Running a business requires constant investment, from purchasing equipment to expanding your operations. But where do you get the capital to fuel this growth? Finding the right financing solution can be a challenge. 

Business term loans are a popular option for businesses seeking a predictable and structured way to access capital. They provide a lump sum of money upfront that you repay with fixed interest over a set term (length of the loan). These loans offer several advantages, including predictable budgeting and potentially lower interest rates than other financing options. 

Whether you’re looking to purchase new equipment, renovate your space, or simply cover working capital needs, a business term loan might be the perfect fit for your business.

What is a Business Term Loan?

In its simplest form, a business term loan is a financing option where a lender provides a business with a lump sum of cash up front. This cash injection acts as a capital boost, but unlike a grant, it comes with the expectation of repayment over a predetermined period, known as the term. Here’s what makes business term loans distinct:

  • Fixed Repayment Schedule: Unlike credit cards with fluctuating minimum payments, business term loans offer predictability. You’ll repay the loan with fixed installments (usually monthly) throughout the entire term. This fixed structure makes budgeting and cash flow management significantly easier.
  • Interest Rates: Business term loans can come with either fixed or variable interest rates. Fixed rates offer certainty in your repayment costs, while variable rates can fluctuate based on market conditions. The interest rate you qualify for will depend on various factors such as your creditworthiness, loan amount, and loan term.

It’s important to differentiate business term loans from other financing options. Lines of credit, for example, provide ongoing access to capital up to a certain limit, but don’t offer a single lump sum upfront. Short-term loans, on the other hand, typically have much shorter repayment terms (often under a year) and may be best suited for immediate, one-off expenses.

The Benefits of Business Term Loans

Small businesses have a variety of ways to access capital—some more readily available than others. When it comes to buying goods or paying for services, a credit card can suffice. Larger purchases or cyclical expenses may require a business line of credit. 

Business term loans fill the biggest needs and can be incredibly helpful in growth, expansion, and even acquisition. Here’s a look at why a business term loan might be the ideal solution for your financing needs:

  • Predictability and Budgeting: Business term loans shine in terms of predictability. The fixed repayment schedule allows you to accurately forecast cash flow and budget for loan payments with ease. This stability is crucial for making informed financial decisions and ensuring your business operations run smoothly.
  • Access to Larger Capital: Compared to other financing options like credit cards with lower limits, business term loans allow you to access a larger sum of money upfront. This makes them ideal for financing significant expenses such as purchasing new equipment, funding expansion projects, or covering a bulk inventory order.
  • Potentially Lower Interest Rates: While interest rates can vary depending on your situation and the lender, business term loans often offer more competitive interest rates compared to other short-term financing options like credit cards or merchant cash advances. This translates to significant cost savings in the long run.
  • Versatility in Use: The beauty of business term loans lies in their flexibility. They can be used to address a wide range of business needs. Need to upgrade your machinery? Considering a renovation project? Facing temporary cash flow shortages? A business term loan can be your one-stop solution for various capital requirements.

Common Uses of Business Term Loans

As mentioned, there are some business expenditures that are just too big to put on a credit card or revolving line of credit. Let’s delve into some of the most common ways businesses leverage business term financing to achieve their goals:

  • Equipment Purchase or Machinery Upgrade: Perhaps your business relies on specialized equipment to operate. A business term loan can provide the capital needed to purchase that essential new printing press, industrial oven, or software program. Upgrading outdated equipment can increase efficiency, improve product quality, and boost your production capacity.
  • Expansion or Renovation Projects: As your business grows, you might need to expand your physical space or renovate your existing location to accommodate increased operations or a growing team. A business term loan can be a strategic tool to finance these expansion or renovation projects, allowing you to invest in your future growth.
  • Working Capital Needs: Every business experiences fluctuations in cash flow. Unexpected expenses or seasonal slowdowns can create temporary cash flow shortages. A business term loan can bridge these gaps, ensuring you have the necessary funds to cover payroll, inventory purchases, or other operational expenses until your cash flow stabilizes.
  • Debt Refinancing: Consolidating existing high-interest debt into a single business term loan can be a smart financial move. By securing a potentially lower interest rate with a business term loan, you can streamline your debt obligations and potentially save money on interest payments in the long run.

How to Qualify for a Business Term Loan

Securing a business term loan will require you to demonstrate your creditworthiness and your business’ stable financial health. Here’s a glimpse into what lenders typically consider when evaluating loan applications:

  • Creditworthiness: Just like any loan, your business credit history plays a significant role in determining your eligibility and interest rate for a business term loan. Lenders will assess your business credit score and report to gauge your ability to repay the loan.
  • Business Plan: A well-crafted business plan serves as a roadmap for your business’s future. It showcases your financial projections, growth strategies, and overall business viability. A strong business plan demonstrates to lenders that you have a clear vision and a solid plan for utilizing the loan funds effectively.
  • Financial Statements: Lenders will closely examine your business’s financial statements, including your balance sheet and income statement. These documents provide a snapshot of your company’s financial health, profitability, and overall debt situation. Strong financial performance increases your chances of securing a favorable loan.
  • Collateral: While not always required, some lenders might ask for collateral to secure the loan. Collateral can be any asset your business owns, such as property or equipment. Having collateral can improve your chances of qualifying for a loan and potentially lead to more favorable loan terms.

