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Business term loans are a versatile financial tool that allow companies to achieve strategic goals without diluting ownership. They provide a lump sum of capital upfront, which businesses repay over a set term ranging from a few months to several years.

This article dives deep into the nuts and bolts of business term loans, exploring how they work, their advantages and drawbacks, and how they compare to other funding options.

What is a Term Loan?

Business term loans are a form of financing where a lender provides a lump sum of cash to a business, which the business must repay with interest over a predetermined repayment schedule.

The “term” in “term loan” refers to the fixed period during which the borrower must repay the loan. This period varies depending on the specifics of the agreement, but typically falls under one of three types.

Types of Business Term Loans

Business term loans are usually categorized according to the length of their repayment period.

Short-Term LoansIntermediate-Term LoansLong-Term Loans
Repayment PeriodLess than 1 year1 to 5 yearsMore than 6 years
PurposeQuick cashEquipment upgradeMajor expansion
Interest RatesHigherModerateLower
Total Interest PaidLowerModerateHigher
Speed of Funding1-2 days1 weekOver 1 week

Best Business Term Loan Providers

1. National Business Capital

National Business Capital stands out among term loan lenders for its ability to provide loans to businesses across various industries, including those in high-risk fields like cannabis. With a network of over 75 lenders, National Business Capital offers a wide array of financing options to suit different needs, from small business loans and lines of credit to specialized funding solutions like equipment financing and SBA loans.

National Business Capital gives you access to a broad spectrum of loan options from $100,000 up to $10,000,000, with APRs as low as 3.25%. NBC isn’t a traditional bank, but rather serves as a bridge between businesses and lenders, primarily focusing on giving companies that struggle to find traditional financing an avenue for growth and operational support​.

If your credit isn’t the best, the good news is that National Business Capital doesn’t impose a rigid minimum credit score across all its business term loans. For instance, with its small business loans, you may be eligible with a credit score as low as 580. Lending criteria hinges on your income more than your credit score.

Generally, you’ll need to show a minimum of $360,000 in annual revenue and at least one year of operation to qualify for most options. However, some products have more lenient criteria for businesses at different stages of growth and financial health.

Term Loans Offered

  • Short-Term Business Loans
  • Intermediate-Term Loans
  • Long-Term Loans

National Business Capital Highlights

Loan Amounts$100,000 to $10,000,000
Minimum Credit ScoreNo Minimum FICO
Estimated APR Range3.25% to 15%
Revenue Requirement$30,000 Monthly
Underwriting Process6 Months Bank Statements
Credit CheckSoft Pull
Approval TimeHours / Days
Collateral RequiredNot Necessary

2. Lendio

Lendio is a prominent provider of business term loans, renowned for its marketplace that connects businesses with a network of lenders. Specializing in term loans, Lendio offers flexible financing solutions tailored to meet the diverse needs of companies across various industries, including startups and those in traditionally challenging sectors.

With loan amounts ranging from $5,000 to $2,000,000 and competitive APRs starting at 6%, Lendio can help businesses seeking term loans without the complexity of a traditional bank. Their platform emphasizes accessibility and efficiency.

Lendio focuses more on your business cash flow than credit score. While some options are available for applicants with credit scores as low as 550, each lender within their network may have varying requirements based on individual financial health and growth potential.

Typically, you’ll need to demonstrate at least six months in operation and $10,000 in monthly revenue to qualify for most term loan options through Lendio. This flexibility makes it easier for emerging enterprises to secure the necessary capital while accommodating more established entities’ expansion plans.

Term Loans Offered

  • Short-Term Business Loans
  • Intermediate-Term Loans
  • Long-Term Loans

Lendio Highlights

Loan Amounts$5,000 to $2,000,000
Minimum Credit Score550+
Estimated APR Range6% to 30%
Revenue Requirement$10K Monthly
Underwriting ProcessCash Flow Evaluation
Credit CheckSoft Pull Initially
Approval TimeFast (Within Days)
Collateral RequiredOften Unsecured

3. Bluevine

Bluevine offers short-term business term loans up to $500,000 designed to provide small business owners with quick funding. Known for its streamlined application process and rapid decision-making, Bluevine can often deliver funds within 12 to 24 hours after approval.

To qualify for a Bluevine Term Loan, your corporation or LLC must have been operational for at least 24 months, maintain good standing with your Secretary of State, and show no bankruptcies in the past three years. A minimum credit score of 625 is required to be eligible.

The APR for Bluevine’s term loans starts at an attractive rate of 7.8%, but depends on your creditworthiness and specific loan terms. Bluevine term loans are considered short-term with maximum 24-month payment period.

