Business Term Loan:

A complete guide

Businesses use several types of financing, including lines of credit & term loans. Term loans help businesses cover immediate cash needs. However, with so many financing options, you might ask how do business term loans fit in? In short, if you have a small business with high-priority and specific expenses to cover, a term loan from an online lender, credit union, or a bank can help a lot.

What is a business term loan?

A term loan, often referred to as a business loan, is an agreement between a lender and a borrower where a lender provides immediate cash to the borrower, and the borrower repays the money in installments over an agreed-upon length of time. The borrower also pays a certain percentage of interest as an incentive to the lender.

Thanks to the flexible repayments, a business term loan can help you as a business owner with large purchases. It efficiently spreads a large sum payment over smaller fixed installments to the lender. Think of it as something similar to a student loan from, where a student pays off the university and then pays back the amount to the lender in smaller monthly repayments.

A business term loan is great for specific expenses like a purchase of a new location for business expansion, equipment, vehicle, etc. to improve your operations and boost growth. However, it comes at the cost of interest or factor rate charges, and costs such as loan origination fees, underwriting fees, closing costs, and more.

How does a business term loan work?

The answer depends on who is providing the loan for you. It is difficult to qualify for a business term loan from a bank or a credit union as they require a business history of several years; however, you get low interest rates. On the other hand, you can quickly secure a term loan from an online lender with fewer conditions but expect to pay a bit more for the convenience.

For a long-term loan between three and ten years, you will probably pay an interest rate between 4% and 6%. However, several factors will determine your interest rates, such as your cash flow, credit history, and other financial information.

There are two types of business term loans offered. One is a secured loan where you will have to provide collateral for the unpaid balance. The second option is an unsecured loan that does not require collateral.

Like any loans, business term loans charge interest. You can get a fixed-rate loan, which will keep the interest rate the same throughout the life of the loan. Alternatively, you can get a variable rate loan, which goes up or down depending on a base interest rate. Most borrowers opt for a fixed-rate term loan to keep interest costs stable.

You can find both short-term and long-term small business loans from several online lenders (sometimes called "alternative lenders"), peer-to-peer lenders, and other institutional lending companies. Some may try to match bank loan rates, but most will cost more.

Benefits of a business term loan

A business term loan may offer several benefits to businesses, but the most significant ones are as follows:

  • Prompt funding

    A standard business term loan transfer may take up to three working days. Some lenders offer same-day funds transfer upon approval.

  • Pre-payment incentives

    Incase you pay off your loan early, you may qualify for pre-payment incentives. This may also make you eligible for the waiver of remaining interest without any fee or penalty.

  • Loyalty benefits

    If you are a repeat customer, many banks and lenders offer you customer loyalty benefits such as no origination fee on any subsequent loans.

  • Helps build credit history

    Making repayments on time helps you build business’ credit. Banks and other lending parties can see these credit reports when running credit checks for future loan requests.

  • Fixed/predictable payments

    With fixed-rate business term loans, you pay the same installments throughout your lending period. This helps you manage cash flow effectively with no surprises or large upfront costs.

Top 5 business term loans

Here are the five best business term loan options you can choose from.

Small Business Administration (SBA) loan

As the name suggests, the Small Business Administration backs these loans and offers guarantees to SBA approved lenders in case of loan default. SBA is not an actual lender, but they set the requirement, qualification, and guidelines for an SBA term loan.

These qualifications and guidelines are stringent and require detailed paperwork for financial statements and annual revenues.

Unfortunately, these loans are comparatively difficult to secure. Moreover, if you are looking for quick access to funds, SBA is not the answer as it requires a long time to process and get approval. Typically it can take from a couple of weeks to months to get accepted.

However, SBA is the most sought after funding option due to its low rates and long terms.

Traditional bank term loan

Some conventional banks also offer small business term loans either directly or via the SBA. However, most banks will only offer business credit cards or lines of credit to companies. Bank loans and their rates are usually competitive but hard to secure.

Business term loans from banks have a low approval rate. Did you know that less than 20% of bank term loan applications receive approval? Unless you have a strong business credit history with many years of history, better to look elsewhere to secure a loan.

Long term business loans from online lenders

Since the rise of online lending, long term business loans have become a popular option among businesses. Long term means a term over two years of duration. The rates are attractive, but vary greatly depending on the lender.

Long term business loan rates tend to be attractive. The approval rates for these loans vary between 15% and 25%, meaning only businesses with a healthy and profitable business history get approved. Credit standards are stringent in comparison to short-term business loans. If you are a business that has been operating for two years minimum, your chances of getting a long term loan are good.

Short term business loans

Short term business loans offer an upfront lump sum amount to the borrower with a fixed interest charge (sometimes called a "factor rate") and term to be paid back over 3 to 18 months. In case you are unable to qualify for a traditional business loan or a long term business loan, a short term is a great alternative.

The total amount you would pay back is the principal amount, which is disbursed to you, multiplied by an interest or factor rate charge (expressed as 1 plus the interest rate). For example, the principal amount may be $100,000 and the factor rate 1.15. The total payable amount then is $115,000 (in other words $100,000 x 1.15). This type of loan typically costs more than a traditional loan, but you do not require extensive paperwork, a high credit score, or a long business credit history to secure these short term business loans.

Business acquisition loans

Whether you are a new business or thinking about expanding your operations, some lenders or banks offer financing options only if you can pay a down payment or offer collateral. A business acquisition term loan offers competitive rates, which typically start at 4.5%.

The rates may increase up to teen figures if you have a challenging application depending on low credit score, financials, collateral, and down payments. Your application will require extensive paperwork. These loans are tricky to secure.

Which is the right business term loan for you?

If you are considering looking for a business term loan and about to begin the process, you must first ask yourself these questions.

  • Why do you need the loan?

  • How much capital do you need?

  • What cost can your business afford?

  • How will a business term loan benefit your business?

The use and purpose of securing a term loan will dictate which option you should choose. We recommend that you balance factor rates or interest rates with terms, fees, loan flexibility, and payment frequency when choosing the best term loan.

Idea Financial Term Loan

We are market leaders offering a business term loan with affordable rates. In the case of early payoffs, you will get a 50% discount on any remaining interest owed. Idea financial has a simple application process with approval in minutes, and you get funding within a day of your loan approval.

To be approved for an Idea Financial Term Loan, applicants need to meet the following requirements:

2 or more years in business

$15,000 or more in monthly revenue

650 or higher personal credit score

Not a sole proprietorship or non-profit entity

If you are looking for a loan amount between $10,000 and $250,000, contact us today!

Apply online or call us at: (855) 900-7838

Applying is free and will not affect your credit score

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