Economics 101: What is a Term Loan?

Posted at May 12, 2020 » By : » Categories : Business Funding,Term Loan »
term loan

There was over $15 trillion in outstanding business debt in the U.S. in 2019. Business loans such as a term loan are an important factor to take into account when calculating the amount of business funding in the U.S.

Clearly, borrowing is a necessary part of our country’s business framework. Without a productive attitude toward borrowing, businesses stand far less chance of surviving in today’s competitive marketplace.

However, to make the best possible use of borrowing, you need to understand what the different types of business loans that are available.

Read on as take a closer look at the term loan, and whether it would be a good fit for your business.

What is a Term Loan?

A term loan is one of the most common types of business financing.

Essentially, it is a standard funding arrangement between a borrower and lender. You borrow a fixed amount from a lender, before paying it back in installments over a given period (the “term” of the loan).

The amount you pay back will be greater than the amount you initially receive. This is due to interest, which is the way in which your lender profits from the transaction.

With term loans, interest rates can be either fixed or floating.

Term loans have repayment periods of anywhere between 1-25 years. However, term loans with a length of around five years are the most common for small businesses looking to fund general operational costs.

Rates of interest vary from one lender to the next. However, loans between three and ten years in length generally have an interest rate of between 4% to 6%.

Term loans of different lengths will have different terms and conditions. Long-term loans will usually come with much stricter security requirements.

Where Can You Get a Term Loan?

There are many different types of lenders that offer term loans. Some of the most common ones are:

  • Banks
  • Credit unions
  • Online lenders

Each of these has advantages and disadvantages in relation to ease of access and interest rates.

For example, online lenders will generally approve term loans far more quickly than banks, but will also charge much higher interest rates. Credit unions may offer you credit more easily than banks, but the upper limit on what you can borrow will be much lower.

Finding the best option can be highly time-consuming.

Our Service

At Your FundingTree, we find you funding options from different lenders. Once you give us your business’s information and the type of loan you want, we’ll find the best deal for you.

This helps you obtain the best rates and terms. It also saves you a lot of time and energy, as you won’t have to search for lenders on your own. We will do it for you!

Other Important Loan Types

Term loans are not the only way in which you can meet your business financing needs. Depending on the extent of your financial requirements, another type of loan might be better suited for you.

Below are explanations of some other key loan types.

Mortgage

If you own the house you live in, chances are you’re already familiar with mortgages. These loans can be taken out in respect of business property as well as residential property.

Essentially, a mortgage is any loan that is taken out against which a piece of real property is used as collateral. If a mortgage holder fails to make repayments as required by the lender, the lender will have a contractual right to repossess the collateral.

Equipment Loans

As the name suggests, equipment loans are used to purchase pieces of equipment. They can be similar to term loans in terms of their amount and length, although they can vary widely in this regard as well.

The key difference is that the equipment that you purchase with one of these loans acts as the collateral. As is the case with the property purchased by a mortgage, if you fail to make repayments on an equipment loan, your lender is entitled to repossess the relevant equipment.

Revolving Credit Facilities

Revolving credit is a type of loan that is renewed each month. You pay back a certain amount each month, but you generally don’t have to completely pay off the full amount owed at any point.

You can use revolving credit for short-term business expenses. Many businesses use it to pay invoices towards the end of the month when they may be short on liquidity.

A business credit card is a type of revolving credit facility.

Is a Term Loan Your Best Option?

Unlike mortgages or equipment loans, term loans are not always secured by an asset. This means that you could get one without giving your lender a potential contractual claim over an item of your property.

This is obviously a good thing. However, it’s not the only factor to consider.

An unsecured term loan is a riskier prospect for a lender than a secured loan. To compensate for this extra risk, the lending institution is likely to charge you higher interest rates.

You should also be aware that not every lender will grant you an unsecured term loan. A lender might require that you post a certain item as collateral, such as a vehicle or piece of machinery.

This is especially likely if you have a poor credit score.

If you enlist our help, we’ll take every relevant factor into account when finding you a loan. This ensures that you’ll get an effective credit instrument that will meet your business’s needs.

Getting the Best Financing Solution for Your Small Business

Whether you choose a term loan or a different type of financing, the key consideration is your own business needs. What suits someone else might not be the best thing for you.

However, if you need to borrow money, don’t let fear stand in your way. Every successful business in operation today needed capital to get moving at first.

If you’re looking for financing for your own business, contact us today or fill out an application online.