Seeking financing can be confusing. Comparing all the different loan products available, and choosing best option for your specific business, can be stressful. This guide will help educate you on the options for bank term loans, how to apply, use of funds, and how Bank Term loans compare to SBA 7(a) loans.
What is a business term loan?
A business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate—this type of traditional financing is what most people think of when it comes to small business loans.
What is a short-term business loan?
Short-term business loans are a type of term loan. A one-time, lump sum is paid out to the borrower up front. The borrower must repay the full sum plus interest and any fees over the term-typically ranging from a few months to a few years. Banks in the SmartBiz network offer Bank Term loans with 2-5 year repayment terms. To learn more, visit the SmartBiz website here.
What is a long-term business loan?
Long-term loans are a type of term loan that typically have a life of at least 10 years, paid down in monthly installments. When the repayment terms are long, the associated monthly payments are smaller since the total owed is broken down into more segments. These are most useful when you’re planning for steady growth over time, instead of addressing immediate needs.
Short term loans pros and cons
Short-term loans can be an excellent source of capital for a business but they come with drawbacks. Here are the pros and cons.
- High credit scores typically not required
- Limited paperwork required to complete application
- Process is typically faster than longer term loans
- Proceeds from a short-term loan can be used in a variety of ways
- The interest rates for short-term loans can be relatively high compared to other loan products
- 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” accumulating more and more interest and fees.
Long term loans pros and cons
Here are reasons to consider before starting a long-term loan application.
- Build business credit
Having excellent business credit is crucial to obtain long-term debt funding with low rates. To secure the lowest cost capital with the longest terms and manageable payments, keep your credit scores healthy. The SmartBiz Blog has a host of resources to help you understand and manage your credit scores.
- Long-term debt fuels growth
Some growth-building uses of long-term debt include buying inventory or equipment, hiring new workers, increasing marketing, shoring up cash flow, and more.
- Long-term debt can save a small business money
Expensive debt – like credit cards with sky-high rates or cash advances – can trap a borrower in a “debt cycle”. A long-term loan helps you avoid this problem.
SmartBiz customer Milton Martinez, owner of Triple D Towing, used this strategy by taking out a low-cost SBA loan. He says, “By getting rid of two small loans I’m saving $15,000 – $18,000 dollars overall. That’s money I can put back into growing my business or into savings.”
- Long-term debt can eliminate reliance on expensive debt
There are lenders who use aggressive sales tactics to get businesses to take out short-term cash advances. Some businesses in need of funds will take five or six cash advances in a row. These loans can trap a borrower into a dangerous debt cycle. Instead, consider a loan with low interest rates, long terms, and low monthly payments. Many SBA loans have no prepayment penalties. SBA loans can be used to help small business owners refinance existing high cost debt if you’re caught in trap.
Consider these cons.
- Businesses must be established
A long-term loan might be out of reach if you are just getting started. SBA loans from banks in the SmartBiz network require 2 years of operation.
- Approval process
More documentation may be required to show the overall financial health of your business. Lenders usually require strong credit scores and evidence that payments can be made in full on time for the life of the loan.
- Rigorous approval process
The approval process for long-term loans may be longer than for a shorter-term loan. If you need funds quickly or want to jump on a business opportunity, a short term may be best.
- Collateral may be required
Collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default. In terms of the types of acceptable assets, these can include inventory, a personal possession, accounts receivable, equipment, real estate, machinery, and general intangibles that are not already held by another lender.
- Interest rates
Though interest rates are often lower, the borrower may end up paying more in interest as the repayment term is much longer.
How term loans work
When your business qualifies for a term loan, you’ll receive an agreed-upon sum of money to be paid off, plus interest, with scheduled monthly payments over a set repayment term. Loan amounts can range anywhere from $25,000 to $500,000.
Term loans generally come with interest rates on the lower side.
*Interest rate on bank term loans depend on loan 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 can be very helpful to help a small business owner focus, rebuild or grow. Terms range from $30,000 - $500,000. Here are general uses. Be sure to check with your lender to determine if you can use the fund the way you want.
Working capital is used to cover a company's short-term expenses like inventory, equipment, marketing, payroll, hiring, and payments on short-term debt.
Many entrepreneurs rely on expensive debt when launching or in the early stages of their business. If those debt obligations are cutting into cash flow, refinancing can help you save big.
A bank term loan can cover costs related to hiring like recruitment, training, salary, and beneﬁts.
Business equipment includes tangible property (other than land or buildings) used for operations. Examples include computers, machines, tools, and vehicles.
A bank term loan can finance marketing efforts to build your brand, attract customers, and increase sales.
If you need to increase existing inventory or expand your product line, funds from a bank term loan can cover the costs.
If you need funds for remodeling, bathroom updates, or other space improvements, consider a Bank Term loan from a bank in the SmartBiz Loans network. Construction can also be used to make your place of business safe in the times of the COVID pandemic.
A buyout is where one party purchases shares of a business to acquire a controlling interest in that company.
Funds from a bank in the SmartBiz network can 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 Loans relationship manager for specifics.
How to apply for a bank term loan
Here are guidelines to follow. Remember, every lender has specific requirements to approve and ultimately fund.
Ask yourself, why do I need this loan?
Lenders will ask your reason for seeking funding and you should have your answer nailed down. 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
A business plan might be required. Some financial institutions or other lenders will not invest in your company unless you present a business plan that demonstrates your steps to success.
Determine if you meet the score requirements for both business and personal credit.
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.
Determine the best small-business lender to work with
Unfortunately, not all small business lenders are on the up-and-up. Confusing language and calculations can result in paying much more than you think you signed up for. Make sure you work with a lending professional who is responsive and answers all questions clearly. Small business lending experience and stellar customer service is key.
Compare term loan vs SBA loan
Because they guarantee a portion of your loan, the SBA needs more information than a term loan application might require. However, by partnering with a loan facilitator who has extensive SBA experience, loans can be completed easily and swiftly.
The other advantage to SBA loans re longer terms, which means lower monthly payments for business owners. SBA 7(a) loans have terms that range from 10 to 25 years, leading to very low monthly payments. This can avoid a cash flow crunch.