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The Small Business Guide to Getting a Business Term Loan
Uncover everything there is to know about how to secure a business term loan, what it is, how it works, and much more. Whether you need a short-term business loan or a long-term solution, this guide shows you the benefits and drawbacks to understand if these loans fit your business's financial needs.
What Is a Business Term Loan?
A business term loan is a lump sum of capital that a business borrows and repays with interest over a fixed period. They’re typically used for specific, larger expenses like equipment purchases or expansion. These loans have set repayment schedules, usually monthly, with terms that can range from a few months to several years, depending on the loan agreement.
How Do Business Term Loans Work?
Business term loans work by providing a business with a one-time amount of capital, which must be repaid over a specified period with regular, fixed payments that include principal and interest. The business uses the funds for growth-related expenses, and once approved, the loan terms (interest rate, repayment schedule, and loan length) are agreed upon upfront and remain consistent throughout the repayment period.
How To Use Term Loans
Use a business term loan to fund significant investments like expanding locations, supporting cash flow, or boosting inventory, which helps support growth and operational efficiency. Additionally, they can assist with refinancing high-interest debt or funding marketing efforts, making it easier for businesses to manage cash flow and drive revenue.
Funding Expansion Efforts
Business term loans provide the substantial capital required for expansion projects, such as opening new locations or renovating current facilities. This allows companies to grow strategically without depleting their regular operating funds.
Supporting Cash Flow
Businesses can use an SBA Loan to buy necessary inventory or supplies, especially useful for seasonal businesses that need to stock up before busy periods or to fulfill large customer orders.
Acquiring Inventory in Bulk
With a term loan, businesses can purchase inventory in bulk to better meet customer demand, lower their per-unit costs, and ensure they have a reliable supply for busy periods.
Types of Term Loans for Business
Short-Term
Short-term business loans are financing options that must be repaid within a year or less, providing quick access to capital for immediate needs like inventory purchases or cash flow gaps. They often have higher interest rates due to the shorter repayment period.
Medium-Term
Medium-term business loans normally have repayment periods ranging from one to five years, making them ideal for financing significant, but not permanent, business needs like equipment or expansion projects. They offer a balance between manageable monthly payments and accessible loan amounts.
Long-Term
Long-term business loans provide financing options with repayment terms extending beyond five years. They’re commonly used for substantial investments like property or large-scale expansion. These loans generally offer lower interest rates and predictable monthly payments, making them suitable for long-term planning.
Why Apply for Term Loans?
Building Business Credit
Repaying a term loan can help establish or improve a business’s credit profile. This makes it easier to qualify for larger financing in the future and demonstrate financial responsibility to potential investors or partners.
Refinancing Existing Debt
Businesses can use a term loan to consolidate or refinance high-interest debt. This often secures a lower interest rate, improving their overall financial health by reducing monthly payment obligations.
Taking Advantage of Growth Opportunities
Enable businesses to seize timely growth opportunities, like purchasing discounted inventory in bulk or launching a new product, allowing them to stay competitive and maximize potential returns.
Pros & Cons of Term Loans
Pros
Predictable Payment Schedule
Potential for Early Loan Repayment
Lower Interest Rates
Cons
Inflexible Repayment Schedules
Stringent eligibility Requirements
Potentially Slow Funding Time
Is a Term Loan Right For You?
The best business term loans offer business owners a reliable source of capital with predictable payments, making them ideal for funding growth or large purchases. However, it’s crucial to evaluate all available financing options, as other solutions might better align with a business’s specific cash flow needs and long-term goals.
Additional Loan and Financing Options to Consider
Small Business Loans: A Practical Option Worth Considering
Small business loans provide immediate funds to support operations or growth needs with defined repayment terms. Unlike a term loan, a small business loan often offers more flexible terms. It can be tailored to meet the specific cash flow demands of a growing business.
