What Is a Term Loan?: A term loan is a loan offered by a bank for a particular amount of money. This loan will be paid back to the bank at a specified schedule and has a fixed or variable(floating) interest rate. Term loans are usually offered to small businesses with stable financial statements. These businesses are also willing to put down a significant down payment to reduce their loan payment amounts and the total cost of the loan.
What Is a Term Loan?
Table of Contents
How Does a Term Loan Work?
A term loan is offered to small businesses, and their repayment period may range from one to 25 years. Small businesses ordinarily use this money to buy fixed assets such as modern equipment. These businesses can also use that money for their month-to-month operational costs. Many banks have created term loans that help businesses in this way.
In the United States, the Prime Rate is the benchmark banks use to determine the interest rate at which they will offer their term loans. The bank then sets a repayment period, usually monthly or quarterly periods and date of maturity. The nature of the asset the business is buying plays a crucial role in the repayment schedule. Term loans usually carry stricter requirements, and the bank may require collateral as well. This is done to reduce the risk of default. Term loans rarely carry penalties if repaid ahead of schedule.
What Are the Types of Term Loans?
Term loans differ mainly based on the period of repayment. There are three types of term loans.
- Short term loans
These loans are offered to businesses that are unqualified for a line of credit. The repayment period lasts between 6-18 months. Most banks and Credit Unions prefer to provide short term loans for less than a year.
- Mid-term loans
This type of loan lasts at least 1-3 years, with monthly payments being paid back to the bank from the revenue collected by the business.
- Long term loans
These loans run from three to 25 years and usually require the company to put down some form of collateral. When a business takes this type of loan, it may limit other financial responsibilities held by it. They may not receive other debts and may be required to set aside a part of their profits to meet the loan repayments.
Where Can My Business Get Access to Term Loans?
You can access term loans from credit unions and banks. The trade-off here is that you will need to have an account with good credit and astute business finance records. It may also take a few business days to get the funds into your business account. Online lenders also offer term loans. They often have fewer
requirements and expedite the process of putting money into your account. The trade-off, however, is that they will provide these loans at higher interest rates to mitigate their risks.
What Are the Benefits of Term Loans?
Term loans are useful because they offer businesses finances to expand and grow. These loans can be paid over more extended periods and are affordable. They also help build your business credit line, increasing your access to future finance and credit lines.