Looking for capital to make a large business purchase or provide working capital for your company can be a long, arduous process, with many small business owners not fully understanding the process. With so many options to consider, it can be difficult to focus in on one to determine if it might be right for your business. The fact that banking jargon can vary so much between commercial lending and consumer lending doesn’t help things one bit. Many first-time business owners looking for a point of reference in their own personal banking are often just as lost as people who have never taken out a loan in their lives.
Few things are as exemplary of this confusion as the small business term loan. While easily being among the most common loans available to businesses, many business owners don’t actually know what a small business term loan is or what it means for their company.
Put simply, a small business term loan is just a standard business loan offered by a commercial bank to a business. Most often, these loans go towards large capital improvements or capital purchases. Term loans are frequently used to purchase new equipment, renovate or expand facilities, or upgrade equipment. Less often, business term loans are used to purchase other businesses or to provide working capital.
Small business term loans often come primarily in two varieties: intermediate-term loans and long-term loans. Intermediate-term loans typically last no more than five years. They are often smaller, and more likely to be used for working capital or equipment purchases. Intermediate-term loans are usually paid monthly and are fully amortizing. Intermediate-term loans usually require collateral.
Long-term loans, on the other hand, are given out for durations of up to twenty years, or more in very special circumstances. These loans tend to be for significantly higher amounts than intermediate-term loans. They are often used to fund large-scale capital purchases or expansion, such as opening up a new plant or location, or building a new company headquarters. Long-term loans will definitely require collateral, and often include other specialized requirements such as limits on how much total debt from all sources a company can take on.
Whatever small business term loan you are looking for, keep in mind that while term loans are a great way to finance your business, they always come with a very thorough approval process. You will need to open your books to the bank and show that your business is profitable enough to support the added risk. You will also need to put up some form of collateral, and will likely need to demonstrate that you have enough cash flow to repay the loan. Having a strong business plan and a historical set of projections that you have either met or exceeded will go a long way towards securing your small business term loan.
Knowing that, why are term loans considered to be a great deal? Unlike many other types of business loans, the interest rate is many times fixed and remains steady throughout the term. This gives business owners security and predictability, knowing that their loan amount will remain constant. They can be cheaper overall than other types of loans. When spending tens or hundreds of thousands on capital improvements, even a percentage point or two difference can mean huge savings. That means a much higher return out of large-scale improvements; something every business owner loves.