A Simple Guide to Small Business Term Loans

Navigating the world of financing for your business can be daunting. There are many different options to work through — and many companies to "help" you through the process.

Where do you even start? And how do you know you’re choosing the right option for you?

See if you pre-qualify

This guide will help you understand business term loans so you are better able to make a financial decision with confidence. Here’s what you’ll learn:

  • What a business term loan is
  • The difference between short- and long-term business loans
  • The pros and cons of short- and long-term business loans
  • How term loans work and how you can use the funds
  • How to apply for a term loan
  • How bank term loans compare to SBA 7(a) loans

What is a business term loan?

A business term loan is a traditional lending product that offers a lump sum of capital that you pay back on a set schedule with regular payments at a fixed interest rate.

What is a short-term business loan?

Short-term business loans provide the borrower with a one-time, lump sum to be paid out in full, plus interest and fees over a short time period (typically a few months to a few years).

The SmartBiz® network of banks offers bank term loans with 2-5 year repayment terms.

What is a long-term business loan?

Long-term business loans typically have a life of at least 10 years, paid down in monthly installments. Long-term loans give you the benefit of smaller monthly payments and are most useful when you’re planning for steady growth over time, as opposed to addressing immediate needs.

Pros and cons of short-term business loans

Short-term loans can be an excellent source of capital for a business, but they do come with drawbacks. Here are some of the pros and cons.

Pros

  • High credit scores are typically not required
  • Limited paperwork is required to complete the application
  • Typically a faster process than long-term loans
  • Funds from a short-term loan can be used in a variety of ways

Cons

  • Interest rates for short-term loans can be relatively high
  • Very short-term daily payment loans may do more harm than good if revenue fluctuates
  • If you need to continually refinance the loan, you could get stuck in a debt cycle, and end up accumulating more and more interest and fees

Pros and cons of long-term business loans 

Pros

  • They build business credit
  • Long-term debt fuels growth
  • Long-term debt can save money for your small business
  • Long-term debt can eliminate reliance on expensive debt

Cons

  • Businesses must be established
  • Rigorous approval process
  • Collateral may be required
  • Businesses pay more in interest due to longer payment terms
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How small business term loans work

When your business qualifies for a term loan, you’ll typically receive an agreed-upon sum of money to be paid back plus interest, with scheduled monthly payments over a set repayment term.

Loan amounts for term loans can range anywhere from $25,000 to $500,000.

Term loans generally have interest rates on the lower side. The interest rates on bank term loans depend on the repayment term and the applicant's credit and financial profile.

What can term loans be used for?

The use of funds from a bank term loan from a bank in the SmartBiz network may help a small business owner focus, rebuild, or grow. Funds can range anywhere from $30,000-$500,000 and be used for a variety of needs.

Below are some common ways to use the funds from your term loan, but always check with your lender to determine if you are able to use the funds the way you want. 

Working capital

Working capital is used to cover a company's short-term expenses like inventory, equipment, marketing, payroll, hiring, and payments on short-term debt.

Debt refinancing

Many entrepreneurs accumulate debt when launching or in the early stages of their business. If those debt obligations are cutting into cash flow, refinancing with a loan that has better rates and terms may help you save.

Hiring employees

A bank term loan may help cover costs related to hiring like recruitment, training, salary, and benefits.

Equipment purchases

Business equipment includes tangible property (other than land or buildings) used for operations. Examples include computers, machines, tools, and vehicles.

Marketing

A bank term loan can finance marketing efforts that may help to build your brand, attract customers, and increase sales.

Inventory

If you need to increase inventory or expand your product line, funds from a business term loan may help cover the costs.

Construction

If you need funds for remodeling or renovations, consider a business term loan from a bank in the SmartBiz network.

Partner buyouts

A buyout is where one party purchases shares of a business to acquire a controlling interest in that company. Funds from a term loan may help with that expense.

Business acquisitions

Term loan funds may be used to purchase an additional business. However, funds cannot be used for a new business purchase. If you have questions, please ask your SmartBiz relationship manager for specifics.

How to apply for a business term loan

When applying for a small business term loan, you’ll generally want to keep a few things in mind. Remember, every lender has specific requirements for qualification and approval. 

Ask yourself, why do I need this loan?

Lenders will ask your reason for seeking funding and you should be ready to give a clear answer. Your purpose for seeking a loan will help you identify whether you’re trying to fill a short-term or a long-term financial need.

Prepare your business plan

SmartBiz does not require borrowers to present a business plan. However, some financial institutions or other lenders won’t invest in your company unless you present a business plan that demonstrates how you’ll achieve success and growth.

Check your credit score

Determine if you meet the score requirements for both business and personal credit.

Learn where you can check your credit score.

Speak to a financial professional

It’s always a good idea to have a financial professional help you crunch the numbers before you seek financing. This may help you avoid costly mistakes and ultimately secure a small business loan that’s best for you. 

Determine the best small-business lender to work with

As with most partners for your business, make sure you’re working with a lender you can trust and always read the fine print. The last thing you want is to end up paying more than you expected because of some confusing language. Ask all of your questions and make sure you are getting clear and direct answers.

Compare small business term loan vs SBA loan

Because they guarantee a portion of your loan, the SBA typically needs more information for their lending products than a term loan application might require. However, by partnering with a loan facilitator who has extensive SBA experience, loans may be completed easily and swiftly.

The other advantage of SBA loans is longer terms, which typically makes for lower monthly payments for business owners. SBA 7(a) loans have terms that range from 10 to 25 years, have low monthly payments, and may help you avoid a cash flow crunch.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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