What is a term loan?
A term loan is a common way for small businesses to get funding for a specific period of time, usually from 1 to 8 years, and might longer depending on the creditworthiness of the business. The lender might ask for collateral also depending on the creditworthiness of the borrower. Collateral is something valuable to the borrower, such as machinery, building, or any worthy assets, that the lender might take if the borrower defaults on paying back the loan. An unsecured term loan does not require collateral but has higher interest rates.
Term loans can be used for different purposes, including Working capital, Expansion, and Acquisitions. When considering a term loan, businesses should carefully compare the terms and conditions of different loans to find the one that best meets their needs. Factors to consider include the interest rate, the repayment schedule, the fees, and the collateral requirements.
Term Loan Explained
Small businesses that need cash to buy equipment, a new building for their production processes, or any other fixed assets to keep their businesses running generally apply for term loans. Some businesses apply for term loans to operate on a month-to-month basis.
Business owners needing term loans must approach their lender and provide statements and other financial evidence that shows they are creditworthy.
Once approved, they receive a lump sum of cash and have to make payments over a certain period, usually on a monthly or quarterly basis.
Term loans can either have a fixed or variable interest rate and a predefined maturity date. The repayment schedule depends on the working life of the asset funded by the term loan. A term loan is secured by the collateral and requires a meticulous approval process to reduce the risk of default. Some lenders needed down payments before sanctioning the loan.
Types of Term Loans