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Posted 02/02/2022 in Business Loans

Terms Loan for Businesses and how can you use it?

Terms Loan for Businesses and how can you use it?

When you have an idea of how much you need to finance your next project or goal or refinance existing debt, consider a Business Term Loan.

If you have a car loan, student loan or a mortgage, then you’re likely already familiar with the concept of a term loan. You borrow a lump of cash upfront for a specific purpose and repay the loan over a set period of time with fixed, equal payments.

How can you use a business term loan?

Business term loans are set up to meet pretty much any business need, no matter how unique. You can leverage your loan for everything from capital improvements to financing new equipment or hiring more staff.

With a term loan, you borrow a specified amount of money and agree to pay a fixed amount each month over the loan period. You may have a variable interest rate or a fixed rate, and your loan may be secured, meaning it requires collateral, or unsecured. All these factors will depend on who you apply for a loan with and what your loan terms are.

Why term loans?

There are a number of reasons term loans are a fan favorite among business owners. Here are just a few:

  1. Receive lower interest rates than most credit cards and any small-dollar loans or payday loans
  2. Simple, streamlined application process
  3. Business advantages
  4. Cash flow flexibility

Term loans also have some cons, here are some:

  1. They're relatively hard to qualify for. Since term loans have favorable rates and repayment terms, they are usually harder to qualify for than other loans. You need to show excellent credit history and provide detailed financial information to your lender.
  2. Wait a while for loan application approval (shorter for online lenders)
  3. They may charge additional fees. Some lenders charge additional costs for term loans, such as origination fees. Depending on the lender, you could even get hit with a prepayment penalty if you pay off the loan ahead of schedule.

What Term loans best for:

Businesses looking to expand & Borrowers who have good credit and a strong business and who don’t want to wait long for funding.

Term loan example

A great example of a business term loan is the SBA 7(a) loan. Designed for long-term financing, the maturity of the SBA 7(a) depends on the purpose of the loan, the borrower’s ability to repay, and the useful life of the asset being financed. You can get a 25-year term if you use the loan for real estate and up to 10 years if you use it for working capital.

If your business is a startup or embarking on an expansion, the lender may give you an interest-only SBA 7(a) loan. In this case, you’ll only pay the interest on the loan for the first few years and skip principal payments. This allows your business to generate income, which you can then use to pay back the loan in full. That said, SBA loans – including the 7(a) – typically don’t allow balloon payments.

Another great example, A bank loan having a variable interest rate must be repaid in full within a certain period. A term loan could be used to finance a small business's acquisition of fixed assets, such as a factory, to function.

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