What is a Business Term Loan?

Business term loans are loans that come with specific repayment periods.

A business term loan is typically used to finance the purchase of assets the business needs—equipment, land, and vehicle, to name a few.

Exact repayment term for a business term loan is often based on the useful life of the underlying asset purchased using the loan. For instance, equipment like a copier or computer might only require repayment in two to three years. Land and buildings on the other hand will often have repayment terms ranging from 20 to 25 years.

In most cases, business term loans are secured by the assets purchased using the loan, although other conditions may apply.

How Do Business Term Loan Payments Work?

Term loan payments cover both a portion of the balance as well as the accrued interest. Fees that come with term loans are either paid up front or added to the loan balance. This will vary from one lender to another so be sure to ask the lender to be sure.

Typically, borrowers will be required to take out insurance on the assets purchased using the loan. If you fail to make payments on the taxes or the insurance of the assets, your lender might require that advance payments are made to protect the collateral. Lenders also have the option to add the costs in the loan balance.

In most cases, penalties will be applied in the event of late payments. Also, while payments are often made monthly, other financial institutions might agree to other options like quarterly payments.

What are the Likely Fees and Rates?

Just like most loans, borrowers will be charged an interest for the amount borrowed. The interest will often depend on the type of structure negotiated as well as the current rate.

Some of the factors that can affect the interest rate include:

  • Perceived credit risk
  • Length of the loan
  • Current index rate

Interest rates for business term loans are either floating (also called variable) or fixed. The latter means the interest will remain the same regardless of what transpires in the capital markets.

Variable rate loans on the other hand will be based on the interest rate index. That means you agree to a rate based on the index rate and you’ll also have to pay interest margin on top of that. In other words, the rate will fluctuate, depending if the capital goes up or down.

You might also need to pay certain fees which can include:

  • A loan or commitment fee (typically 1 percent of the amount)
  • Closing cost

Why Get a Business Term Loan?

While credit cards are deemed best for immediate purchases like office supplies and travel expenses, business term loans are considered the consummate option for high-cost and specific purchases that will benefit the business for a long time.

Generally, business term loans are used to purchase some of the following:

  • Office space build-out, real estate, construction, and renovations
  • Machinery, equipment, and other tools for service, repair, and manufacturing
  • Technology and office equipment like copiers, furniture, phone systems, computer equipment, and point-of-sale systems or POS

How Do You Expedite the Application Process?

To increase your chance of getting the nod and to hasten the approval, it is recommended that you have all the necessary documents ready.

These documents may include but are not limited to the following:

  • Tax returns (for the owners and the business).
  • Business financial statements (this can include the profit and loss statements as well as the balance sheets).
  • Lease of the business premises (when applicable).
  • Financial projections (this should indicate expected expenses and revenues for at least three years).

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