Repayments are typically scheduled on a weekly basis but can also accommodate monthly arrangements based on initial agreements.

Term loans from Bluevine do not normally include prepayment penalties—allowing you more control over costs. Because these loans use simple interest calculations, paying off your balance early will help you save on interest.

While Bluevine’s speed in providing capital and absence of prepayment penalties stand out as significant benefits for businesses requiring immediate financing solutions, potential borrowers should consider associated costs carefully. Interest rates and fees could be higher than those tied to traditional bank loans if seeking long-term financial solutions.

It’s important to note that while Bluevine serves many industries across various states, certain locations such as Nevada, North Dakota, South Dakota, and U.S. territories are excluded from eligibility.

Loans Offered

  • Short-Term Business Loan
  • Business Line of Credit

Bluevine Highlights

Loan AmountsUp to $500,000
Minimum Credit Score625
Estimated APR Range7.8% to 43%
Revenue Requirement$40,000 in monthly revenue
Underwriting ProcessConnect bank accounts & QuickBooks
Credit CheckSoft Pull
Approval Time5 minutes
Collateral RequiredPersonal guarantee

Term Loan Overview

Typically, term loans are amortized, meaning that each payment is the same amount throughout the term and includes both principal and interest. By the end of the agreed term, the entire loan balance should be repaid in full.

Interest rates for business term loans may be fixed or variable; a fixed rate is set for the life of the loan, whereas a variable rate may fluctuate based on changes to an underlying interest rate index.

Business term loans are normally used to finance long-term investments or consolidate existing debts. They differ from revolving credit lines and types of alternative financing that offer more flexible borrowing and repayment terms. The structure of a business term loan aligns with long-term financial planning with predictable repayments.

Reasons to Choose a Term Loan

Term loans are a popular financing option for businesses for several reasons:

1. Predictable Payments

Term loans offer the certainty of fixed payments. This makes budgeting easier for businesses as they can plan ahead for consistent repayment amounts.

2. Defined Repayment Period

The fixed duration of a term loan means that borrowers know exactly when the debt will be paid off. This allows for long-term financial planning and the setting of clear debt reduction goals.

3. Large Loan Amounts

Typically, term loans offer access to significantly larger amounts of capital compared to other types of financing options, such as lines of credit or credit cards. This makes term loans suitable for large investments.

4. Lower Interest Rates

Due to their secured nature and longer repayment terms, business term loans often feature lower interest rates than unsecured loans or short-term financing options, resulting in lower overall costs.

5. Collateral-Lead Security

With a term loan, lenders may allow collateral, such as property or equipment, to secure the loan, which can also contribute to more favorable borrowing terms including potentially lower interest rates.

6. Boost Credit History

Successful repayment of a term loan can help establish and improve a business’s credit history, making it easier and often more affordable to borrow in the future.

7. Flexibility

Though less flexible than a revolving line of credit, some term loans offer flexibility such as periodic repricing, the ability to pay off early without penalty, and restructuring options, if necessary.

Term loans are appealing to businesses because they provide better control over cash flow and enable significant investments in growth. Unlike lines of credit, which can have variable volatility, or high-cost short-term options, term loans offer stability and affordability.

What Are Term Loans Used For?

Using a term loan strategically can allow you to undertake major projects or address essential needs that will drive your company forward. It’s vital that the way you choose to use the funds aligns with your wider business objectives and the agreed repayment plan is sensibly structured so your company can repay it.

A term loan can equip your business with the necessary funding for various strategic initiatives. Here’s how you might choose to apply a term loan for your company’s benefit:

Business Expansion

If you’re aiming to widen your market reach by opening new outlets or enhancing your production capabilities, a term loan can provide the substantial capital required for such growth endeavors.

Purchase Equipment

If your business needs new equipment or machinery, a term loan can help finance these major investments without straining cash flow.

Inventory Management

Should your business need to stock up on inventory ahead of high-demand seasons, a term loan allows you to make these sizable purchases, maintaining a steady supply for customer demands.

Staffing and Recruitment

To not only sustain but also scale your business operations, investing in human capital through hiring efforts can be facilitated with the resources from a term loan.

Debt Refinancing

Exploring better interest rates or consolidating several debts into one regular payment is possible with a term loan, optimizing your business’s financial commitments.

Property Investments

Whether it’s purchasing additional office space or a new storefront, real estate acquisitions can be realized using the funds from a term loan suited for large-scale capital investments.

Enhance Working Capital

Utilizing a term loan can give your business an essential infusion of working capital to support the day-to-day operational needs, keeping everything running smoothly even during varying sales cycles.

