A business term loan can be the perfect answer for financial situations that a business owner may encounter during the course of running a company. It can also help an entrepreneur get finances to start a small business. Yet a business term loan is not a commitment to jump into without a good idea of what it is and what to expect.
Unfortunately, too many business owners run into difficulties after getting approval for a business term loan due to lack of information.
This article will outline the following subjects:
Businesses acquire business term loans for several reasons, ranging from purchasing assets like equipment or vehicles to expanding operations. Therefore, there are several types of these financing options available. The language used for each type is similar, so having an idea what terms mean will be useful, whatever option the business owner chooses.
There are other costs that come with the approval of a business term loan in addition to the amount borrowed. The business owner will pay interest, which is the cost charged for the loan.
The interest paid depends upon:
A business term loan will also incur penalties for payments that are late. The amount for these fees varies by lender. The business owner will also pay a loan origination fee (usually about one percent of the amount of the loan). Closing costs are paid when the loan is approved; they can also vary depending on the lender and the time of loan.
A business term loan is ideal to meet expenses related to high cost purchases which will result in profit over time. Unlike a business credit card, the loan amount will be specific to the purchase and be enough to cover the cost of the intended purchase. Additionally, a business term loan costs less than a business credit card or other financing. Borrowers may also be eligible for tax advantages from a business term loan, depending on the location where they do business.
Risks a business owner assumes with a business loan include:
Commercial banks are typically the first place a business owner looks to get a business term loan. These banks are experienced lenders with expertise in financing all types of businesses in addition to funding both new and established companies.
For brand new businesses or a business with bad credit, various financing companies are available to offer creative funding to meet their needs. Brick and mortar lenders, as well as online lenders are other resources for business term loans. Some vehicle and equipment manufacturers have what are called captive finance divisions that finance purchasers of their products.
To get a business term loan and end up with more headaches than before is counterproductive and costly. The loan transaction can end in a rewarding experience, however, starting with before the loan process starts. This includes the business owner researching in advance to know what to expect and what is expected.
Before applying for a business term loan, the borrower should begin to gather the following documents which the lender will need to process the loan:
While there may be a variation on what each lender expects, these are at least some of the documentation that will be required to process the business term loan. Having them ready can speed up the application process and potentially provide a greater chance for approval.
Advance preparation also includes asking the lender whether all penalties or other costs are included in the terms. There might be additional penalties for early repayment and other fees as well. Information about changing the rate structure during repayment, and if a discount is offered for automatic debit payments should be discussed prior to getting the loan. And business owners can and should have a lawyer or other expert look over the loan terms if they need assistance-before they sign on the dotted line.
A term loan can be a leg up for businesses to accomplish goals that will be financially beneficial to the company. If a business owner is open to flexibility in the amount of the loan, willing to consider alternative means of financing, and committed to making payments on time, the business term loan can make financial dreams a reality.