Everything You Need to Know About Business Term Loans

Trying out a new business for the first time comes with several challenges you have to deal with. Sourcing for a vendor to handle your demands, looking for investors, buying equipment, paying staff, deploying different marketing strategies, etc., doesn’t come easy. You’d need enough finance to foot these mounting bills that are higher than the available resources.

When you don’t have cash readily available, you’d need a business term loan. This article will discuss everything you need to know about business term loans, how it works, and how to secure one for your business.

What Is a Business Term Loan?

Business term loans are loans provided to executives to develop their business and achieve their brand objectives. These loans are typically granted by financial institutions and certified lenders to take care of their business needs when the funds aren’t available.

Business term loans are also called installment loans – as they’re meant to be repaid at the maturity date. The loan's interest rate depends on the type of term loan selected by the business owner.

Usually, these loans are used to finance fixed assets, but businesses can also use them for working capital requirements, expansion, marketing strategies, and many other reasons.

Types of Business Term Loans

There are different types of business term loans, and you should know how each of them operates. These loans include:

Line of credit. This is one of the most common forms of loans available for small businesses. These loans help business owners make up their working capital for daily operation costs, inventory purchase, expenses, etc. These loans typically come with low interest, so it’s recommended for small businesses to have a line of credit.
Letter of credit. If you’re a business involved in international transactions, then you might want to consider getting a letter of credit. This loan ensures payment is made to a vendor located in another country. The buyer (who applied for the loan) will pay the loan plus interest on a specific date as agreed with the financial institution. For non-payment, the bank may be forced to seize the buyer's personal assets and opt to sell in the open market to recover the loan. Most experts do not consider the letter of credit a term loan, but businesses need it.
Short-Term loan. Like the name already suggests, short-term loans are loans granted for a short period. These loans are best suited for businesses that are somewhat seasonal in nature. For instance, companies who experience peak sales in a particular season can take short-term loans to finance operating costs and payback with interest later.
Long-Term loan. These loans are provided for a long time and are best suited for businesses looking to expand services, acquire or merge with another company, and for more extended financing periods. These loans have lower interest rates compared to short-term loans. If your business has an impressive credit report, you can apply for long-term loans.
Secured loans. These are loans granted to businesses in exchange for collateral in the event of non-repayment. If the company fails to pay back the loan, the financial institution has a right to sell off the collateral to recover the loaned amount. Secured loans are granted for more than a year.
Unsecured loans. These loans are granted to businesses without collateral in place. In this case, the banks are confident that the company will pay off the loan with interest at the agreed maturity date.

How Does Business Term Loans Work?

When your business needs resources to handle your corporate and marketing needs, you’d need a business term loan. These loans are granted by lenders to enable you to easily take care of your needs.

In exchange, you’d be required to make future monthly repayments with interest. However, you can agree with your lender to work out repayment terms, including maturity date, interest rate, or reset rate requirements.

Business terms loans are just what you need to keep your business afloat if the necessary funds aren’t available. You can choose the preferred loan that suits your best interests from the type of loan listed above.

Pros of Business Term Loans

Business term loans come with several merits and demerits. Let’s start with the advantages first.

Low monthly down payments. Some of these loans come with lower monthly down costs, which is beneficial. You won’t have to exhaust your entire cash flow into paying back the loans.
Additional income. Another benefit to these loans is that you have the funding power to acquire fixed assets and tools for your business. These acquired items will generate revenue for your business over time, and some of the funds can then be used to pay back the borrowed loans.
Increased returns. Business terms loans can generate more returns to your company if used the right way. The right marketing strategy coupled with the necessary loans will boost your profits in no time.
Establish ownership. One of the best ways to ensure you don’t lose equity over your business is proper term loans.

Cons of Business Term Loans

Some of the cons of business term loans include:

Difficulty in qualifying for the loans. Some of the listed loans are difficult to be eligible for, especially if the credit score for your business is low.
Collateral required. Some loan terms come with a collateral guarantee that will be acquired by the lender in the event of non-payment. A personal guarantee may be required as well.
Repayment penalties. Some of these loans come with late and prepay penalties. For instance, if you intend to pay off the loan before the maturity date, you may be charged a hefty fee. You may also experience the same problem if you fail to make timely payments on the agreed maturity date.
Business loss if there’s no revenue. If you borrowed a loan for a business venture and it doesn’t pan out the usual way, you’d have to deal with paying back the loans when there’s no real return on investment. That’s why it’s recommended to review your business strategy before applying for a loan.

Final Thoughts

Business term loans are perfect for your financial needs if the available resources aren’t enough. Before applying for any of these term loans, take some time to identify your needs, the loan amount needed, and the suitable loan type for your business.

Here at Bunny Lender, we connect you with the best lenders in your city to provide you the best funding for your personal and business needs.