Business Term Loan Costs & Fees

Securing a term loan involves various costs and fees, which are added expenses on top of the interest rate. That’s why it’s critical to understand each one and consider them in your cost-benefit analysis when securing funding for your business.

Transparent lenders will outline the costs upfront to avoid any hidden surprises down the line. Always make sure to ask about any additional charges that may apply during the life cycle of your business term loan so that all possible expenses are accounted for in your financial projections.

The disclosed fees will differ from lender to lender; however, here are some common costs that you might encounter:

FeeWhat it's forWhat it can cost
Origination FeeProcessing a new loan0.5% - 5% of total loan amount
Application FeeSubmitting a loan application$25 - $350
Service ChargesAccount maintenance and management$10 - $50 per month
Prepayment PenaltyCompensate lender for early loan payoffSeveral months’ interest or % of balance
Late Payment FeesDelays in repaymentFlat fee ($30 - $50) or percentage (3% - 5%)
Guarantee FeeBacking by SBA or third-party guarantor0% - 3.75% of guaranteed portion
Collateral Appraisal FeesProperty valuation for collateralSeveral hundred dollars
Closing CostsLegal and filing paperwork$2,000 - $5,000+
Packaging FeeThird-party services for securing financing$2,000 - $4,000
Wire Transfer FeeCovers bank fees for funds transfer$10 - $75 per transfer
Renewal FeesExtending or renewing term loanVaries widely, inquire with lender
NSF / Bounced Check FeesChecks drawn on insufficient funds$15 - $35 per incident

How Business Term Loans Work

Understanding the workings of a business term loan can shed light on whether this type of financing is suitable for your business needs. A typical business term loan involves the following steps:

  1. Application Process
    To initiate a term loan, your business first completes an application with a lender, which requires providing detailed information about your business’s financial health, credit history, profit margins, and other relevant documentation.
  2. Approval & Terms
    Once your application is reviewed, the lender will either approve or deny your request based on their lending criteria. If approved, the terms of the loan—including interest rate, repayment schedule, fees, and other loan covenants—are presented to you.
  3. Funding
    Upon agreeing to the terms and signing the loan documents, the lender will disburse the funds as a lump sum to be used for purposes as defined by you during the application process.
  4. Repayment Schedule
    The repayment schedule stipulates when and how often payments are due—typically monthly. The amount includes both principal and accrued interest calculated over the agreed loan term.
  5. Amortization
    Most business term loans are amortized, which means that early payments consist mostly of interest, while later installments primarily pay down the principal balance.
  6. Loan Maturity
    When all scheduled payments are made successfully, your loan matures—indicating full repayment. If a balloon payment was part of the agreement, it would be due at this time.
  7. Additional Services and Management
    Throughout the life of your loan, you may access additional support services offered by your lender to monitor and manage your loan effectively, including online account management and customer service assistance.

Is a Term Loan is Right for You?

Deciding whether a term loan is the right financing option for your business requires a thorough analysis of your financial situation, as well as an understanding of your short-term and long-term objectives. Here are some considerations to help guide your decision:

What’s the Purpose of the Loan?

Assess what you’re aiming to finance with the term loan and ensure it aligns with your business plan and projected growth.

Analyze Your Business Cash Flow

Look over your past financial statements and cash flow forecasts to evaluate whether you can consistently cover loan repayments without causing a burden day-to-day operations. Be sure to consider seasonality.

Consider the Term Length

Understand how the term length associates with your investment timelines. Short-term needs may not warrant a long-term loan due to potentially higher overall costs of borrowing.

Evaluate Repayment Terms

Look at the frequency of repayment, total number of payments, and possibility of balloon payments or penalties matching against your cash flow cycles.

Interest Rate Impact

Consider how fluctuating interest rates might affect payment amounts over time, especially if you’re contemplating a variable-rate loan.

Fees and Additional Costs

Factor in all upfront and ongoing fees, penalties for late payment, prepayment penalties, and any other costs associated with the loan to get a full picture of affordability.

Assess Funding Speed

Understand how quickly you need funds; term loans have longer processing times compared to alternative business loans which may not be suitable for urgent funding requirements.

With a business line of credit you can get funds in as little as 24-hours.

Collateral Requirements

Ensure you are comfortable with what assets must be pledged as collateral (if required), and understand the consequences should you default on the loan.

Weigh Alternate Financing Options

Compare term loans and other financing products like lines of credit, merchant cash advances or factoring services considering flexibility and cost-effectiveness in context with your goals.