The specific documentation required for a business term loan application can vary depending on the lender. However, common documents might include tax returns, business licenses, and bank statements.

What is the Average Business Term Loan Rate?

The world of interest rates can feel complex, and business term loans are no exception. While a definitive “average” rate is difficult to pinpoint due to several factors, there are some indicators that can help in determining a general range to set your expectations against. 

Based on current market trends (as of April 2024), most small business owners can expect average business term loan rates to fall somewhere between 6% and 36%. This range applies to fixed-rate loans from traditional banks. Some lenders offer business term loans with variable interest rates that, while initially lower, can become higher than average purely based on economic conditions. 

The specific interest rate you qualify for will depend on several factors, including:

  • Creditworthiness: Businesses with strong credit history receive lower interest rates.
  • Loan Amount: Smaller loan amounts might come with higher interest rates.
  • Loan Term: Longer loan terms often translate to slightly higher interest rates.
  • Lender: Different lenders have varying risk assessments with differing interest rates.

To secure the most favorable interest rate, it’s crucial to shop around and compare offers from multiple lenders. Focus on your creditworthiness by maintaining a healthy business credit score and prepare a strong loan application package that showcases your financial health and business plan.

Considerations Before Taking Out a Business Term Loan

While business term loans offer numerous advantages, it’s crucial to carefully consider all aspects before committing. Here are some key points to ponder:

  • Impact on Cash Flow: Business term loans come with fixed repayment obligations. It’s essential to thoroughly analyze how these repayments will impact your business cash flow. Ensure you have sufficient funds to comfortably cover the loan payments alongside your regular operating expenses.
  • Prepayment Penalties: Some business term loans come with prepayment penalties. This means you might incur a fee if you choose to pay off the loan early. Factor in potential prepayment penalties when evaluating loan options and choose a term that aligns with your repayment goals.
  • Collateral Requirements: As mentioned, some lenders might require collateral to secure the loan. Pledging collateral puts those assets at risk if you default on the loan. Carefully evaluate if you’re comfortable with the potential implications of using collateral before proceeding.

Where to Get a Business Term Loan

If a term loan sounds like the best course of financing for your business, the next step is applying for one. Here are some of the common avenues for obtaining a business term loan:

  • Traditional Banks: Brick-and-mortar banks have been a mainstay for business financing for decades. They offer competitive rates and potentially longer loan terms, but the application process can be more rigorous and time-consuming. Strong credit history and a well-established business are typically prerequisites for securing a loan from a traditional bank.
  • Online Lenders: The rise of online lending platforms has revolutionized the business financing landscape. Online lenders often offer a faster and more streamlined application process compared to traditional banks. However, they might have stricter eligibility requirements or higher interest rates for borrowers with less established businesses.
  • Small Business Administration (SBA) Loans: The SBA, a government agency, offers loan programs specifically designed to support small businesses. SBA loans often come with more favorable terms, including lower interest rates and longer repayment periods. However, the application process for SBA loans can be more complex and may require additional documentation compared to other options.
  • Alternative Lenders: Alternative lenders encompass a wide range of non-bank financial institutions that offer business financing solutions. This can include merchant cash advances, invoice factoring, and equipment financing. While these options can provide quick access to capital, they often come with higher interest rates and fees compared to traditional loans.

To secure the best business term loan for your company, carefully compare factors like interest rates, loan terms, eligibility requirements, and application process complexity across different lenders. Finding the right fit involves balancing these considerations to ensure you get a competitive rate, a suitable repayment schedule, and a smooth loan application experience.

Apply for a Business Term Loan Today

Business term loans can be a powerful tool for fueling your business growth. They offer predictable repayment structures, access to larger sums of capital, and the potential for competitive interest rates. For many businesses, they’re the best answer for securing critical capital for big-time projects. 

If you’re set on getting a business term loan, NorthOne is ready to help. With loan amounts available from $10-$250k, we help account holders get an infusion of cash now, so they can repay it over time in monthly payments. Apply for a NorthOne business term loan today and fund the next step in your business’ journey!

Frequently Asked Questions (FAQs)

Have more questions about business term loans? Here are some of the most frequently asked questions (and their answers) from other small business owners. 

What is a term loan for a business?

A business term loan is a lump sum of money repaid with fixed installments over a set term.

What is the longest term for a business loan?

The longest term for a business loan can vary depending on the lender, but it typically falls between 6 and 10 years, or even up to 20 years for some loans.

What is the average business term loan rate?

The average business term loan rate, as of April 2024, ranges from 6% to 12% for fixed-rate loans from traditional banks.

How long is a short-term business loan?

A short-term business loan typically has a repayment term under one year, and may be best suited for immediate business expenses.