This is just like a traditional bank loan, with a traditional-term business loan, you are lent a set amount upfront, which you pay back, with fees, over a set period of time.
Maximum Loan Amount
As quickly as 2 days
What is a Term Loan?
A traditional business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate. The “term” in “term loan” comes from its set repayment term length, which will typically be 1 to 5 years long. It is common for most business owners use the proceeds of term loans to finance a specific, one-off investment for their small business.
Maximum Loan Amount Loan Term Interest Rates Speed
$25K to $500K 1 – 5 years 7 – 30% As quick as 2 days
- Set payment structure
- Suitable for a wide range of business purposes
- Lower monthly payments than short-term loans
- Longer payment terms than short-term loans
- Potential prepayment penalties
Who Qualifies For A Term Loan?
Plenty of businesses will qualify for a traditional term loan—as long as you’ve been in business for a while, have a good credit score, and are generating revenue.
(See more on a term loan’s minimum qualifications below.)
Not all term loans are the same, though: the interest rate, length of the term, and maximum loan size depends on your business revenues and credit rating.
Since traditional term loans have longer repayment periods than short-term loans, your business’s financials and credit score will be more important
Most Customers Who Were Approved Had
Time in Business
Over 3 years
How to Apply
Term loans are traditionally a bank product. If you’re applying to a term loan from a bank, you can expect a longer application process with many documents required.
There are now many online term lenders, like Funding Circle and Lending Club, that offer term loans at affordable rates. These lenders have online applications that are much faster to complete and process.
You Will Need These Documents:
- Driver’s License
- Voided Business Check
- Bank Statements
- Balance Sheet
- Profit & Loss Statements
- Credit Score
- Business Tax Returns
- Personal Tax Returns
How Do Term Loans Work?
Most businesses could use some extra cash. Whether it’s for an equipment upgrade, an order of inventory, or a new employee, a business loan can always help out.
How do you find funding that your business can afford?
We deal with all sorts of businesses here at Common Funding, and we have insights into which applications lead to which loans.
Take a look at how a term loan works—and what you’ll need to qualify for one. That will help you understand whether a term loan is the right product for you.
First—imagine a business loan.
Most likely, you thought of a term loan, it’s the most common kind of business loan out there.
Simply put, they’re all about predictability.
You get a predetermined amount of money with a set interest rate, which might be fixed or variable. Then you pay that cash back over an agreed-upon amount of time in regular intervals and increments.
When it comes to term loans, it’s all up front, there’s nothing unexpected. You know exactly what you’re getting into.
Applying for a Term Loan
Term loans from traditional banks and certain online lenders will be the hardest term loan products to qualify for.
Getting a traditional term loan won’t be easy if you have a low credit score or no collateral to secure that cash with.
Collateral might be a requirement for a term loan—depending on the rest of your business’s financials—and, important to note, you risk losing that collateral if you can’t repay your loan.
While many of these lenders might not ask for a specific piece of collateral but, instead, put a “blanket lien” on your business, the same risk still applies.
Remember: when you apply for a small business term loan, make sure to ask if there are any prepayment penalties or other fees you should be aware of. Go over the exact terms with the lender so you can arrive at a monthly payment you know you can afford.
When you should use a term loan
If you’re financing something big for your business, that’s the point of a term loan
Whether you need to make a specific equipment or inventory purchase, want more working capital, need to refinance other business debts, are looking to meet tax or payroll obligations, or something else entirely, a small business term loan could be the answer.
There are few loan use restrictions, if any—though, it’s best practice to spend that money creating more revenue for your business.
Since borrowing isn’t free, you want to come out of a loan with more money than you began with. It’s all in the planning ahead.
If used the right way, traditional term loans can help you push your business to the next level—introducing new equipment, locations, products, or marketing campaigns into your toolbox.
Remember that a term loan is predictable.
You should be able to figure out whether a term loan will help or hurt your business from the Start. Have a clear understanding of the calculations beforehand and plan the coming months or years of spending carefully.
What Will a Term Loan Cost?
You should always know how much the financing will cost you no matter what type of financing you’re applying for.
Thankfully, the cost of a term loan is pretty easy to figure out, and it tends to be very affordable.
Here’s a look at a cost example:
Term Loan Example
Assume you’ve qualified for a term loan.
In this term loan offer, you’re borrowing $25K from a lender at a 12% interest rate and a 5-year term.
Given the longer length of that traditional term loan, you’ll most likely have a monthly payment of about $556. (Term loans can come with weekly payments, too.)
That’s a predictable expense you can easily understand and plan your financials around.
Term loans, like other business loans, can also come with fees attached to the loan. These fees could be origination fees, packaging fees, prepayment fees, and so on.
Don’t ignore fees on your loan offer—be sure to factor any and all small fees you might have to pay in order to understand the true cost of your loan.
Loan Payment Breakdown
Here’s something to remember about term loans: not every payment goes toward the same thing.
Traditional term loans amortize, meaning, you don’t pay equal parts interest and principal (or the amount you borrowed) from month to month. Instead, lenders usually stack interest payments early on and leave your principal payments for later on in the life of your term loan.
This way, even if you pay your loan off early and get the rest of the interest forgiven, you’ve still paid most of it to the lender.
This means that you might save less than you’d think by paying your term loan off before it’s due.
However, your monthly payment is still the same amount—it’s just the proportion of interest to principal that changes.
In order to understand your loan completely, be sure to ask your lender for an amortization schedule.