While seeking external funding assistance may not be your priority at the moment, it is a reality that most businesses will eventually need to face. Having access to additional financial resources can help a business scale up operations, expand into new markets, or invest in research and development for new products and services. The funding also helps bridge the gap between current financial resources and future growth potential.
Many different financing options are available, but a term loan is one of the most common options for small business owners. Term loans can be used for a variety of purposes and can have a range of different durations.
What is a Term Loan?
A term loan is a type of loan that is typically paid back over an agreed-upon period of time, with regular payment amounts consisting of both principal and interest. Unlike a revolving line of credit, where the borrower can choose how much to withdraw, a term loan has a fixed amount that must be repaid. The repayment terms and interest rate of the loan will depend on the lender, credit history, and other factors. A term loan can be used to even out cash flow, improve working capital, purchase equipment, and scale a business.
Types of Term Loans
There are three main categories of term loans:
Short-term loans are designed to meet the immediate financial needs of businesses. These loans usually have repayment periods of one year, and borrowers typically make daily payments to repay them in full. Generally, loan payments are spread out over a fixed number of days, and the amount due each period is usually the same. With fast approval times and quick access to funds, short-term business loans can be a great way for businesses to secure working capital in a hurry. However, it’s important to use short-term loans only for expenses that will deliver an immediate payoff. Otherwise, you could fall behind on your payments and rack up a lot of debt in interest fees.
Intermediate term loans generally have repayment periods of one to five years, with regular payments occurring on a bi-weekly or monthly basis. These loans often come with relatively low interest rates, making them attractive for businesses who need to borrow money for short-term projects, such as funding new equipment purchases or expansions, buying inventory or paying off existing debt.
Long-term loans generally run from six to 20 years. Long-term loans are beneficial for businesses that need to acquire capital for large projects such as constructing new buildings, purchasing expensive equipment, or acquiring another business. Such loans allow companies to spread the cost of big projects out over a long period of time and pay only the interest on the loan until they have enough money to pay off the loan principal. Long-term loans also come with low interest rates, making them a much more cost effective way to finance large projects.
Benefits of a Term Loan
A long term loan is a great option for those who need to finance large purchases. Some advantages of long-term loans include:
Building Credit – Establishing a strong credit history for your business can help you secure additional financing in the future and can also help you obtain better interest rates and terms.
Lower Interest Rates – The interest charged on a long-term loan is typically lower than that of short-term financing since it is paid off over time. Long-term loans offer borrowers the advantage of predictable monthly payments due to the fixed interest rate. The lender is also shielded from potential fluctuations in the interest rate during the term of the loan, allowing them to manage their liabilities more effectively.
More Capital – A long-term loan typically allows you to borrow much more than a short-term loan. You’ll be able to use the loan for significant items, such as purchasing expensive equipment or buying a new building. You can also keep part of the proceeds for when you need it or to buffer your working capital.
Longer Commitment Period – Agreeing to a loan of this length is beneficial in that it allows individuals to plan and predict their financial obligations for the long-term. This is advantageous since it removes the need to manage uncertainty, as individuals are aware of their financial commitments over the next decade or more. Additionally, having a loan of this length eliminates frequent adjustments to the loan agreement and potential refinancing, which can be expensive and time-consuming.
A short-term loan may be more realistic for newer businesses or those who don’t want to commit to long repayment periods. Some advantages of short-term loans include:
Quicker Access to Funds – Because short-term loans involve less paperwork and involve shorter repayment periods, businesses have quicker access to the funds they need. This can be especially beneficial for businesses that are in a pinch and need money quickly.
Easier Qualification Requirements – Short-term loans tend to have less stringent qualification requirements than long-term loans, making them easier for small business owners to obtain. Because of their shorter repayment terms, lenders are often willing to overlook certain qualifications and lend to businesses that would not be approved for a long-term loan.
Lower Risk – Since short-term loans involve smaller amounts of money and shorter repayment periods, they inherently involve less risk than longer-term loans. This can make them a great option for businesses that don’t have the financial stability to handle a long-term loan.
Helpful for Emergencies – Providing funding for emergencies is one of the most valuable benefits of short-term financing. These funds provide a lifeline in times of need, allowing businesses to access much-needed capital quickly and efficiently. This type of financing helps companies bridge the gap between income and expenses, ensuring that necessary operations can be maintained and costs are covered.
Using a Term Loan to Cover Your Business
Using a term loan is a great way to maintain control of your business while still receiving the necessary capital needed to drive growth. It’s a welcome alternative to accepting outside investors who may want a say over your operations. Unlike equity financing, which involves the sale of ownership stakes in the company, a term loan typically involves borrowing from a single lender.
Using a term loan over personal funds is also a way to keep your company safe. Putting money into a business from one’s own pocket can be a tempting proposition, especially if the individual has strong personal ties to the organization. However, it is critical to remember that doing so can create more problems than solutions in certain contexts. These funds may not have been budgeted and could put a strain on the business’s future finances, jeopardizing the company’s ability to meet its obligations and remain solvent. In addition, using personal funds can create potential legal issues with regards to the law and related regulations such as taxes and securities.
Apply for a Business Term Loan with Online Capital
Are you ready to apply for a business term loan?
Online Capital understands that no two businesses have the same needs. That’s why our business loan packages come with flexible repayment options and customizable terms to meet your unique requirements. Unlike other money lenders, we offer transparent terms and conditions that will help you stay on top of your payments over the course of your loan. Our knowledgeable staff will help guide you through the entire process, ensuring you get the best value. Best of all, our application process is quick and easy so you can get the cash you need when you need it most.
Apply with Online Capital today!