What Is a Term Loan and Is It Right for Your Business?

Are you considering a small business loan for your company?

If you have, you should consider securing a term loan. A term loan is when you receive a sum of cash for a specific purpose.

Afterward, you’ll be required to repay the loan in fixed payments over a set period.

As such, it might be especially important for a small business that’s trying to scale. You can use it if you need to launch a new product or service and are low on cash.

Here’s what you need to know about a term loan.

How a Term Loan Works

If you’re considering a term loan, you’ll have to first prepare a proposal of why you need the loan.

You have to consider why you need a lump sum of cash upfront. Do you need it to cover expenses to manufacture a product? Do you need the money to hire staff to help you launch a new business service?

Make sure you take your time to prepare this proposal before you seek financing through a term loan.

When you get selected for a term loan, you want to make sure you understand the rules before you accept it. You have to pay attention to the interest rate and the payment schedule.

For example, you might receive a $10,000 loan to be paid back within 5 years (60 months). This might come with a 10% interest rate.

In such a scenario, your monthly payment has to be at least $212.47. Your total interest that’ll get paid over the 60 month period will be $2,748.20. As such, your total repayment will be $12,748.20.

If that sounds feasible, you can consider taking the loan. Failure to pay the loan can lead to harsh consequences for your business. Make sure you assess your company’s financial security before you accept a term loan.

Major Advantages of Term Loans

So what are the major advantages of term loans that business owners should consider?

With a term loan, you can get the following:

  • A large lump sum of cash to scale your business
  • Flexible time periods to repay your loan
  • An opportunity to build good business credit
  • Easy approval and less stringent criteria

You’ll find that a term loan is often one of the best types of small business loans available.

Major Disadvantages of Term Loans

But are there any reasons why taking a term loan isn’t the best option for your company?

Here’s what might deter you from term loans:

  • Payments have to be frequent
  • Interest rates might be quite high
  • In some cases, you’ll have to provide collateral

Make sure you take the time to understand the terms of the term loan before rushing into accepting one.

Consider a Term Loan

Now you can consider if a term loan is ideal for your business. This can be a great opportunity to finance a project or grow your business.

You want to make sure you spend time understanding the criteria to qualify for a term loan.

You want to consider the advantages and disadvantages of a term loan before you decide if it’s right for your company.

Please share this guide with your fellow entrepreneurs. You can find more great business advice on our website.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.