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Business Term Loans Compare Options

Recognizing business term loan options is an essential expertise for anyone who wishes to borrow money for business. The loans are a loan category with a pre-determined repayment timeframe. These are usually given by banks and other institutions, and an interest rate has to be agreed upon. Applicants usually provide accompanying reams of documents to be considered for these loans. Some term loans are secured, while others are unsecured and they differ in their repayment terms. Now, we will delve into the details of these loans and how they are offered.

by | Nov 17, 2023

Common Attributes

The main factors to consider when getting into a term loan are the characteristics of the loan. The factors defining loans could be many such as the interest rate, repayment conditions, or the time in which you will get the funds.

Applicants, meanwhile, need to be aware that each loan comes with its own stipulations and papers to be submitted. Understanding these aspects beforehand therefore should help borrowers avoid any stress when applying for a term loan and increase their chances for getting the funding they need.

Business Term Loans Overview

A lot of companies use term loans to finance their projects. These loans are characterized by fixed interest rates and they constitute the most important source of financing growth of a business enterprise.

With a term loan, small businesses can acquire funds that will be used for widening their operations or for investing in their further growth.

Different from other types of financing such as credit lines, term loan gives you a sum upfront all at once, one which is repaid over a fixed time and at an interest rate already determined.

The Anatomy of a Business Term Loan

Deciphering Term Loans

Lenders are a core element in determining the mechanics of term loans.

They formulate the terms of repayment which include the loan amount, interest rate, and duration among others.

The interest rates for term loans may be fixed or variable. It is important that borrowers know how to calculate these rates.

Moreover, there is a sequential application process where borrowers are required to make an application following certain steps involving assembling required documents and supplying accurate and full information.

Documents Required

Before going for a business term loan, borrowers should prepare all the paperwork. These could be the likes of income statements, balance sheets, personal credit score, tax returns and bank statements.

Lenders may even request additional documents if they have their own requirements.

With the help of these documents, the lenders are able to assess the creditworthiness of the borrower and determine if they meet the lending criteria.

Benefits and Drawbacks

Evaluating Term Loans for Your Business

One of the advantages of business term loans is that they are offered with stable interest rates and manageable monthly payments.

Nevertheless, there are also shortcomings, like needing collateral and then limiting your future financing options.

Borrowers have to consider these factors in their decision-making before applying for a term loan.

Affordability Assessment

Before opting for a business term loan, borrowers should examine the affordability of the loan.

The lender will conduct the assessment based on several criteria including financial statements and credit history to determine whether the lump sum is an affordable repayment for the borrower’s business.

Indicators like the debt service coverage ratio is usually used to calculate how the cash flows are compared to the repayment obligations of the borrower.

Term Loans vs Other Financing Options

If you are a borrower, you might want to compare term loans with other forms of financing. Further, different loans such as SBA loans, term loans, equipment financing, and lines of credit are available in the market, each having their own pros and cons. Let’s see the differences between term loans and other forms of loans.

Term Loans vs SBA Loans

 

Preparing for a Successful Application

When comparing term loans with Small Business Administration (SBA) loans, one of the main attributes that borrowers should consider is the length of the repayment.

This is because term loans typically have a fixed repayment period as well as a fixed interest rate, making them predictable in terms of budgeting.

In sharp contrast, most SBA loans are guaranteed by the government and can have more favorable terms, such as a shorter down payment, longer repayment terms, and in some cases, lower interest rates.  

SBA loans require more rigorous qualifications than that of term loans and often also take a longer time to qualify for.

Also, SBA loans might have collateral and personal guarantee requirements, while term loans don’t. Finally, SBA loans might be a better fit for startups/businesses with no credit history, as they provide financing that might otherwise be unavailable.

Term Loans vs USDA Loans

You have to look at the business needs and eligibility requirements of the term loans and USDA loans to decide which is right for you. Term loans often have set repayment periods and interest rates, making them manageable from a budget perspective.

These loans are accessible to small businesses and other similar enterprises. If you run a rural business or have an agriculture venture and need favorable terms at low interest and long repayment terms, government support is available.

The USDA loans have terms designed to support and advance these essential aspects of the community.

While USDA loans may impose stricter eligibility criteria, such as location- and industry-specific requirements, it may also demand more collateral and longer approval times than a term loan requires.

Prospective borrowers should weigh their prospects of receiving favorable repayment terms on an USDA loan over those of a term loan.

Term Loans vs ABL (Asset-Based Lending)

Finalizing Term Loans

Differentiating between term loans and asset-based lending (ABL) is important because the two loan types can offer quite different structures and eligibility requirements.

Typically, term loans have a fixed time period for repayment and a set interest rate reflecting the risk associated with the lender’s investment.

While these loans are a good choice for businesses with stable, consistent cash flow and other assets, they may not be ideal for businesses that often lack sufficient starting capital.

On the other hand, an ABL loan (asset-based lending) allows businesses to borrow against their assets. Lenders look at the worth of a business’s assets, be it its accounts receivable, physical inventory, or machinery and equipment, to determine the amount of money that can be borrowed.

ABL offers somewhat more flexibility in the amount that can be borrowed, or even the timing of repayment of funds – because the funding is backed by assets, not determined by a prior sentence to a predetermined term.

However, ABL typically includes higher interest rates and fees than a term loan, plus more frequent reporting and review of assets, which adds more administrative burdens on the borrower.

Watch Our Videos

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FAQ

Here are some answers to Frequently Asked Questions.

What is a term loan?

A term loan is a type of loan that provides a fixed amount of money to a borrower, which is then repaid over a set period of time with regular installment payments. It is commonly used by businesses to finance specific projects or investments.

How do term loans work for businesses?

Businesses can obtain term loans from banks or other financial institutions. The loan amount, interest rate, and repayment terms are agreed upon between the lender and the borrower. The borrower receives the funds upfront and repays the loan in installments, typically monthly or quarterly, over an agreed-upon period.

What should I consider when evaluating term loans for my business, specifically the repayment terms, working capital, and repayment periods?

When evaluating term loans, it’s important to consider factors such as interest rates, repayment terms, fees, prepayment penalties, and any additional requirements or conditions set by the lender. It’s crucial to assess your business’s financial situation and projected cash flow to ensure you can comfortably meet the loan obligations.

How do term loans compare to other financing options?

Term loans differ from other financing options like lines of credit or equity financing as they provide a lump sum amount that must be repaid over a fixed period. Unlike revolving credit lines, once you repay a portion of the principal on a term loan, you cannot reuse those funds without applying for another loan.

What strategic considerations should I keep in mind when applying for a term loan with repayment terms and working capital?

Before applying for a term loan, it’s wise to determine your specific funding needs and how the borrowed funds will contribute to your business goals. Understanding your creditworthiness and preparing necessary documentation like financial statements and business plans will enhance your chances of securing favorable terms.