Business Term Loans

One of the best things about a term loan is that it can be used for a variety of funding needs. Here are some examples of how you can use your term loan:

Payroll gaps

You can use a small business term loan to cover a payroll gap you’ve got to cover. You might have one because your business is seasonal. Or you might have one because you had a rush of business and had to bring on new employees to help cover it all. Either way, you can use a term loan to pay.

Adding another business location

If you’ve got one brick-and-mortar business location that’s thriving, the opportunity to open another might be too good to pass up. You could use a term loan to help you cover the startup costs of your new location. Renovations, rent, and materials for running your business all cost money a term loan could help provide. 

Marketing

Word-of-mouth advertising is great, but it only gets your business so far. You likely need to market your business at times and term loan funding can help you do that.

Acquiring another business

Another way term loans could help your business is if you’ve got the chance to acquire another business. If there’s one that comes on the market and would be the perfect addition to your existing business, don’t miss out. You can use a term loan to help acquire it.

The interest rates for term loans tend to be lower than those for short-term loans or other kinds of quick financing. You should also be able to calculate monthly payments for your loan as well because the interest is a flare or fixed interest rate. You could see interest rates as low as 6% with a term loan. Don’t forget to add in any origination fees or application fees, and be aware of any early repayment fees that could come with the loan.

Term loans are best used for one-off expenses like investing in equipment, real estate, or working capital. Because term loans can be approved relatively quickly, they are a great way for businesses to fund essential projects or expansions to grow their business long-term. If you need money for a big project with solid ROI potential, a term loan can be a good option.

Term loans can be used for a number of projects or investments, such as expanding office space, purchasing a new building, upgrading technology, or diversifying holdings. Typically, term loans are used to purchase long-term assets that won’t be sold or converted into cash within the year. However, they can also be leveraged for other intangible projects like funding a marketing campaign, creating a new website, or even paying off another higher-interest loan.

Well-established businesses with a solid history of strong financials and healthy revenue are a good match for term loans. Lenders are looking for borrowers that can demonstrate reliable income and repayment through strong credit and financial history. 

Newer businesses or startups with less than two years in business are unlikely to be a good match for term loans—they simply don’t have the financial history yet to prove they are a safe bet for lenders.

Term loans have advantages and drawbacks—which loan is right for you will depend on your own business goals and how well you meet eligibility criteria. Weigh the pros and cons carefully to understand if a term loan is right for you.

Pros of Term Loans

Predictable payment schedule

Term loans are lump sum funds with a set repayment schedule, which means you’ll always know when payments are due and how much is owed. This predictability makes it easier to plan your finances, make more accurate projections, and budget accordingly. 

Lower interest rates

Long-term loans typically have lower interest rates compared to other financing options, making them a more affordable option for businesses. Additionally, because the loan is spread across a longer time period, the monthly payments will generally be lower, resulting in less impact on cash flow from month to month. Plus, interest on term loans is tax deductible, putting more savings into your pocket. 

Versatile short- or long-term financing options

Term loans offer flexible financing options for businesses, from short-term funding up to 18 months to longer terms anywhere from a few years to a decade or more. 

Cons of Term Loans

Inflexible payment schedule 

The predictability of term loan payments can also be a disadvantage. Term loans have fixed repayment schedules and often have strict policies on early repayment. This means you must pay on time every month with little to no exception. And short term loans may have more frequent repayment deadlines with weekly or even daily payments. This can put a strain on a business if its cash flow is unpredictable. 

Strict eligibility requirements

Because term loans typically deal with significant sums of money, lenders have stringent eligibility criteria. Borrowers should have an established business with strong finances, and a good credit score. 

Be prepared to share:
 

• Credit history
• Personal and business cash flow
• Annual business revenue
• Business plans

New businesses don’t have a long-established financial history to demonstrate secure cash flow and practices, so they are less likely to get approved. 

Extensive paperwork

Term loans are a big investment for both lenders and borrowers, so expect a fair amount of paperwork. Lenders will do their due diligence, combing through extensive paperwork to understand your financial history and ability to make monthly payments and to uncover any potential red flags. 

Organize your records, including:

• Multiple years of tax returns
• Bank statements
• Debt obligations
• Balance sheets and income statements

Businesses with well-organized finance records can save time and help the process move forward smoothly.