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Show Me the Money: What is a Business Term Loan and Why Do I Need One?

Term loans

Show Me the Money: What is a Business Term Loan and Why Do I Need One?

Show Me the Money: What is a Business Term Loan and Why Do I Need One?

Updated: Aug 18, 2017

Of all the reasons why businesses fail, a lack of cash flow is one of the most common.

At a certain point, you’re going to need to expand your business, and that can be tricky if you don’t have enough capital. This is where taking out a business loan can be helpful.

If you’ve never borrowed money for your business before, you might have some questions about business loans and business term loans, more specifically.

For example, you might be wondering, “what is a business term loan?” or “do I need a term loan?” 

What is a business term loan?

There are several different types of loans you can take out to help you grow your business. One of the most popular small business loan options, though, is known as a business term loan.

A business term loan is a type of loan that comes with a specific repayment schedule. It may come with either a fixed interest rate or a floating interest rate.

Term loans are good options for small businesses that are in a sound place financially. 

There are lots of ways to use a term loan. In most cases, though, businesses will use the money from a term loan to purchase specific, fixed assets.

For example, they may use it to purchase new equipment or to purchase a property like a warehouse to help them expand their production process.

Reasons to get a business term loan

There are a lot of benefits that come with applying for a business term loan over another type of small business loan. The following are some of the greatest benefits you’ll get to enjoy if you take out a term loan:

Lower interest rates

In many cases, business term loans come with lower interest rates than other types of loans.

This is especially true for businesses that have been in business for at least a few years, have a high business credit score, and have a high amount of revenue.

There are a lot of factors that influence the specific interest rate you’ll pay (loan length, collateral, credit history, etc.). Most of the time, though, you’ll pay much less interest with this type of loan.

Maintain cash flow

Some business owners are very averse to taking out loans. The truth, though, is that it is possible to use loans in a strategic way to grow your business without putting any extra strain on yourself.

When you take out a business term loan, you can use that money to cover the cost of a particular asset like a piece of equipment or a new building. By doing this, you’re able to get what you need to keep your business growing, but you don’t have to sacrifice your cash flow. 

Fast approval

Often, you can get approved for a business term loan very quickly. This is especially true when you work with online lenders, who tend to have faster approval rates than traditional banks and credit unions.

If you need money right away, you definitely ought to consider applying for a term loan.

Flexibility

The terms of business term loans are flexible, and it’s easy to personalize them to suit your business’s specific needs.

Before your loan is granted, there are plenty of opportunities for you to negotiate the duration of the loan, as well as the amount and its interest rate.

If your business is in a healthy financial position you’ll have even more bargaining power to get the terms and loan amount that you’re looking for.

Easier budgeting

With a term loan, especially a term loan with a fixed interest rate, it’s easy for you to work the monthly payments into your business’s budget. You’ll be able to calculate how much you owe each month and pay it back in a timely manner without having to worry about any unpleasant surprises popping up. 

Tax advantages

There are also some tax advantages that come with taking out a business term loan. For example, the interest you pay on a term loan can be deducted from your yearly tax bill. This helps to lower your tax bill, which is something just about every business owner can get behind. 

How to apply for a term loan

The process of applying for a business term loan is pretty straightforward. In most cases, you’ll just need to follow these steps:

Gather essential documents

When you’re getting ready to apply for a business term loan, it’s important to gather some essential documents beforehand.

You might not need to submit all these documents, especially if you’re applying online. However, it’s a good idea to have them at the ready in case you need information from them when filling out your application.

The following are all documents you may need when applying for a loan:

  • Business bank statements
  • Balance sheet
  • Profit and loss statements
  • Credit report
  • Business tax returns

In some situations, you may also need a copy of your driver’s license (or another form of ID) and a voided business check.

Fill out your application

Once you have all your necessary documents and information at the ready, the next step is to fill out your application.

When you’re applying for a business term loan at a bank or credit union, the application process can be quite lengthy.

With online lenders, on the other hand, you can get it done much faster. If you’re in a hurry and don’t want to sift through a ton of paperwork, working with an online lender might be a better option for you. 

Wait for approval

Once you’ve filled out the application, all you have to do is wait for the approval to come through.

With a business term loan, the approval process doesn’t take very long. Often, you’ll know within a couple of business days whether or not your application has been approved. Some online lenders offer even faster approval times.

Tips for getting approved

If your business is in a relatively good financial place and you have a decent credit score, it shouldn’t be too difficult for you to get approved for a term loan. If you want to increase your chances of approval, though, keep these tips in mind:

Know your credit score

Before applying for any kind of business loan, it’s a good idea to check your business credit score. This will help you figure out where you stand and what kind of terms you can expect to get.

Looking at your credit report beforehand can also make you aware of any potential errors that might be dragging down your score.

If you do spot any errors, be sure to correct them before you apply for a loan. This will help you get the best terms and increase your chances of getting approved.

Know your debt-to-income ratio

In addition to knowing your business credit score, it’s also a good idea to make sure you know your debt-to-income ratio.

Having that information at your fingertips helps you to be more realistic about the type of loan terms you’re likely to get approved for.

It also gives you a chance to consider whether or not you need to try and pay down some of your debt before applying. Doing this may help you to get better loan terms and interest rates.

Consider a larger downpayment

You may also want to consider making a larger downpayment when applying for your loan.

A larger downpayment will lower your monthly loan payments and may qualify you for better terms. If your business credit score is not as high as you’d like it to be, lenders will often allow you to offset that with a higher downpayment.

Sure, you have to pay more upfront. It’s a viable option, though, if you’re worried about getting approved.

Look up an online lender

If you want to have your loan application approved as quickly as possible and want to simplify the application process, you definitely ought to consider learning more about and working with an online lender.

Online lenders are often more flexible than traditional lenders, too.

If you’ve been on the fence about applying for a term loan, they’ll work with you to figure out the right type of loan that works for you and your budget while still giving you access to the funds you need. 

Apply for a business term loan today

Now that you have answers to questions like “what is a business term loan?” and “why do I need a business term loan?” what do you think?

Does a term loan seem like a good option for your business and your funding goals? Are you ready to apply for one?

If you’re interested in applying for a business term loan and want to get great rates, we’re here to help at Funding Circle.

We’re an award-winning business lending company with an A+ rating from the Better Business Bureau. We’ll help you get the best loan for your business with personalized rates as low as 4.99%.

As an added bonus, it only takes 4 minutes to apply for a loan. What are you waiting for? Apply today!

Funding Circle

Tags: Term loans

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