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If you’re one of the millions of entrepreneurs searching for a simple funding option to achieve your business goals (and avoid selling your soul), a small business term loan could be your ticket. Let’s break it down in a way that won’t make your eyes glaze over. Promise!
What are small business term loans?
Also known as “Installment loans,” these are basically the “here’s some cash, pay me back later” deals of the business world. You get a nice lump sum of money upfront and repay it over time—like borrowing from a friend, except the friend is a bank, and they want interest.
Term loans come in short and long versions, perfect whether you’re just starting out or already drowning in paperwork. Whether you need cash for a new piece of equipment, a swanky new office, or just to keep the lights on, term loans help you do all that without having to barter with your neighbour for free electricity.
Key features of term loans
- Security: A business usually needs to provide collateral to secure a term loan.
- Maturity: Repayment typically happens over 5 to 10 years.
- Interest: Interest rates are usually fixed, but you can negotiate with your lender when the loan is disbursed.
- Funding time: You can get funds as quickly as two days.
Qualification requirements
Not every business can qualify for a term loan (they’re picky like that). Lenders are looking for businesses with great credit, strong revenue, and a solid track record—basically, your business needs to look like it has its life together. Here’s what gets you in the loan club:
- Business history: At least one year in operation.
- Credit score: A minimum of 680.
- Annual revenue: At least $100,000.
- Profitability: Your business should have a positive net income.
- Other factors like cash flow, industry type, and your overall business health can also impact your eligibility. It’s always a good idea to discuss your needs with the lender to determine the best fit for your business.
How to apply for a business term loan
The first step is finding a lender. While traditional banks are known for their more complicated approval processes, online lenders like Funding Circle or Opportunity Fund offer faster, more streamlined options.
Documents you’ll need include
- Driver’s license
- Business certificate or license
- Business plan
- Balance sheet, profit and loss statements
- 2 years of personal and business tax returns
- Credit score and bank statements
How do term loans work?
The basic procedure of term loans is simple: you get a lump sum amount of money. You’re then responsible for repaying the total loan amount over the period of the term, plus interest, which might be fixed or variable. When it comes to term loan, is everything transparent. You know exactly what you’re getting into.
Besides traditional banks, this sought-after financing product is available through various alternative lenders and even the Small Business Administration. Though they’re not actually originated by the SBA, instead are backed by the government, making them a popular choice among small business owners.
While the maximum loan amount a small business can get ranges from $25K to $500K, but the exact amount you qualify for depends on your company’s financial conditions and business needs.
If you’re approved and have received your funds, you might begin making payments to your lender on either a monthly, bi-weekly, or weekly basis. Remember, all business-term loans are not the same. Depending on your business credit rating, cash flow, revenue and growth needs, and more, there are plenty of different kinds of term loans available.
Why choose a business term loan?
There are several reasons why small business owners love term loans:
Lower interest rates
Term loans generally offer much lower interest rates compared to other types of financing like credit cards or merchant cash advances. This means you pay less in the long run, making it a more affordable option for larger investments. Plus, the fixed-rate structure ensures your monthly payments stay consistent, so no nasty surprises.
Set payment structure with longer repayment terms
Term loans come with a predictable repayment schedule—perfect for budgeting and planning your business finances. Repayment terms can stretch from 1 year to as long as 25 years, depending on the type of loan and amount borrowed. This allows you to spread out your payments, reducing the monthly burden on your cash flow, which can be especially helpful during slower seasons.
Quick application process
Gone are the days of waiting months for loan approval from traditional banks. With the rise of online lenders, you can apply for and get approved for a term loan in as little as 2-3 days. This speedy process means you can access the funds you need quickly, allowing you to seize new opportunities or cover unexpected expenses without delay.
Large loan amounts
Term loans allow you to borrow significant amounts of capital—ranging from $25,000 up to $500,000 or more. Whether you’re looking to make a one-time purchase of equipment, expand your business to a new location, or invest in a major project, term loans provide the flexibility to finance larger, long-term business goals.
Tax benefits
The interest paid on business term loans is often tax-deductible, which can reduce your overall tax liability. This can be a major benefit at the end of the fiscal year, allowing you to reinvest savings into other areas of your business.
Build Business Credit
Repaying a term loan on time helps build your business’s credit profile, which can improve your chances of securing larger loans or better financing terms in the future. Establishing a strong credit history is key for long-term business growth and expansion.
Also read: How to Improve Business Credit Scores: A Guide for Small Business Owners
Use for a variety of business purposes
Term loans are highly versatile. You can use the funds for almost anything—whether it’s purchasing new inventory, refinancing existing debt, covering operational costs, investing in marketing, or even buying commercial real estate. This flexibility makes them one of the most popular financing options for small business owners looking to scale.
Also read: Exploring Financing Options: 11 Types of Small Business Loans
We’re here to help you thrive
We get it—small business term loans can be a bit overwhelming. But don’t worry! With the right knowledge, you can make confident decisions that will help your business soar.
If you’re feeling a bit lost with cash flow or figuring out your financing options, Forwardly is here to lend a hand! We love supporting businesses like yours to streamline cash flow management.
With Forwardly, you can receive invoice payments instantly and pay vendor bills anytime—no more chasing after payments! Approve and pay bills with ease, all while seamlessly syncing with your accounting software. We’ll take the stress out of your financial management at no monthly subscription cost. Ready to simplify your finances? Get started for free today!
