is good to note as well that there are short-term loans available and these are different from the traditional term loan we are discussing here. Because you have longer payment periods available for this type of loan, your business should appear more capable of making payments over a longer period of time, hence the importance of your revenues and credit score.
Term Loan Basics
Term loans are popular simply because it can be used for a variety of reasons or purposes. Whether you need a new set of high-powered computers for your office or if you simply need to replace the company truck, or even if you need more funds to be able to afford a new marketing head you badly need to hire, a term loan is always a good option for you.
The type of term loan you can get highly depends on what your company’s revenue is, as well as your cash flow and your credit score. There are loans that you can avail with daily payments over shorter periods of time or monthly payments over a longer period of up to 5 years.
As we mentioned earlier, a term loan can be borrowed from your traditional bank; however, there are term loans that are also available from alternative financial institutions or lenders.
One of the best things about term loans is how interest rates stay fixed through time. This only means that even if the economy takes a dip or flourishes at one point, your term loan stays the same. You can accurately predict what you need to pay for and you will know in advance so you can properly plan your finances and prepare payments.
It is important to know as well that in some cases, a collateral may be required for a term loan.
Term Loan Application Tips
Applying for a term loan might seem easy, but with all the requirements and the criteria for approval, it won’t be as simply as it seems to be when you first check it out. Nevertheless, we are confident in saying that it is less complicated compared to other loan products. To get most out of your term loan and make the application process easier for you, here are a few tips to keep in mind.
1. Do a self-check on your credit score.
There are ways for you to check on your credit score prior to application of a loan. Do a personal credit score check too, as lenders are more interested on the individual applying for the loan rather than the name of your small business. The point mainly is that they want to loan the money to a “real person” rather than just a company name. You can get a free credit report from one of the three major reporting bodies – they have to give you one once a year. Once you get the report, check your score and ensure that there are no errors, misreporting is more common than you think and can be easily fixed in most circumstances. In addition, pay down any personal credit card debt that you may have, as this is a quick way to get your credit score where it needs to be.
2. Prepare the necessary documents.
From identification cards to tax returns to balance sheets and more, as with most loans, you have to get ready with these when you apply for a term loan. There’s usually no way to go around these requirements. Head to the website’s of the lenders that you are considering and see which documents they require. There are basic documents that all lenders will require, but others will be more intrusive and will require a range of different things.
3. Straighten out your company’s finances.
We already told you time and again how your business standing matters when applying for a term loan. If you plan on submitting a term loan application soon, now is not the time to relax and take for granted your business’ finances. Figures don’t lie and even if you do your best in convincing lenders that your business is on the right track, an approval will be far from possible if your documents state otherwise. You should also have a business plan to make sure that the lender know you are fully aware of how to run a successful business – they want to make sure that you understand your industry and potential road blocks.
4. Specify what you’re using the loan for.
Yes, a term loan can be used for a variety of purposes. However, you have to be able to say what you will be using it for. As a company, you should dig deeper into the situation and study well whether getting that loan is worth it in the first place. If you have a specific asset that you’re purchasing – such as a piece of equipment – lenders are more likely to lend you money. This is because they view specific asset purchases as evidence that you can make your business more efficient.
5. Plan your payments ahead.
The laugh now, cry later attitude isn’t welcome when you have a term loan to pay for. Plan how you will use the money and how you will make money to pay for it.
6. Check on your amortization schedule with your lender.
Because there are different term loan types, payment schedules, payment rates and interest rates differ as well. You have to ask your lender for your amortization schedule to avoid any surprises and for you to fully understand your loan.
7. Ask Your Lender if They Have Tailor-Made Loans for Your Business
This may sound ridiculous, but many lenders have tailor-made loans for specific industries. Lenders know that different businesses have different requirements when it comes to funding and they don’t want to risk you not being able to pay your loan back. They may be able to change term times or different requirements to better fit the industry that you work in.
8. Stay Open Minded
You may think that a term loan is a great idea, and it normally is, but there are also plenty of other options to choose from. The world of modern finance has some awesome products that are great for businesses that don’t fit into traditional molds. If you’re asking a lender about a term loan, always be open to other suggestions. Just make sure that you do some independent research on alternative options before you make any commitments.
Term Loan Advantages
One of the best ways to determine which type of finance will work for you is to have a full list of the pros and cons of what you’re considering. You’ve probably already determined whether you’re interested in a term loan, but make sure to consider the following points before making any decisions. Below is a list of the most considerable benefits of using a term loan:
- Structure – Term loans provide a preset and predictable structure that makes it easier for you to plan expenditure in your business. With other forms of credit, flexible payment structure may make it harder for you to stay disciplined and meet your payment obligations on time. This can be bad in the long term when you begin accumulating interest. Term loans typically have a total cost that is easily predictable.
- Interest Rates – Term loans typically have fairly good interest rates – this is often because they are secured against a specific asset. In addition, lenders typically have high requirements for credit scores and therefore interest rates often stay low. These interest rates are also typically fixed, making them more predictable.