Prepayment discounts
Borrow up to $1.5 million
Revenue Advance: A Personalized Funding Alternative
A revenue advance is a cash advance based on future sales, repaid through a percentage of daily revenue. It can be a better option than a business term loan because repayment adjusts with sales, offering flexibility during slower periods. Unlike a small business loan, which has fixed repayments, a revenue advance fluctuates with daily sales.
Variable terms accommodate lower cashflow periods.
Weekly payback plans
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Minimum Eligibility Requirements
The criteria include evaluating credit scores, financial records, your business's history, potential collateral, and additional factors. Here’s an overview to help you understand what to anticipate:
Minimum Requirements
| Time in Business | Minimum 6 Months |
|---|---|
| Business Annual Growth Revenue | $240K+ Annual Revenue |
| Business Checking Account | Yes |
| US Citizen/Based Company | Yes |
| FICO Score | 570+ |
| Other Financing | None |
| Bankruptcies | None open |
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Business Term Loan FAQs
How long is a business loan term?
It depends on the type of loan and lender. Short-term loans typically last from 3 to 18 months, medium-term loans between 1 to 5 years, and long-term loans potentially stretching from 10 to 25 years or more.
How do short-term business loans work?
Short-term business loans provide a fast infusion of cash, designed to be repaid quickly, often within 3 to 18 months. Businesses use these loans for immediate needs like covering payroll, inventory purchases, or addressing seasonal fluctuations, and lenders usually set higher interest rates and weekly or even daily repayment schedules to reflect the short duration.
What are some examples of term loans?
Examples of term loans include equipment financing, which allows businesses to purchase necessary machinery or technology and pay for it over time, commercial real estate loans to fund property purchases or renovations, and working capital loans aimed at helping businesses meet their day-to-day operational expenses. Each loan provides a specific solution to a business's needs, structured with a fixed repayment term and schedule.
What are typical term loan interest rates?
Interest rates for term loans can vary widely, ranging from 4% for highly qualified borrowers up to 30% or more for those with lower credit scores or shorter loan terms. The rate often depends on the lender, loan amount, term length, and borrower’s financial history; lower rates are typically associated with long-term loans and strong credit, while short-term and higher-risk loans come with higher rates to compensate the lender.
What kinds of businesses are best suited for term loans?
Established businesses with steady revenue and a clear investment plan are best suited for term loans, particularly those needing capital for long-term investments like expanding operations, purchasing large equipment, or securing commercial property. Startups or businesses with irregular cash flow may find shorter-term or more flexible loan options better until they have a more predictable income stream.
Does applying for a business term loan require a hard pull on my personal credit?
Yes, most business term loan applications involve a hard pull on the applicant's personal credit. This helps lenders assess the applicant's creditworthiness and ability to repay. While some lenders may consider business credit, personal credit is a key factor in approval decisions, especially for small businesses and sole proprietors.
Do I have to provide collateral for a term loan?
Lenders often require collateral for larger-term loans to secure their investment, which could include business assets like inventory, equipment, or real estate. However, some smaller or short-term term loans, particularly those for well-qualified borrowers, may be unsecured, though they typically come with higher interest rates as a trade-off.
How do you qualify for term loans?
Businesses usually need a strong credit score to qualify for a term loan. Consistent revenue and a clear demonstration of financial stability are also required. Lenders may also need a minimum operating history, typically at least one to two years, and financial documents like tax returns, profit and loss statements, and bank statements to assess the business’s ability to meet regular repayments.
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Blackrock Consulting LLC provides business capital, including business loans and Revenue Based Financing, directly and through a network of unaffiliated third-party funding providers. All offers will depend on your business meeting at the time of submission our pre-qualification and/or underwriting criteria, which includes, but is not limited to, business & personal credit history, time in business, cash flow, revenue consistency, industry-specific underwriting rules. Business loans are offered by Blackrock Consulting LLC, by Blackrock Consulting LLC. Revenue Based Financing is offered by Blackrock Consulting LLC.