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Updated: Feb 6, 2020
One of the most common forms of business financing, a term loan is a medium-to-long-term loan option with terms that last anywhere from one to 10 years. These loans provide a large amount of capital to the business in a single lump sum. As a provider of intermediate-term loans, for example, Bond Street offers small business debt financing for one to three years, for amounts up to $1 million.
Term loans have a variety of advantages, and can be the best option for financing large investments, such as hiring new employees; opening a second location; investing in a new piece of equipment; or buying a vehicle to expand production or services.
Depending on the reason for the loan, term loans have many advantages when compared to other forms of debt financing. However, before deciding which loan option is the best choice, it is important to research all alternatives and match the financial need with the life expectancy of the investment. Based on their length, term loans are best for financing a business’ long-term growth, and are generally used for purchasing assets that will not be converted to cash within a year.
Simple, Streamlined Application Process
Unlike many other lenders, Bond Street applicants enjoy a simple, streamlined online application process, and know within 48 hours whether the loan has been approved. When the loan is approved, funding occurs within 7 days.
Lower interest rates
Due to their longer durations, term loans are available at lower interest rates than shorter-term loans. Interest rates for Bond Street loans are between 6 percent and 23 percent, (with 8 percent to 25 percent APR) depending on the length of the loan; the collateral used to secure the loan; and the borrower’s credit history. Additionally, the interest rates on term loans are fixed, and do not vary during the lifetime of the loan.
Allows operational cash flow to be used elsewhere
Term loans give the borrowing business the ability to use their cash flow in other areas, while the loan provides the funding needed for larger investments in the business. For example, a term loan can give a company the capital it needs to hire a new employee, covering the time it takes to train the employee and allow them to establish themselves within the company before beginning to contribute to the bottom line.
Fast Approval; Preserves Shareholder Equity
For businesses that need cash quickly, a term loan can be approved within a short time frame – anywhere from 2 days to 2 weeks, depending on the lender. This option is much faster than other forms of financing. Additionally, since a term loan is debt financing, it does not affect the interest of the equity shareholders, and keeps the company’s equity intact.
Term loans are flexible: the loan’s duration, amount and interest rate are all be negotiated before the loan is granted. The better the business’ and business owners’ credit scores, the more flexible and advantageous these terms are likely to be.
Accounting and Tax Advantages
The interest of a term loan is tax deductible, and the regular payment amounts allow for straightforward budgeting – the same amount is paid every month or — as in Bond Street’s case — every two weeks for the duration of the loan.
Receiving a Term Loan and Making Payments On Time Boosts Credit Score
Regardless of which lender a business chooses, the loan can be used as an example of creditworthiness, making it easier to apply for and receive other loans in the future. By repaying a term loan on time and according to the terms outlined in the agreement, the business will be able to improve its credit score, which can ultimately lead to other financing opportunities at competitive interest rates.
Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor's degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.