A business term loan is one of the most straightforward forms of business financing: the lender provides a lump sum of capital, and the business repays it through scheduled payments over a set period of time, usually with interest or another stated financing cost.
Term loans work particularly well when a business has a specific, identifiable need, such as:
Purchasing equipment
Expanding a location
Buying inventory
Renovating a facility
Hiring employees
Purchasing another business
Consolidating or refinancing existing business debt
Providing working capital
The major advantage is predictability. The business knows how much it is receiving, how long it has to repay it, and what its scheduled payments will be.
It depends heavily on the lender.
Traditional banks generally look closely at credit, revenue, profitability, cash flow, time in business, existing debt, collateral and the company's ability to repay.
Online and alternative lenders may have more flexible requirements and can sometimes approve businesses with shorter operating histories or weaker credit, but that flexibility can come with higher costs and shorter repayment periods. (The Wall Street Journal)
Predictable payments.
Potentially larger funding amounts.
Longer repayment periods than many short-term financing products.
Can be used for a wide variety of legitimate business purposes.
Can provide capital without giving up ownership of the company.
The biggest issue is that the payment generally doesn't disappear just because sales slow down.
A business could have a bad month and still owe the same scheduled payment. Taking on too much debt can therefore create additional cash-flow pressure.
Some lenders may also require personal guarantees, collateral, strong credit, or substantial financial documentation.
For commercial term loans, restrictions are primarily determined by the individual lender and the type of financing—not simply by the fact that a business is a particular industry.
Some lenders specialize in particular industries, while others exclude certain businesses or activities.
For example, SBA-backed term loans have specific restrictions. SBA rules exclude or restrict certain businesses, including nonprofits, businesses primarily engaged in lending, certain passive businesses, pyramid-sale businesses, businesses deriving more than one-third of revenue from legal gambling, and businesses engaged in illegal activities. (Legal Information Institute)
A term loan is essentially:
“Give the business a lump sum today, and the business repays it over an agreed period of time.”
It can be a good fit when a business has a clear use for the money and sufficient predictable cash flow to comfortably handle the payments.
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Educational information only. Olsen Business & Financial Solutions Consultants (DBA - BizMoolah) does not provide legal advice. Financing, restructuring, consolidation, and other solutions are subject to qualification, availability, creditor approval, contractual terms, and applicable law.