Are you a business owner or are you considering starting your own business? At one time or another, more often than not, business owners need loans. While there are numerous types of funding available, one method is through term loans. Here, we’ll take a look at term loans, what they are, types of term loans, and more.
First things first – what’s a term loan? In exchange for specific borrowing terms, a lump sum of cash is provided to a borrower through a term loan. Frequently, if a business has a sound financial statement and is already established, term loans are used. The borrower agrees to certain terms in exchange for a specified amount of cash: i.e., a flowing interest rate, fixed interest rate, repayment schedule, etc. To reduce the total cost of the loan and reduce the payment amounts, substantial down payments are sometimes required.
Term Loan Types
There are several varieties of term loans. The lifespan of the loan is basically reflected in the name:
- Long-Term Loans – From either cash flow or profits, quarterly or monthly payments are required and collateral in the form of company assets is required as well. These can run from three years up to as much as 25 years. Any other financial commitments the business may take on will be limited including principles’ salaries, dividends, other debts, etc. Specifically for loan payment, the lender may require the business to set aside a precise amount of profit.
- Intermediate-Term Loans – From the cash flow of a company, these loans are paid in monthly installments and generally apply to a time span of 1 to 3 years.
- Short-Term Loans – If a business doesn’t qualify for a line of credit, these kinds of loans are usually offered. While they can apply to a loan up to and in excess of 18 months, repayment terms ordinarily run for less than a year.
Term Loans – Why Would a Business Get One?
Typically paid off between one year and 25 years, a term loan is frequently used for working capital, real estate, or equipment. A small business, in order to purchase fixed assets, often uses term loan cash. Example: For a business needing a new building or equipment for its production process.
In some cases, from month to month, a business will borrow the cash they need. Many banks, in order to help companies in this manner, have established term loan programs.
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