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Updated: Feb 6, 2020
When determining how best to finance changes to your business, the most important step is to match the financial product to the type of opportunity. Term loans – like the ones Funding Circle offers – are generally used to fund larger investments in the business. They are expected to fund assets that will continue to have use for multiple years, matching the length of the loan.
Term loans lengths can last anywhere from one year to up to 20, although most tend to be one to 10 years in length. They are best used to invest in long-term assets for the company so that every-day working capital can be reserved for other uses.
Term loans are generally used as a medium- or long-term loan option; as a result, they have lower interest rates and APRs than shorter-term loan options. Due to their extended lengths and the fact that they’re secured by collateral, these loans have lower interest rates than short-term loans – rates vary from 6 percent to 30 percent, depending on the business’ creditworthiness and the loan’s amount and duration.
A term loan is generally for amounts ranging from $20,000 to $500,000 (Bond Street offers loans up to $500,000) and is paid back in identical installments on a set schedule – usually every two weeks, or once a month. This makes it easy to incorporate repayment into budgeting – payments will always be the same, throughout the length of the loan.
A term loan can be approved relatively quickly – depending on the lender, in as little as 48 hours. This can give the borrowing business quick access to capital for the expansions necessary to grow their business for the long-term.
This type of financing is also called project financing, and can include helping a company to expand its office space or production, to help diversify its holdings, or to modernize or update either a space or even the business’ technology. The loan can also be used for less-tangible and more virtual upgrades as well.
Investing in PP&E
Term loans are ideal for investing in long-term tangible pieces of property, which are sometimes referred to as PP&E: Property, Plant and Equipment. This can include purchasing a new building, a new truck for deliveries, computer and server equipment, machinery, etc. In general, term loans are meant for purchasing assets that will not be sold or converted to cash within the year.
Hiring New Employees
Term loans are often used to hire new employees, giving the company time to train the new employee. In turn, having the term loan capital available gives the employee the time they need to begin to bring in more clients and increase revenue, covering the cost of the loan and ultimately exceeding it.
“Intangible” Uses for Term Loans
Aside from the tangible options for using term loans, there are also other uses that make sense for use. These loans can help a business develop a new website or help them to add a new customer interface platform on their current website. Oftentimes, these loans are also used to pay off another debt with a higher interest rate.
Once a business has decided that a term loan is the best option for financing a planned expansion or improvement, it is important to research a variety of lenders to find the best loan option. Since term loans are flexible in terms of length, amount and interest rate, it is important to compare various lenders to ensure the best terms for your business.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.