- Options – There are tons of options available in terms of lenders. There are plenty of online and in-person lenders that can help you get a wide variety of different quotes. Those who opt to get term loans typically have some of the best variety in financial institutions – almost all finance companies will have a form of term loan to offer you.
- Build Credit – As with any form of finance, getting a term loan is a great way to get your business credit score off the ground. If you pay back the entire loan with on-time payments, your credit score will improve drastically. Because some term loans are secured against assets, they can be a good first port-of-call for those looking to start building or re-building their credit.
Disadvantages of Term Loans
Term loans are normally one of the best choices available to those who want to get funding for their businesses. But there are a few drawbacks that should be considered prior to determining if a term loan is the right fit for your business. A full list of the most prominent drawbacks is provided below:
- Rigid – Because term loans have set interest rates and set payment periods, they’re way less flexible than other forms of credit. This can be a good thing but can also make it difficult if you find that you work in an industry that has unorthodox market cycles. You can still request that your lender help customize your loan but it won’t always be possible to do so.
- Eligibility – Because interest rates are quite low, many term loans are hard to qualify for, this is especially true for loans that you get through traditional commercial lenders. Typically, if you find something that you can secure against the loan you will be more likely to get the funding that you need.
- Secured – As mentioned in the previous point, many loans are sometimes secured. This may seem like a good thing as it can help you become eligible for a loan that you may not be able to get with your credit score, but at the same time it opens you up to unwanted risk. For example, if you secured your loan against the building you purchased to run your business, this building may get claimed back by the bank if you ended up failing to make any payments. It can mean that your entire business may not be able to function if you end up defaulting on your loan.
Where Can I Get a Term Loan?
Getting a term loan is much easier than ever before. Term loans are one of the oldest forms of finance in the modern world – they’ve been issued by banks for over a century. Many of the oldest and most historic companies you can think of were actually started and funded by term loans. The landscape has changed but the basic concepts have not. You can still walk into a traditional bank and apply for a term loan whenever you like. Getting a term loan at a regular bank can be time consuming, you normally have to schedule an appointment and clear a multitude of checks and document requests. Banks are traditionally a great option when it comes to attaining a term loan, or any loan for that matter. They have large customer service teams and they have access to capital the cheapest prices – this normally means that their interest rates are quite low.
But as mentioned previously, getting a term loan at a bank can be a lengthy process – it also may be impossible if you don’t have a long enough credit history. In recent years, many online lenders have emerged and began to start offering online term loans. They’re able to speed up the process and get their clients capital much quicker than traditional lenders. This is a great option for those who are trying to get the money they need as quickly as possible. It also takes away the headache of face-to-face meetings and preparing documentation – you can submit all your forms online through the lender’s website portal. Of course, just because it’s convenient doesn’t mean it’s the best option – you have plenty of choices when it comes to term loans, make sure to shop around.
Term Loans Vs. Revolving Credit
People make a distinction between term loans and revolving credit all the time, this is because they are two of the most popular forms of finance. But there are a lot of differences between term loans and revolving credit – as a business owner it’s important to know these differences.
‘Revolving credit’ credit is a form of credit in which a lender extends you a limit from which you can borrow. If you don’t access anything from your credit limit, you don’t pay any interest – you only pay back what you take out of your credit limit. If you do borrow money from your credit limit, but you pay it back, you can access this money again straight away – there is no need to make additional loan applications. It is considered a very flexible form of lending and it is typically unsecured. The major downside of revolving credit is that it typically has high interest rates. In addition, because there are no term times, and you only have to make small monthly payments, it can be easier to get into a debt trap. The most popular forms of revolving credit for business are business lines of credit and business credit cards.
Term loans are much better for those who have set purchases or funding requirements. Interest rates are lower which means you will save money in the long terms. In addition, the term payments mean that you are more likely to pay your debt off in full and on time when compared to revolving credit.
There are plenty of reasons that you may find a term loan useful for your business. Small business owners have been using term loans for over a century to help fund various aspects of their businesses. Equipment purchases, land acquisitions, and inventory are all common examples of what businesses use term loans for. A VA business loan can cover these things too if you are in this category.
With any financial decision in your business, you need to be extremely careful to do as much research as possible into the right avenue for you. Many lenders treat the process like a sale call – they’ll want to glamorize the loan to you as much as possible. That’s why it is vitally important that you do your own independent research and don’t take a lenders word for anything. Make sure that you cross reference what they say with customer reviews online – the best way to determine if a lender acts ethically is to see what past clients have thought of them.
You should also head online and find a term loan calculator. This will provide you with a way of viewing whether or not you can afford a term loan. You can input different variables such as term time, interest rates, fees, and down payments. It’s a great way to get an initial understanding of what your financial commitments may be.
Lastly, always make sure you have enough time to make the right decision. Rushing into any financial obligation can be disastrous in the long-term.