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Updated: September 11th, 2020
Term loans are as dependable as the sunrise. They are a simple way for small businesses to gain access to financing, whether it’s for making big purchases like inventory before a busy season, opening a second location or increasing cash flow. Whatever the need is, chances are a term loan will fit the bill.
In the world before COVID-19, term loans gave business owners the opportunity to both secure financing to invest in their business while also supporting monthly budgeting processes thanks to steady and consistent payment schedules. But since COVID-19 has come on the scene, things have become more complicated and you may be wondering what to expect from term loans during and after the pandemic. Find out how to get a term loan during COVID-19.
Before we get any deeper into how COVID-19 could affect your term loan, let’s run through some of the features of the product. Unlike SBA loans, there aren’t any standard characteristics so the details will vary from lender to lender.
Basically, a term loan is what most business owners think of when it comes to financing. It’s a lump sum of money that’s delivered to you and is repaid on a schedule, albeit weekly, bi-weekly or monthly, for a predetermined period, ranging anywhere from three months for short-term loans to as long as two decades for longer-term options.
You’ve got a great deal of flexibility in how you can use the funds, but one thing that generally stays the same is the interest rate. Most term loans come with a fixed rate over the life of the term, which in turn means that the size of your payments will remain constant.
If you’ve already got a term loan, then you already know what to expect. But one thing that you probably couldn’t have imagined is the economic slowdown due to the aftereffects of the pandemic. And whatever cash flow that you’ve been able to generate, chances are that the money must now go towards investing in the business so that you meet the new social distancing requirements. For example, that might be to buy equipment that’s conducive to dining outdoors or hiring more personnel to manage appointments for your business.
If you find yourself in a situation where you expect to fall behind on your payments, the first thing to do is to call or email your lender and notify them. Don’t wait until the payment date has passed. It’s not uncommon during times of crisis for lenders to work with business owners. Your lender may be offering a hardship program designed to work for you, not against you.
This relief could come in the way of delayed payments, lowered payments or skipping late fees. Make sure you’re clear on any consequences of the hardship program, such as whether the amount you owe will increase and if you’ll be charged a late fee – not to mention whether it’s reported to the credit rating agencies. You might be able to avoid any negative marks on your credit report, which could come in handy the next time you want to take out a term loan.
Another option to consider if you’ve already got a term loan during COVID is the possibility of refinancing the loan at a lower annual percentage rate (APR). What it means is essentially replacing an existing loan with another one for the amount that reflects the balance of the loan at a better rate or longer term length — so you wind up with lower payments during and after the pandemic. This could free up some much-needed cash flow during COVID-19.
Who wouldn’t want a quick term loan during the pandemic, a time of financial uncertainty? If you are thinking of getting a term loan in a post-COVID economy, you’ll find certain dynamics working in your favor. For example, interest rates are currently hovering near zero as a result of the Federal Reserve’s decision to slash rates due to the pandemic. Rates are also expected to remain low for the foreseeable future. As a result, you’re likely to be able to lock in an extremely attractive rate for the life of the term loan, which will result in a lower cost of financing.
On the flipside, it isn’t uncommon to hear about businesses who have fallen behind on payments as a result of having to close their doors during lockdown. If this describes you, the last thing you need is to have blemishes on your business credit history that weren’t there before.
If you’ve got a solid credit history, creditors and vendors could be more willing to show leniency toward you during the pandemic.
That being said, check your credit reports, both personal and business, to make sure there aren’t any errors that were reported during this time. By the same token, be sure that your creditors and suppliers are reporting your payment history to the trio of business credit bureaus — especially if you’ve been making your payments on time.
In fact, getting approved for a term loan after COVID-19 could help to improve your business credit score, as long as you continually make payments on time.
You have options when the time comes to take out a term loan. For instance, you could go the traditional route and apply with a bank, though be prepared to spend hours on the application process and up to months waiting for a decision.
Otherwise, you could go through one of the many online lenders like Funding Circle, where you can get started in as little as 6 minutes and have a decision in 24 hours. Funding Circle like many of its peers has been lending to the small business community throughout the COVID-19 crisis.