small business term loans

Small Business Term Loans: Definition, Importance, Working, and Pros & Cons

Last Updated on: October 17th, 2024

Small business pursuers often need loans at the start of their venture. A lump sum of money is not easy to come by unless you have an asset you can sell. Loans are the last resort for many in such cases.

Small business term loans are those loans for small businesses as working capital. If you have a small business and want to take a loan, this article is for you.

This article is a detailed guide to small business term loans.

What Are Small Business Term Loans?

According to Investopedia, ?A term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms. Term loans are normally meant for established small businesses with sound financial statements. In exchange for a specified amount of cash, the borrower agrees to a certain repayment schedule with a fixed or floating interest rate.?

Small business term loans are those loans in which a bank or a lender pays a lump sum of money to a business startup. Then, the business must repay that money within a limited period. The startup business requiring the loan must repay the money weekly, quarterly, or monthly.

Such loans usually meet all the needs a small business may have for gathering startup capital. However, depending on the loan period, the interest rates may vary. In addition to that, a small business term loan might require a substantial down payment. This will help reduce the loan payment amount and total cost.

Term Loans Key Takeaways:

? The bank gives the business a lump sum of money.

? The business has to repay the money within a prescheduled date.

? A business may repay the money in weekly, monthly, or quarterly installments. Since the money is repaid in installments, the loan is also called an installment loan.

? The interest rate for the loan may vary based on the period of the loan.

Common Attributes Of Small Business Term Loans

Common Attributes of Small Business Term Loans

The following are some of the common attributes of small business term loans:

  • They have fixed and variable rates of interest.
  • The repayment schedule is mostly monthly or quarterly and within a set maturity date.
  • If you use the loan to finance the purchase of an asset, it can impact the repayment schedule during the useful life of the asset.
  • The approval process is quite rigorous for small business term loans. Apart from that, some lenders might even ask for collateral to reduce the risk of default or failure to make a payment.
  • In general, there are no penalties for term loans if you pay them ahead of schedule.

Small Business Term Loans: How Do They Work?

Small Business Term Loans: How Do They Work

Generally, small business term loans are for businesses that need cash. The need can be anything like purchasing equipment, buying a new building, purchasing a fixed asset, or many more. Basically, the business needs a loan to ensure its continuation.

However, some businesses borrow the necessary cash to operate monthly. It is interesting to note that many banks provide term loan programs specifically to help small companies grow.

The application process for small business term loans is the same as that for any traditional loan. However, a business needs to provide various statements and financial evidence to show that they are creditworthy.

If a borrower company is approved for a loan, it gets a lump sum of cash. Furthermore, it needs to make payments over a certain period. This payment happens on a monthly or quarterly basis.

In general, small business term loans come with fixed or variable rates of interest. Apart from that, they also have a set maturity date. Furthermore, if you, as the administrator of your business, use the finance to purchase an asset, there might be an impact on the repayment schedule when the asset is in its useful life.

On the other hand, the loan requires collateral and a strict approval process. This reduces the risk of failure of repayment or loan default. Furthermore, even some lenders might ask for down payments before they agree to offer you the loan you need.

Types Of Small Business Term Loans

Types Of Small Business Term Loans

Small businesses looking for working capital must know the different terms of the loans before taking them. There are three different terms for these loans. For instance:

1. Short Term Loans

Short-term loans usually have a term of 1 year or less. The online lenders lend these loans. They can be very flexible about the qualifications. These loans are very fast to fund, and they are usually expensive.

2. Medium-Term Loans 

Banks, credit unions, and online lenders offer medium-term loans. These loans have a repayment tenure of around five years. These loans are slower to fund than short-term loans, and they are much more affordable.

3. Long-Term Loans

The long-term loans require lots of qualifications of the borrowers, and they are slower to fund. The repayment tenure of these loans is more than 5 years. The period may reach up to 25 years. Traditional lenders like banks and credit unions offer these loans if they have very minimal interest rates.

Small Business Term Loans Criteria

When you apply for a term loan, you must meet the criteria set by the lender/the banks. Here are some of the criteria

  • credit scores
  • Time in the business
  • Collaterals
  • P&L or the statement by the bank to prove your revenue.

How Small Business Term Loans Are Available?

Just as I mentioned above, a small business term loan by a lender gives a business huge funding in return for timely payment. The payment schedule varies based on the business type and payment term.

These loans are available from banks, credit unions, and several online lenders. Credit unions and banks usually offer ideal rates and terms. But they also require top qualifications. The amount of funding available from the lenders is higher, but they are more expensive and often offer smaller terms. Bank loans are slow to fund, but online lenders may offer more flexibility and faster funding.

Pros And Cons Of Small Business Term Loans

There are pros and cons to these types of loans. Before taking these loans, you must check their pros and cons. These will help you with more accurate decision-making.

Pros:

  • Borrowers have a set payment structure, period, and terms. This structure helps the borrowers to make their financial plans.
  • A vast range of businesses can benefit from these loans.
  • Online lenders fund you quickly if you need instant funding.
  • The long-term loanshelp to fund larger investments.
  • Long-term loans charge minimum interest and are affordable.

Cons:

Frequently Asked Questions (FAQs):

Here are some popularly asked questions about small business term loans. For more queries, you can follow the questions and their answers below:

1. What Are The 3 Types Of Term Loans?

There are three types of small business loans. Here are the types:

  1. The long-term small business loans
  2. Medium-term small business loans
  3. Short-term small business loans

2. What Is The Average Term For A Business Loan?

If a business takes a short-term loan, the term may be around one year to 18 months (about 1 and a half years). If a business takes a medium-term small business loan, then repayment tenure is around 5 years. When the loan is a long-term loan, the repayment period may be within 25 years.

3. Are Interest Rates Higher For Long-Term Loans?

Small business owners with a tight budget can benefit from small-term business loans. The repayment terms are every month, and the interest rates for long-term small business loans are the lowest. However, if you are looking for large funding, these loans are the best options yet. 

4. What Is The Interest Rate On Term Loans?

Different aspects determine the rate of a loan. For example, during the approval of a loan, the lender (bank) judges the principal amount, repayment capacity of the borrower, and type of loan to fix the interest rate. Usually, the interest rate ranges from 12% to 20%.

Bottom Line

As a small business taking small business term loans is a good idea. Small business owners can better plan their financial period with these loans. These loans offer more flexibility when it comes to borrowers? qualifications. If you take a long-term loan for expensive equipment funding, the low interest rates will help you.

I hope that you got the information you were looking for regarding term loans for small businesses. If there is any further question, you can let us know in the comment.

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Inspired by The Social Network, Soumava loves to find ways to make small businesses successful – he spends most of his time analyzing case studies of successful small businesses. With 5+ years of experience in flourishing with a small MarTech company, he knows countless tricks that work in favor of small businesses. His keen interest in finance is what fuels his passion for giving the best advice for small business operations. He loves to invest his time familiarizing himself with the latest business trends and brainstorming ways to apply them. From handling customer feedback to making the right business decisions, you’ll find all the answers with him!

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