Even when you’re already established in your industry, business loans and other financing options can often come in handy. Some of the most popular funding products include business term loans, which offer a lump sum of capital paid back over a specified schedule.
What is a Business Term Loan? How do Business Term Loans work?
Business term loans are loans that provide a one-time lump sum funding with a fixed duration of repayment. Duration will vary; Some are shorter-term loans, while others are longer-term loans. The loan term or repayment schedule for a business term loan is typically monthly payments, but can also be bi-monthly, weekly, or sometimes daily. An automatic clearing house or ACH deducts the payment from your business bank account based on a set schedule.
You even have the option to explore medium-term loans with an intermediate repayment schedule. Interest rates, terms, and the maximum loan amount will vary and depend on creditworthiness. Lenders typically offer fixed payments.
Alternatives to Business Term Loans
Exploring various lending options is crucial for businesses seeking financial flexibility. A business line of credit, for instance, offers a revolving line of credit without the structure of a term loan—allowing companies to pay interest only on the amount borrowed up to a set credit limit, much like a credit card. This can be especially advantageous for businesses that have a high credit score, as lenders often favor borrowers with strong credit histories. Furthermore, invoice financing presents a direct way for companies to improve cash flow by borrowing against the amounts due from customers, giving immediate access to a percentage of the total invoice value.
Merchant cash advances provide an immediate lump sum at funding and, although similar to loans, they are technically advances against future sales, providing another avenue for businesses to maintain cash flow. These advances are repaid by allocating a percentage of daily or weekly sales, positioning them as a flexible solution for continuous capital.
For substantial funding needs, invoice factoring could also be a strategic choice, where businesses sell their accounts receivable at a discount to a factoring company, like eCapital, in exchange for immediate cash, which can be up to $30,000,000.
Where can you find Business Term Loans?
You can find term loans from many online lenders, including traditional banks such as Bank of America and Wells Fargo, the Small Business Administration, or online Fintech lenders like Fora Financial and Credibly through the marketplace at AdvancePoint Capital. The financing companies in the market offer various products—from business lines of credit to equipment leasing and loans, enhancing the palette of options available to businesses.
Whether you need a short-term business loan, medium-term business loan, or long-term business loan, understanding the business loan requirements that lenders have and the borrowing amounts available can enhance your chances to secure the right financing. In addition, platforms like Fundera by NerdWallet provide an aggregate view of your options, assisting in the comparison of potential loans.
Small business term loans through platforms like AdvancePoint Capital often carry lower costs and offer higher borrowing amounts, making them an excellent choice for business owners looking for a blend of traditional and innovative lending solutions. Our lending partners and product diversity is far superior to banks or traditional lenders, providing flexibility and faster funding times that modern businesses require—qualities that particularly stand out when compared to the longer funding times typical of bank loans.
AdvancePoint Capital makes the loan application process a simple, straightforward experience, helping businesses navigate the financial landscape with ease.
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AdvancePoint Capital makes the loan application process a simple, straightforward experience.
Choosing the Right Small Business Term Loan
When searching for small business funding, first ask yourself, “Why? ” Why do you need the funding you are applying for right now? Understanding your needs can be pivotal in business banking, as it can guide you toward the most suitable financial product. The purpose or use frequently dictates which loan is best for you. Not only will traditional lenders and online lenders want to know where their money is going when determining a small business owner’s eligibility for a term loan, but they will also look at how this loan will impact your financial stability. To get a clearer picture of this, using a business loan calculator can help you understand potential monthly payments and total loan cost.
The product you settle on applying for is ultimately up to you, but multiple components are at play. While many business owners only make their choices based on business term loan interest rates, there are more things to consider, such as:
- Interest Rates
- Fees
- Term
- Frequency of payments (monthly, bi-monthly, weekly or in some cases daily)
- Flexibility
- Qualifications & Eligibility requirements
- Agreement terms & conditions
In addition, understanding how your repayment behavior affects your business banking profile is crucial since on-time payments are reported to business credit bureaus, which helps build your business credit history.
After considering everything above, you can determine whether short-term loans, medium-term loans, or long-term loans are right for your business. AdvancePoint Capital will help you make an educated decision about the best business-term loan for your needs, taking into account all the variables including estimated repayments that you can calculate using a loan calculator provided by platforms like NerdWallet, which Randa Kriss augments with her expertise on the intricacies of business banking.
The Most Common Uses of Business Term Loans
- Improving Cash Flow Issues
- Working Capital, including covering short-term operating expenses like payroll financing
- Raising capital to expand infrastructure or operations
- Acquiring new or existing businesses
- Funding significant or ongoing projects
- Replenishing essential supplies and inventory purchases
- Covering emergency expenses
- Finishing business renovations, enhancing the facility’s appeal and functionality
- Hiring new employees
- Debt refinancing
- Purchasing or leasing large machinery and equipment
- Making regular payments at a fixed interest rate
Term Loan Options for Your Business
Take a look at some of the most popular term loan options for small business owners below:
Small Business Term Loans
Small business loans are term loans with fixed loan amounts, fixed terms, and fixed monthly payments. Weekly, bi-weekly, or daily payments have also become popular over the last couple of years, helping to provide more flexibility for startups and established businesses alike. Additionally, microloans have emerged as the best alternative for small business needs, when entrepreneurs may not meet typical lending criteria. A small business loan funds businesses for various uses such as purchasing inventory or office supplies - crucial for maintaining the smooth operation of a company. Notably, even businesses with owners who have a lower FICO credit score can be considered for a microloan, which can be particularly beneficial for new business ventures. Small business loans are commonly referred to as working capital loans as well.
