Term Loans

A term loan is a loan from a bank or finance company for a specific amount that has a specified repayment schedule and a floating or fixed interest rate. Term loans most commonly mature between one and ten years.  A small business would consider a term loan for investing into the business to increase sales or business capacity.  Term loans can be used for equipment, labor, inventory, and other month to month expenses during growth phases.

Term loans are typically broken into two segments by lenders.

Short to Intermediate Term Loans: Usual term is less than three years, these loans are normally repaid in monthly installments from a business's cash flow. Shorter length term loans are normally secured by company assets which can include real estate, inventory, equipment, and accounts receivables.

Long-term loans: These loans are commonly structured for more than three years. Most longer term loans are between three and 10 years for the repayment schedule.  Like shorter length term loans they are collateralized by a business's assets and require a monthly payment over the loan term.  Sometimes longer term loan structures include a balloon payment at the end of the repayment term.

Who should consider term loans?

Seasoned well established small businesses that can utilize solid financial statements and provide larger down payments to minimize the impact of monthly payments and total loan expense. Term loans require strong collateral and a relatively detailed approval process so be prepared to have all your financial data in order. Borrower’s looking at a term loan for equipment should always consider leasing and the tax benefits of leasing before making a decision to use a term loan for investing into equipment.  Find out more about equipment leasing in our equipment financing section of the website.  Minimum loan size is normally around $25,000, but can vary greater depending on the lenders requirements.

Approval Chances: Varies greatly from bank to bank and finance firms. The degree of financial strength required to get approval is all across the board so it makes sense to use the businessfinanceapp.com portal to get several lender quotes.

Best Way to Use: large capital investments, machinery; expansion needs, working capital; purchases of existing businesses.

Cost of Capital: Inexpensive if the loan seeker can pass the financial requirements. Rates vary tremendously so it’s critical to shop around and get several quotes.  Common rate structures are prime plus 2.5% to prime plus 5%.

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