A traditional term loan is probably the most common form of business loan, so it’s pretty easy to understand. You borrow a fixed amount of money – often for a specific purchase you’re making for your business – and pay the loan back over a fixed term, most often at a fixed interest rate.
How Term Loans Work
A term loan is what most people think of when they think of business lending. They are loans with a set repayment time, set number of payments, and have a fixed or variable interest rate. There is a great number of term loans available for small businesses depending on the business needs, credit rating, cash flows, and many other factors. The terms of the loans vary greatly from 1 year with daily payments to 5 years with monthly payments, and everything in between. Term loans are provided by both traditional banks and non-bank alternative lenders.
You can use a small business term loan to meet virtually any business need, including specific purchases such as equipment or inventory, working capital, paying back other debts, meeting tax obligations, or meeting pretty much any other small business need.
Getting a traditional term loan isn’t always easy – especially if your credit is poor or if you don’t have collateral. In fact, collateral may be a requirement for a term loan and you risk losing your collateral if you don’t pay back the loan.
If you apply for a small business term loan, be sure to ask if there are any prepayment penalties or other fees you should be aware of. Go over the exact terms with the lender so you can arrive at a monthly payment that you know you can afford.
Let’s say you borrow $25,000 with a 12% interest rate that needs to be paid back in 5 years. That means you’d pay back the loan with monthly payments of about $556, which will stay the same over the life of the loan. This structure means you will have predictable monthly payments and know exactly when the loan will be paid back.
Most businesses can qualify for a traditional term loan, but the interest rate, length of the term, and maximum loan size depends on your business revenues and credit rating. Since traditional term loans have longer repayment periods than, say, a short-term loan, your credit score will be a more important factor.
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