- Simplified application process
- Fixed payments
- Terms from 12 to 36 months
- Completive interest rates
Long-Term Business Loans
A long-term business loan is a small business loan that is paid back over a long period of time, typically 5 to 30 years. Just like mortgages and car loans, these loans are often structured with an amortization schedule to provide a clear timeline of monthly payments until the total debt is repaid. This business loan is most commonly used for large business expansion plans that will require a substantial loan amount and need to be paid over long periods of time to ensure an affordable payment under current business revenue.
- Repayment terms greater than 5 years
- Monthly payments outlined in an amortization schedule
- Application process requires significant paperwork to qualify
- Rates that start at 9%
Short-Term Business Loans
Short-term loans are tailored for businesses that require an expedient solution for their financing needs, with a shorter term for payback, typically 6 to 18 months. Short-term loan approval is easier to get because of the reduced risk associated with a shorter repayment window, which lenders find appealing. It's important to have a fair or better personal credit score for approval, reflecting a common prerequisite for most financing options. Same-day funding is a notable benefit, offering immediate support for urgent financial obligations. These loans are a viable resource for managing cash flow and working capital, essential components for the day-to-day running of a business.
- Terms from 3 to 18 months, up to 24 months, adaptable to a range of short-term financing needs.
- Streamlined application process, convenient for busy entrepreneurs, requiring only 3 months' bank statements, simplifying the lending journey.
- Rates and costs are higher than traditional small business loans due to the expedited access to funds and shorter repayment terms.
- Higher approval rates than longer-term financing options, providing an accessible lifeline to businesses seeking quick financial aid.
Small Business Administration (SBA) Loans
The Small Business Administration is a federal agency that sets the guidelines and requirements for SBA loans. The SBA is not the lender but provides guarantees to SBA-approved lenders so they will lend affordable interest rates, terms, and monthly payments for small businesses that lenders would not do without the guarantee.
- Excellent rates and terms
- Lengthy application process
- Must have good credit
- Backed by the Small Business Administration
Equipment Financing
For businesses that rely on heavy equipment for their services, equipment loans provide a path to purchase equipment vital to the business's success under the benefits of a term loan with affordable monthly payments to repay. The loan amount will depend on the purchase price and down payment for approved borrowers.
- Quick application process
- Limited documentation needed
- Equipment is used as collateral to secure the loan
- Terms range from 2 to 5 years
The fast, convenient, and straightforward way to get the money you need for your small business – now!
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Qualifying for a Business Term Loan
Quite a few factors can play a critical role in your ability to get approved for a small business term loan.
Credit History
Many term loan products require a decent business owner credit score and solid credit history to qualify. Some options, such as short-term loans, have more leniency when it comes to personal credit and your credit score.
Financial Statements
Documentation of your business’s financial health and annual revenue is critical in proving your creditworthiness to a lender. You may be asked to provide profit and loss statements, annual revenue insights, market projections, and more.
Time in Business
Most lenders like to see that you’re well-established in your industry. Term loan options typically require your business to operate for at least one year, if not two or more.
Other Requirements
Loans like those from the SBA or a traditional bank might require you to submit additional paperwork such as a business plan to learn how the business operates.
Collateral
SBA Products will require business owners to provide collateral such as real estate, personal or business assets, and equipment.
Pros and Cons of Business Term Loans: Is a Business Term Loan a Good Idea for my Business?
Pros
- Meets a range of business needs, such as tracking expenses and unlocking valuable rewards for your company.
- Set repayment schedule, providing predictability for cash flow management.
- Online lenders often fund quickly and receive funds the same day, offering an efficient solution for urgent financing.
- Helps build business credit and improve business credit score, which could lead to more favorable loan terms and rewards opportunities.
- Can finance a larger project or major investment, thereby contributing to business growth and potential access to exclusive business credit card rewards.
- Same-day decisions from trusted lenders, helping businesses take advantage of time-sensitive opportunities.
Cons
- Typically requires collateral or a personal guarantee. This may take the form of a blanket lien, which can be a double-edged sword, as it uses all assets as collateral but might increase the risk to the business owner.
- Potential for prepayment penalties, which could negate some of the financial benefits if you choose to settle your debt early. However, if you qualify for a loan without a prepayment penalty, you could save on interest without incurring extra costs.
- Can have higher fees than other small business financing options, with the complexity of the loan structure often translating into additional costs.
- Does not have a draw feature like a business line of credit, limiting the flexibility to access funds on an as-needed basis.
FAQ: All About Business Term Loans
How to Apply for a Business Term Loan
At AdvancePoint Capital, we strive to be the one-stop-shop for small businesses seeking out a term loan or any other small business financing product for that matter. We make you our top priority and provide valuable insights while searching for the best business term loan for your organization regardless of credit score.
- Identify need- Consider what you need business funding for and how much you will need
- Initial interview- Discuss products based on your need as well as qualifications with a business funding specialist.
- Application- Fill out application and provide required documents for the business term loan approval. This usually consists of business bank statements and other financial statements.
- Offer(s)- A decision then comes with hopefully an offer(s) that are issued. The offer will include a term sheet and/or disclosures clearly outlining the product rate, term, and conditions. Compare multiple offers so that you can make a good decision.
- Accept terms- Once you have selected an offer you will need to sign agreement and provide closing conditions to fund.
- Business Funding- When agreement is signed and underwriting clears all remaining conditions, and ACH payments are set up, funds are sent by wire or ACH...
Our experts can help you explore every possibility and compare multiple lenders, all with attractive rates. This way, you can settle on a loan product that’s perfect for your business and its needs and receive funds in a timely fashion. Contact us now to learn more about business term loans and additional options to continue expanding your business today.
