Your Guide to Term Loans

Your Guide to Term Loans

Running a successful business can be a significant challenge, especially in today’s increasingly competitive market. A term loan can help to provide the extra financial support needed to maintain and grow operations. Term loans offer an injection of capital that businesses can use for short-term needs and are one of the best solutions to help businesses stay afloat and maintain financial stability.

Are you wondering if a term loan is right for your business? Our guide will take you through everything you need to know using the 5W1H approach: what, who, why, when, where, and how.

What is a Term Loan?

A term loan is a type of loan that typically has a predetermined amount, interest rate, and repayment schedule. It is usually offered to businesses for a variety of purposes including working capital, expansion funding, equipment acquisition, and debt consolidation. Term loans are normally repaid in regular installments over the life of the loan, with a lump sum payment of principal and interest due at the end.

The amount borrowed and the repayment term are typically determined by factors such as the borrower’s creditworthiness, cash flow situation, and purpose for borrowing. Interest rates on term loans vary based on market conditions, risk assessment of the borrower, and other factors. The terms of repayment are often fixed but may include a variable interest rate or an adjustable payment amount.

Who is a Term Loan For?

A term loan is an ideal financial solution for businesses looking to make large investments or capitalize on growth opportunities. Providing up-front capital, a term loan can help businesses purchase equipment, expand their locations, hire additional staff, and access operating capital.

A Working Capital Loan is a hybrid product between a merchant advance and an expansion loan. It is an uncollateralized product paid back plus fixed simple interest. There is no interest rate and although there are fixed payments, the term is only an estimate based on a business’ projected gross revenue. A working capital loan is a great option for businesses that need to cover short-term operational costs.

Expansion Loans function just like traditional term loans, except you won’t secure them through your local bank. In some cases, you’ll have to provide collateral to back an expansion loan. You receive an agreed upon dollar amount at a fixed interest rate, that you pay back over a set period of time in regular intervals. An expansion loan is an ideal option for businesses that are looking to grow and reach their next level of success.

Why Do I Need a Term Loan?

Term loans are an effective and reliable way of obtaining capital, and they can provide businesses with the necessary funds to grow their operations and make investments. Term loans are also useful for providing businesses with the capital they need to improve their balance sheets and help them become more competitive in the market.

Working capital loans are used for short term projects generating immediate profits such as:

  • Marketing campaigns and advertising
  • Storefront renovations
  • Seasonal hiring
  • Bulk inventory purchases

Expansion loans are for long term projects generating a delayed return on investment such as:

  • Physical expansion or additional locations
  • Equipment financing
  • Product development
  • Debt consolidation

When Do I Apply for a Term Loan?

As with any type of financing, applying for a term loan before it’s needed can be beneficial in many ways. Having access to the funds before needing them can help businesses plan ahead and make better financial decisions. Having access to financial reserves during slower sales times or seasonal downturns helps ensure that operating expenses can be paid on time and that there are resources available to maintain operations even when profits are temporarily down. Businesses that secure a term loan before they need it may also benefit from lower interest rates or longer repayment terms than those available when the funds are needed.

Conversely, as it may be hard to predict, waiting until you need a term loan to apply is not uncommon. Whether you apply for one ahead of time or wait until you actually need one, many alternative lenders offer quick approval processes and fast funding, some as quick as the same day.

How Do I Qualify for a Term Loan?

The vast majority of small businesses can meet the minimum requirements for a working capital loan because of their considerably more lenient approval criteria, which is holistically based on time in business, industry, cash flow and more, instead of just on credit. You can secure this type of loan by just providing your business bank statements.

Expansion loans have the most stringent approval criteria. The typical borrower has great personal credit, a low debt-to-income ratio, and an established profitable business to meet periodic payments regardless of changes in revenue during the normally longer term. You’ll usually need to provide both business and personal financial statements as well.

Where Do I get a Term Loan?

Term loans are typically offered by banks, credit unions and alternative lenders. Compared to traditional bank loans, alternative lenders often boast shorter application timelines, with some offering same-day approvals. These lenders also typically offer more flexible repayment plans, allowing borrowers to choose a term that best fits their business needs. Additionally, alternative lenders usually have more relaxed qualification criteria, meaning even businesses with bad credit histories still access capital.

We know you have options when it comes to selecting an alternate lender for your term loan.  We hope you’ll consider CapFront for your funding needs. Our focus is on complete transparency with our clients, and our dedicated relationship managers are bonafide experts in business funding. Our working capital loan term range is from 3 months to 3 years and up to $2,000,000. Our expansion loan terms range from 6 months to 10 years and up $500,000.

Apply with CapFront and you can get the capital you need quickly, without hassle.