1. Term Loans
All You Need to Know About Term Loans
Term loans sound a lot more intimidating than they are. Term business loans are the classic business loans that get taken out by small business owners every day. They’re flexible, so you can use them for almost anything, including working capital, buying equipment, servicing debt or adding machinery to your workshop.
As industries have realized how important startups are, how beneficial it is to support businesses, and how you can actually make money by lending money, thousands of lenders have emerged that are willing to give out business term loans, from traditional banks to online lenders.
That means you have plenty of choices — which is good for variety and competition but can make choosing the best loan for you more complicated. If you’re wondering which lender to go with, how term loans actually work, and what to do next, this guide can help you. Seek Capital’s experts have gathered all the information about term business loans you’ll need so that you can make an educated decision when choosing between lenders.
How Much Can You Borrow with a Term Loan?
In today’s warm lending climate, you can get a business loan for as little as $100 and for upwards of a few million dollars. Most lenders cap their minimums at $500 to$1,000 for a business loan, and you’ll generally find that the maximum you can borrow is around $25,000 to $500,000. Don’t be discouraged if you need more, though, because there are plenty of lenders that will finance a loan of up to $2 million.
The amount that you can borrow with a term loan depends on your business profile and the lender's terms. Businesses with a high credit rating, good borrowing history, strong annual revenue, and clear business plan will be able to borrow more than a business that has only been around for a year and isn’t pulling in much revenue.
How Long Does It Take to Get a Term Loan?
One of the best things about term loans is that you can qualify for them faster than other loan types. Online business lenders have online applications, so you can apply in less than five minutes. Some lenders even have the technology to respond to your application instantly. If you’re approved for the loan, funds can be in your account within as little as 24 hours. In the lending industry, that’s lightning fast.
If you apply for a term loan through your bank, it’ll take longer than that to get your money because you’ll usually have to apply in person or over the phone. Just this step can take hours, as you’ll have to discuss your business needs, go through paperwork and more. Banks also take longer to consider your application and complete the underwriting process. In some cases, however, you can still get a bank-funded business loan within a couple of days.
What Documentation Do You Need to Qualify for Term Loans?
Term loan approval is a lot like the approval process for other types of loans. You'll start by completing the lender's application form. Each lender will have different requirements, but most ask for your business credit score, proof of your time in business, and basic business finance documentation. If you're applying for a secured business loan, like an auto loan or one secured against your equipment, you'll also need to send documentation about the collateral you’re putting down.
You’ll need to provide these documents during the loan application process:
Profit and loss statement
Business bank account statements
Your credit score
Business and personal tax returns
Your driver’s license
A voided business check
Who Can Get a Term Loan?
Every lender has a different set of qualifications for who can get a loan, but generally, you can get a term loan if you have:
Been in business for more than three years
A credit score of 680 or higher
An average annual revenue of $300,000 or more
If you don't meet those requirements, you still might have a chance. Some lenders have more lenient requirements, and some specifically cater to businesses with bad credit or startups that have been in business for less than two years. Other lenders specialize in industries like gambling or medical marijuana, which might have trouble getting traditional bank loans.
If you're a member of a minority group, a woman, or a veteran, you might qualify for a special business term loan that comes with lower rates or offers longer terms.
How Much Does a Term Loan Cost?
The interest rate you pay accounts for the lion’s share of your costs. You’ll get a lower interest rate if your credit and cash flow are both strong and you have been in business for at least three years. You’ll also get a better rate if you put up collateral to get a secured business loan.
Business term loans can have fixed or variable rates. The advantage of fixed-rate loans is that you know exactly how much you’re paying every month. There are no surprises, and you won’t need to worry about having to pay more if the prime rates change.
Variable rates can change every quarter or even every month. Even with a variable rate, however, you'll probably have a fixed margin rate that is added to the benchmark rate. Here’s what that means: The benchmark rate is usually The Wall Street Journal prime rate or the London Inter-Bank Offered Rate (LIBOR). This rate goes up and down frequently, so you’ll be charged a different interest rate (within your payment structure) each time the rate changes. The fixed margin rate doesn’t change. It stays fixed and gets added to the benchmark rate. So, if for example, your business loan has a margin rate of 2.75 percent, and the benchmark rate is 5 percent, you’ll pay a total interest rate of 7.75 percent.
The final cost of your loan is also determined by the fees and penalties the lender charges. Make sure you read the fine print before taking out a business loan because you could end up paying a lot more in fees by going with one lender over another.
Here are some of the most common fees and charges to look out for:
Origination fee. Typically, 3 percent-5 percent, an origination fee is very common. It covers the cost of processing your loan and includes running a full credit check and confirming your financial information. The origination fee could be added to the overall cost of your loan or taken out of the original loan amount.
Check processing fee. Typically, this fee is $10 per check. If you repay your loan amounts by check, you might have to pay a fee for every payment. Consider paying online to avoid this fee.
Late payment, returned payment, non-sufficient funds (NSF) payment. Typically, $10-$35, or 3%-5% of the failed payment. You'll be charged a penalty any time that your payment is late, returned, or doesn't go through as a result of insufficient funds in your account.
Prepayment penalties. These fees vary. Some lenders will charge you a penalty if you repay your entire loan before the end of the term or overpay at any point. Check if there are any prepayment penalties, especially if you hope to pay your loan off early.
Legal or closing fees. These fees typically range from $2500 to $5000. If you’re taking out a secured business loan, or your term loan is particularly complex, you might have to pay closing costs or legal fees to cover the cost of writing your loan agreement or associated other legal expenses.
What Are the Payback Terms Like for a Term Loan?
One nice thing about business term loans is that they come with a range of repayment terms. For example:
Short-term business loans can have a term as short as a few weeks or up to 1-2 years
Most term business loans need to be repaid in between 1 and 7 years
Long-term business loans can have a term anywhere between 3 years and 25 years
Usually, lenders will want you to make payments every month, but that can vary depending on the arrangement you make with your lender. Some lenders let you choose between monthly, four-weekly, or two-weekly payments. If you take a short-term loan with a term that’s under a year, you could be making payments every week or even every day. There are also lenders who’ll permit you to skip a payment once a year, or to put off a payment once every six months.
Term Loans Explained
Now that you know all about term loans and more, you can apply for a business loan with confidence. Sometimes, this knowledge is the edge that a company needs to really get out of a tough spot or take off, so apply today and watch your business grow.