Get Advice from Financial Experts

Talking to an accountant, financial advisor, or business consultant can provide insightful guidance tailored to your situation. They can help you model the costs for different types of loans to make sure you make the best decision for your business.

Don’t Use a Term Loan if…

Deciding to pursue a term loan is a significant financial decision for any business owner. While term loans can provide capital needed for growth and development, there are scenarios where this form of funding might not be the best choice.

  • Your business has inconsistent cash flow
  • Unclear purpose or mismatch with business strategy
  • More affordable financing options are available
  • Need for borrowing flexibility is greater than what a term loan offers
  • Unwillingness or inability to collateralize the loan
  • Loan-associated fees outweigh potential benefits
  • Your business is already carrying substantial debt

Be sure to reflect on your company’s fiscal health, immediate needs, and long-term goals before taking on any form of financing.

Prepare for a Business Term Loan

Preparation is key when approaching a business term loan. A well-prepared loan application not only increases your chances of approval but can also help you get more favorable terms.

Here’s how to prepare your business before entering the loan process:

Clarify the Purpose

Be specific about what the loan will fund – whether it’s for equipment, expansion, or another strategic investment.

Review Your Credit History

Check both your personal and business credit reports for errors that could affect your loan terms or approval odds. Typically, to qualify for a standard bank-issued business term loan, a personal credit score above 680 is preferred.

Gather Financial Statements

Compile up-to-date balance sheets, income statements, cash flow statements, and tax returns to demonstrate financial health.

Develop a Business Plan

Draft or update your business plan to show how the loan will contribute to your business growth. Be sure to include realistic financial projections.

Assess Your Debt Service Coverage Ratio (DSCR)

Understand this key financial metric that lenders use to evaluate your ability to repay the loan. The Debt Service Coverage Ratio (DSCR), also known as the Debt Coverage Ratio, is a financial ratio used by lenders to assess a business’s ability to repay a term loan. It measures the cash flow available to service a company’s current debt obligations, including principal, interest, lease payments, and other types of debt service.

A DSCR of 1 means your business’s net operating income is equal to its debt payments. Values above 1 indicate that the business has more income than necessary to cover its debt obligations, while a DSCR below 1 implies insufficient cash flow.

Most traditional lenders look for a minimum DSCR of 1.2 to 1.25 and SBA-backed loans may allow a DSCR as low as 1.15.

Prepare for a Personal Guarantee

If necessary, be ready to back your loan personally, especially if your business does not have an established credit history or significant assets.

Outline Your Repayment Plan

Clearly detail how you plan to tackle repayments within your budget without jeopardizing other critical business operations.

Research Potential Lenders

Compare rates, terms, fees, and application requirements from multiple lenders to find the best fit for your business needs.

Legal and Tax Consultation

Consider speaking with legal and tax experts to understand the implications of taking on additional debt.

Financing Alternatives for Small Businesses

When a term loan doesn’t quite align with the needs or circumstances of your business, several other financing options exist, each with its unique characteristics:

Business Line of Credit

A revolving line of credit functions similarly to a credit card, with your business having access to a certain amount of funds to use as needed.

Unlike term loans with their fixed repayment schedule, lines of credit offer flexibility in borrowing and repaying funds. Interest is only paid on the amount used rather than the full loan amount, potentially making this a good option for ongoing liquidity needs rather than long-term investments.

Equipment Financing

This form of financing is for purchasing new equipment where the equipment itself often serves as collateral for the loan.

Equipment financing is more specific than general-purpose term loans and can be easier to qualify for since the equipment secures the loan. It’s designed strictly for asset acquisition, whereas term loans can fund a broader range of business needs.

Invoice Factoring

Invoice factoring involves selling some or all of your accounts receivable to a third party at a small discount in exchange for immediate cash.

The cash flow provided by invoice factoring is not a loan but an advance on your invoices, so it doesn’t incur debt. However, it can be more expensive in the long run than a low-interest term loan so invoice factoring is better suited for immediate cash flow needs rather than capital investment.

The Verdict on Business Term Loans

Navigating through business financing options can be overwhelming, but learning how business term loans work is important for making the right choice. Term loans can be useful for fueling growth, buying equipment, or providing working capital, yet it’s essential to evaluate whether they align with your business’s needs and goals.

Understanding the costs and repayment expectations are essential parts of choosing between a term loan or an alternate funding source. For most, it boils down to how much money you need, how steady your cash flow is, how soon you need funds, and how these factors balance out against the total cost of borrowing.

Your decision-making should always tie back to your broader business strategy. The key is to ensure that any borrowed money works for your business and doesn’t put unnecessary strain on its future.

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