Who Qualifies for a Term Loan?
Lots of businesses can qualify for term loans. Some lenders exclude businesses considered high-risk, such as restaurants, nonprofits and those in the cannabis and adult entertainment industries. However, with careful research, a lender can usually be found for nearly any legitimate business that meets the requirements detailed above.
When Should a Term Loan Be Used?
Business term loans are best used to finance business activities and purchases. These funding needs can take a number of forms, including:
- Increasing working capital
- Meeting tax or payroll obligations
- Paying for inventory or equipment
- Refinancing existing business debts
The majority of business term loan lenders don’t put a lot of restrictions on the use of the borrowed funds. However, the main purpose of any sort of business loan should be to generate more revenue.
While it’s not advisable to take out a loan if a company is in dire financial straits, business term loans can be used in a variety of ways to help a company grow, such as funding daily operations, taking a business to the next level and covering large business purchases.
Funding Daily Operations
The most common reason for taking out a business term loan is to help fund daily operations. For example, payroll may need some additional cash until the busy season rolls around. Or, inventory may need a boost to ensure there’s ample product on hand for a grand opening sales event. Whatever the need, a business term loan can bolster the company coffers.
Taking the Business to the Next Level
Increasing the working capital of a company can be the difference between losing an opportunity and landing that major account that elevates a business to the next level. The launch of a new product line can help a business expand its customer base and increase its future earning potential. Business term loans can help fuel that growth by providing funding for research, development and marketing.
Covering Large Purchases
A major purchase can eat up a business’s available capital. By borrowing the funds instead, a company can finance a major purchase such as new technology or updated equipment without draining the business bank account.
Breaking Down Each Term Loan Payment
Business term loans follow an amortization schedule much like car loans and mortgages. This means that at the beginning of the loan, a larger portion of each payment goes toward interest and a smaller portion toward principal. As the loan matures, this gradually reverses until the majority of each payment is going toward the remaining principal.
This is done primarily as a safeguard for the lender against an early payoff of the loan. By collecting interest early and leaving the principal until later, most of the interest is already collected if the borrower pays off the loan balance before the end of the term. While the monthly payment on the loan stays the same throughout the term, a company can save more interest by paying off a loan sooner rather than later.
To understand what’s being paid and when, borrowers should always ask their lender for a loan amortization schedule.
Comparing Term Loans
Business term loans are really quite simple and precise. A business borrows a certain amount for a specific period of time and repays it in set amounts at regular intervals.
Banks are the traditional lenders for term loan products. They offer lower term loan interest rates but take longer to fund and generally have stricter requirements, such as a higher annual revenue and personal credit score. Repayment terms from banks are typically up to 10 years.
Online lenders that offer term loans generally have less rigid qualifications than banks. They offer convenience and faster funding but typically cost more than bank loans in the end. Moreover, online lenders offer short-term loans with repayment terms between three months and three years in length.
Small Business Administration (SBA) loans are another option. They’re guaranteed by the federal government and available through both online lenders and banks. This kind of term loan can provide as much as $5 million for as long as 25 years, depending on how the money will be used. SBA loans have some of the lowest APRs available.
With all these resources available to provide funding to businesses, choosing a provider for your term loan is all about the research and paperwork. Lendzi’s transparent business term loan rates and simple process makes securing your loan as easy as applying now.