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Compare Term Loan Options That Fit Your Business's Financial Needs

What is a Term Loan?

A small business loan that typically lasts three to 10 years is called a term loan. When a business is ready to make a significant investment in future growth, a long term loan is a common way to fuel that progress. Long term business loans allow companies to afford large outlays, such as purchasing new manufacturing equipment or remodeling facilities, paying little by little over time. Without a term loan, many businesses would not be able to take the important step from financially focusing on short-term survival to planning for long-term growth.

How Does a Term Loan Work?

When pursuing a long term business loan, companies typically need to borrow between $25,000 and $200,000, though long term loans can be for less or (a lot) more than those figures. Although the length of time to pay off a term loan can generally span between three to 10 years, they can go to 20 and beyond depending on the business’s needs and the lending company’s amenability. Businesses receive a lump sum of the total loan amount after they are approved, which they must pay back with interest monthly (or sometimes quarterly) over the term of the loan.

In most cases, long term business loans are used to purchase something specific that will enable the company to grow and make more money. This can include machinery, vehicles, real estate, and many other things. The rule of thumb is that the loan term should be as long as or shorter than the useful life of the investment. So, it would be appropriate to purchase a tractor you expect to use for at least 10 years with a term loan. It would not be appropriate to purchase a new software system that will have to be updated within two years with this type of small business loan.

Long term loans are often supported by the business’s existing collateral. This means that, should the business default on its loan payments, the lending company will be able to recoup some of the expense by selling off the business’s owned assets like inventory, real estate or vehicles. Without collateral, a robust business history, and a solid credit score, it can be difficult for a business to secure a long term loan.

Long Term Loan Options That Fit Your Business’s Needs

One size does not fit all when it comes to term loans. There are a number of options and different types of lending companies that offer business loans with longer terms.

Based on your business’s credit, current financials, future financial needs, and other factors, you could qualify for a 5 year, 10 year, or 20-year term loan – if you find a lending company that agrees to that length. The loan’s length and interest rate will affect how much you pay monthly for the loan amount that your business needs.

For instance, if you needed a $200,000 term loan with a 6% interest rate that you have to pay back within 10 years, you would be looking at a monthly payment of $2,220.41 – given that you have a good credit score, business history, and financials. However, if you had the same loan amount and interest rate, but wanted to pay the amount back within 5 years, your monthly payment would be $3,866.56. So, the term of the loan makes a difference when it comes to paying back the amount.

Fortunately, a business loan’s term is fairly negotiable. The particulars of the loan will depend on the lending company you choose as well as the details of your business, but the monthly payment structure will remain the same.

Term loans come in a variety of options, so it’s important to think about why your business needs the loan and how quickly you believe you can pay it back. You should also take some time to consider the lending company you choose. Choosing to do business with a lending company that offers competitive rates can be extremely beneficial in the long run.

Pros and Cons of a Long Term Loan

Pros

Long term business loans feature very low interest rates compared to alternatives. With fixed monthly payments and fixed interest rates, long term loans are predictable and let a business easily plan for payment. Most term loans do not specify how the money must be spent. This flexibility gives the business ultimate control over how best to invest in the company. Responsible payment of a term loan will help your business cultivate a good credit score that will open up other opportunities for business funding.

Cons

Some businesses simply don’t qualify for a term loan. Companies must have at least two years in operation, a strong credit score, and existing collateral. The process of securing a long term loan is lengthy. There is a lot of paperwork involved and very long processing times.

How Much Will a Term Loan Cost?

Long term business loans need to be paid back with interest. Rates usually range between 6 and 8 percent of the total, but can differ based on the lending company and the timing of the loan. Additionally, a term loan will likely come with closing costs and other processing fees that will vary based on the lending company. Check your contract for other hidden costs like early repayment fees.

If your business is barely getting by each month, a long term loan might not be a good fit until you are in a position where you have a reliable cash flow and a little money to put aside each month. Defaulting on a term loan could be devastating for a business, as you could badly damage your credit and lose your assets, both business and personal.

Additionally, if you need cash immediately, a long term loan is not the best choice, as time from application to funding can be months.

How to Apply for a Long Term Business Loan

Before applying for a term loan, you’ll need to have a well-thought-out business plan in place that outlines how you’ll use the money and how it will impact your business. You’ll also need to gather documentation like a business license, Employer Identification Number, filing of legal structure, recent tax returns, balance sheets, and P&L statements, among others. Lending companies will run a credit check on the business and on the owners personally, so ensure your credit scores are favorable before applying.

You can shop for small business loans by visiting nearby banks, contacting your local SBA office, reaching out to your city’s chamber of commerce, or searching online. There are many online lenders who will do the comparisons for you, making it simple to find a great match for your needs.

The application process will usually start with some paperwork requesting basic information about your company, how much money you need, and how you plan to spend it. After processing and a credit check, the lending company will follow up for more detailed information and additional paperwork. Once your application has been approved, it can take up to a month for the term loan to get funded. If you choose to work with an online lending company as opposed to a traditional bank, this process will be sped up significantly.

Long term loans can be a great way to fund large investments that enable business growth. There are many options and different types of lending companies that specialize in these types of small business loans. So, with a little research and some patience throughout the application process, your business will be on its way to the next level.