A Term Loan is a loan given to established small businesses to purchase equipment, acquire real estate, or boost its working capital. Just like mortgage, term loans are repaid within a specified period of time, which is between one year and 25 years. Additionally, a term loan normally has a floating or fixed interest rate for the fixed repayment period. However, in order for a business to obtain a term loan, it has to put down collateral and undergo a demanding approval procedure so as to lower the risk of paying off.
Therefore, term loans are beneficial for small businesses as banks are able to create programs that will supply them with the cash needed to perform daily operations on a monthly basis. There are some online lenders who offer term loans to small businesses without necessarily requesting for collateral though it really depends on the loan amount.
Online lending companies just require a person to sign as a guarantor to assure repayment. This is because the companies see term loans as a personal loan to the business owner. Nonetheless, business owners have to have excellent credit scores in order to be considered for the loan. Even so, the online companies offer the repayment schedule of term loans for a period of one to five years.
Term loans can be categorized into two types – intermediate term loans and long term loans.
This type of loan is a short-term loan as it lapses in less than three years. The intermediate loan is repaid in monthly instalments from the business’ cash flow. Since the intermediate term loan uses the business assets as collateral so the repayment of the loan will be directly tied to the practicality of the asset that is being financed. Generally, an intermediate term loan can be ideal for businesses seeking to refinance debt, open a second branch, hire new employees, or purchasing equipment.
This type of loan lapses from three to 25 years. The collateral used for this type of loan is the business’ assets and the repayment mode is normally based on monthly or quarterly profits or cash flow. The long term loans restrict the business from handling other financial commitments such as paying up debts, business owner’s salaries, or dividends. Moreover, long term loans sometimes require certain amount of proceeds to be put aside for the loan repayment.
The several features that banks look at when deciding whether or not to approve the term loan application include business’ capital, credit score, collateral involved, credit capacity, and the viability of the business plan.
Credit capacity: this indicates that the business or its owner has to have a credit score that can allow him to access term loans.
Just like any business loan, a term loan application requires the business and/or owner to present different pieces of specific information relating to the business. For instance, your lender may require you to submit your record of invoices and other sales records.
In order to increase the chances of approval, you need to have a fully filled out loan request form and also be willing to provide any extra information required by lender. Moreover, you will require a well-written and thorough business plan that will explain the reason for the need of funding for the business. The financial statements for the business and its proprietors for the previous three years are equally vital if you want the loan to be approved.
Your lender will also require the tax returns of the business for the past three years. Furthermore, the bank will require a debt plan together with financial projections of the business for the next three years. Your lender will also require information on the assets that are intended to be purchased by the business. This includes sales agreements, contracts among others.
A term loan can be used by businesses to upgrade or expand. For example, a business can obtain a term loan for key capital enhancement, huge capital investments such as working capital, equipment, purchasing property as investment, and buying existing businesses.