Term Loans: What They Are and Where to Get the Best Deal

 Know your options before applying for a term loan. Keep reading for term loans: what they are and where to get the best deal.

 If you’re financing a business venture, term loans are a practical funding option you can choose from. If you’re a responsible borrower, term loans can be a convenient and reachable option for you. Yet not all term loans are alike.

You can find out more here on these funding tools. You’ll learn about their benefits as well as their challenges. Study them closely to find out which funding mechanism is best for you.

What are Term Loans?

Term loans are provided through banks and private lending companies. When a business or individual is approved for a loan, they can make either quarterly or monthly payments for a pre-determined period of time. Term loans offer either a floating or fixed interest rate.

Term loans are categorized as either long, intermediate or short term. Long term loan repayment periods last for three or more years. An intermediate-term loan repayment schedule runs between 1 and three years while a short-term loan is repaid in 18 months or less.

There are a variety of benefits of a term loan. Term loans are a predictable source to help finance large investments like hiring more staff or buying a new building for your business. They can also provide cash up front if a borrower needs access to more funds then they could save up for all on their own.

Banking institutions, credit unions, and online lenders are all prime sources for a term loan. Each lender has its own conditions and fees for their loan packages. Be sure to get in writing what the financial obligations are for each source you are considering.

Here’s a closer look at a long, intermediate and short term loan. Each has its own advantages and challenges:

Long-term Loans

Long-term loans have affordable rates that are six to seven times cheaper than short or intermediate loans. Most long-term loans have fixed interest rates. That means your monthly payments won’t fluctuate for the life of the loan.

Long term loans also have monthly payment schedules, unlike short term loans which may require daily or weekly payments. Long term loan payments tend to be in smaller amounts than short or intermediate loan repayment amounts which could mean less stress on your cash flow and bank account.

A long term loan is often difficult to qualify for. It’s also very difficult to obtain a loan like these for less than $250,000. Banks discourage these lower amounts because they spend the same amount of time to process all loan sizes so it’s more profitable for them to issue larger loan amounts.

Another long-term loan provider for companies is the US government. The US government doesn’t directly loan the funds but guarantees that the loans can be repaid to lenders.

The most popular government-backed loans come from the US Small Business Administration (SBA.) The SBA develops policies for lenders to negotiate with small businesses to manage these loans. A “small business” is defined as a company that generates less than $750,00 in revenues and employees 250 people or less.

Not all companies fit the definition of a “small business.” The US Census Bureau website classifies businesses by industry to define a “small business.” Check their site to determine if your company industry qualifies for an SBA long-term loan.

Intermediate-Term Loan

The main difference between a long-term loan and an intermediate term loan is the repayment schedule. Intermediate-term loan repayment schedules last up to three years. Intermediate loans also have fixed interest rates which allows a company to predict payment amounts and what the loan costs over time.

Intermediate-term loans have a unique quality in that you can repay them using profits generated by what the loan was used to buy. For example, if you buy new equipment that increases your revenues, you can use that revenue to repay the loan. Intermediate-term loan conditions also give you a waiting period for the new asset to get up to speed before you need to start making loan repayments.

Intermediate-term loans are also hard to qualify for. If you don’t have strong cash flow or good credit history, you won’t be considered a safety risk. Intermediate-term loan application periods are also longer and require applicants to pledge collateral as security to repay the loan.

Intermediate-term loans are also offered by traditional banks, credit unions, and online lenders. They can provide borrower’s up to $1 million. Talk to these lenders to find out if their institution has prepayment penalties or origination fees for their loan packages.

Short-Term Loan

These business loans are a flexible term loan that can support short-term needs. These needs can include paying for emergencies or unexpected needs. Short-term loans can also help leverage unforeseen business prospects or temporarily support cash flow.

Short-term loan applications are quick and easy to apply for. You can apply for one online from any bank or other lending institution. Borrowers find out in one or two days if they qualify. If they qualify, borrowers receive a lump sum of cash at once to be paid back within 18 months.

Short-term loan amounts are for smaller amounts, either $5,000 or less. Like mentioned before, short-term repayment schedules are also dramatically shorter. Borrowers can expect to make weekly or even daily payments.

Short-term loans also come with high-interest rates. That’s because lenders have less time to vet a borrower’s checking and business history to make sure there is no risk. The higher interest rates are the price one pays for the quick advance and the best way lenders can protect their interests from riskier borrowers.

Next Steps

Feel like you’re ready to leverage one of these term loans for your business? If you are, then you can start today!

Whichever loan you are applying for, be sure to assemble your financial statements and credit history early. These are the bare bone requirements for applying for any term loan.

Review your cash flow management processes to see if you can handle the aggressive repayment schedule of a short-term loan. If you have quick, lower-costing purchases to make like new equipment or repairs, this loan package might be right for you.

For more on what’s a term loan or how to apply for a loan, head on over to our website. We’re ready to help you get your business dreams up and running –without limits!
 

 

 
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