What Is Business Term Loan? And How Do They Work?

Running a successful small business requires you to stay ahead of the game and come up with solutions that enable you to take advantage of financial opportunities. One such opportunity is taking out a term loan, which can provide your business with extra capital when needed so that you can continue to expand and become more profitable.

Keep reading as we break down what exactly a term loan is, its benefits, as well as how it works in order for you to determine whether or not it’s the right choice for your small business.

What Is Term Loan Financing?

With term loans, your business receives a one-time lump sum of money. You then repay the loan and the accumulated interest over a specific period of time. The interest rate on the business term loan can be variable or fixed. Furthermore, the interest rate is usually lower than the rates of other types of lending.

With this type of loan, the borrower agrees to pay back both the principal balance and the interest rate in regular payments over the lifetime of the loan. Using a business term loan can be a great way to boost your business's chances of success as it provides you with more capital and reduces financial risk, paving the way for future growth and expansion.

Business owners generally apply for term loan financing to finance certain one-off investments for their businesses, such as business expansion, debt refinancing, real estate purchases, and much more.

How Does a Business Term Loan Work?

With a business term loan, a lender sends you a lump sum of capital that you pay back with interest and fees over a set period of time. Typically, there is no prepayment penalty.

Although the exact payment schedule depends on the type of business term loan and the lender who’s providing it, you’ll make equal payments throughout the entire duration of the term loan. 

After choosing your business lender and being approved for the loan, you’ll need to agree to the repayment terms and rates. The repayment terms for a business term loan usually range from three to 10 years. 

 Fundid Recommendation: Looking for a business term loan lender? Funding Circle offers business term loans with fixed rates and predictable monthly payments. Their dedicated Funding Specialists will walk you through your funding options and ensure you have all of the information needed to make a decision.

If you are a business owner who’s been in business for at least two years, with strong annual revenue and strong personal credit & business credit, Funding Circle could be a fit for your business! See if you qualify today without any risk to your credit.

What are the Interest Rates for a Business Term Loan?

Business term loans are generally fixed-rate loans that will have the same interest throughout the loan’s lifetime. The rates you receive on your term loan will depend on many factors, which include your business and personal credit history, cash flow, time in business, and the term length of your loan. 

What Are Business Loans Used For?

In general, business loans are used to:

• Purchase equipment or inventory
• Finance working capital
• Hire staff
• Purchase real estate
• Fund long-term investments
• Meet payroll or tax obligations
• Refinance other business debts
• Finance business expansions

Lenders may choose to put restrictions on what they finance.

Related Reading: A Business Owner's Guide to Business Loans

Common Loan Terms and Rates

Generally speaking, business term loans have a one to seven-year repayment period. However, you can also find short-term loans with repayment periods of one year or less, as well as long-term loans with repayment periods of 25 years. 

Nonetheless, most business term loans can have a weekly or monthly repayment schedule. Shorter-term loans may require daily repayments. 

When it comes to the interest rates on business loans, they will usually range from 5% to 30%. Bank and SBA loans may even offer interest rates lower than 7% if you’re an exceedingly qualified business.

Different Types of Business Term Loans

When applying for a business term loan, you’ll have to choose one of three periods:

1. Short-Term Loan

A short-term loan typically lasts one or two years and is usually for a smaller amount of capital.

Short-term loans are best for financing working capital expenses. It’s also important to know that short-term business loans have higher rates since they are more convenient and easier to apply for. 

2. Medium-Term Loan

Medium-term loans, also known as intermediate-term loans, usually have a repayment period of two to five years. Usually, your business can access up to $500,000.

These loans are typically used by businesses looking to launch a new location or hire more employees. This level of funding can substantially boost and grow your business operations.

3. Long-Term Loans

Long-term loans provide the greatest amount of capital and have the longest repayment terms. They typically range up to 25 years and allow you to access millions of dollars in term loan financing.

Long-term loans are ideal for established companies with a tremendous financial record and credit history. 

Who Issues Business Term Loans?

Business term loans are issued by banks, credit unions, and online lenders. Make sure you shop around to find the best rates for your lending. Online lenders offer more flexibility and faster funding times but include more expensive rates with shorter terms.

 Fundid Recommendation: Looking for a business term loan to support your growth? Funding Circle offers business term loans with fixed rates and predictable monthly payments. Their dedicated Funding Specialists will walk you through your funding options and ensure you have all of the information needed to make a decision.

If you are a business owner who’s been in business for at least two years, with strong annual revenue and strong personal credit & business credit, Funding Circle could be a fit for your business! See if you qualify today without any risk to your credit.

Pros and Cons of Business Term Loans

With all financing options, there are pros and cons you need to consider before finalizing a decision.

Here’s a breakdown of the advantages and disadvantages of term loan financing:

Pros

• Ability to fund short-term financial needs
• Lower rates than other forms of lending
• Help you build your business credit
• Set payment structure

Cons

• Hard to qualify for
• Lenders may require collateral or a personal guarantee
• Lenders may charge additional fees

As you can see, finding the right loan is important, as the right financing will provide more pros than cons. 

How To Know if a Term Loan Is Right for Your Business

If your business is looking for a financial boost to help support your business growth, there are many options to consider. These include business grants, a line of credit, invoice financing, and working capital loans, to name a few.

However, term loans are an excellent choice for an established business looking to access a larger amount of capital to grow. For example, if your business needs to purchase equipment or hire additional employees, a term loan can be an excellent option.

Furthermore, term loans are ideal for established businesses with proven financial track records. If your company has poor credit and doesn’t have many years of experience, it will likely be challenging to qualify for a term loan. 

With Funding Circle

• Term lengths up to 7 years¹
• Funding from $25K - $500K¹
• Funds in as few as 2 days²

How To Get a Business Term Loan

Although there are several options when it comes to finding a business term loan, you’ll need to evaluate your business first.

With Funding Circle, they look for an established business owner who’s been in business for at least two years, with strong annual revenue and strong business credit, and at least a 660+ FICO credit score. 

Applying for a Business Term Loan

After determining where your business will likely qualify, you can begin preparing your business term loan application.

The application process varies from lender to lender. Banks will require extensive documentation and a paper or in-person application. Alternative lenders usually offer online and streamlined applications without much documentation.

However, here’s the information you can expect to provide:

• Personal and business information (driver's license, proof of ownership, business license, voided business check)
• Personal and business bank statements
• Business financial statements (balance sheet, P&L statement, etc.)
• Individual and business tax returns
• Personal and business credit score

It’s also vital to remember that most lenders will require you to sign a personal guarantee for the loan. 

Before finalizing and signing the agreement, make sure you extensively review every detail to understand the fees, terms, and liabilities.

¹Rates, terms, and maximum loan amount may vary according to the overall creditworthiness of the applicant and financing product selected. To see what your business may qualify for, apply today at no obligation. Approval and funding times may vary by lending partner and financing product selected. All loan offers and qualifications require credit approval and are subject to change with or without notice.

²Approval and funding times may vary by lending partner and financing product selected. Decisions on loan approval within 24 hours after document submission.