Term Loan

There are many types of loans out there. Whether for business, pleasure, or personal use, knowing what type of loans are available is important to making sound financial decisions. One common type of loan is the term loan. It is a common way of getting quick financing for many reasons.

The way a term loan works by the definition of most banks is fairly simple. The loan is given to you and is due up on a certain date. Before that date you may payments that are generally on interest only. On the term loan date, though, you will owe the entire balance of the loan.

The maturity of such a term loan is usually anywhere from three to five years. That makes it a fairly short term loan. Though dangerous because of the lump sum due at the end of the loan, term loans do have a place in the financial landscape and can be valuable.

On the other hand, it is important to note that some banks call any loan written for a specific time a term loan. That means a 60 month (5 year) loan with monthly principal and interest payments is a type of term loan. Though not as common a definition it is important to realize that there are alternative definitions.

With multiple definitions available for a term loan, it is important to consider all the different types. Depending on what you need and how long you need it, there may be a number of term loans you would want to consider. Additionally, fully understanding what is out there in terms of a term loan can help you make a sound financial decision.

The most common use of term loans is for businesses. If you are running a small business, there are undoubtedly going to be times when you need some working capital to either get things going or keep yourself afloat. Many times, a term loan is the answer for just such a problem.

Many banks and similarly run financial institutions offer term loans as a way to help small business owners. However, like with any other loan you and your business need to qualify. How does that work, though? There are some factors that will affect term loan approval.

The first thing a bank looks at when considering your business for a term loan is your credit character. That is, they want to know how you have managed loans in the past. They will look at you personally as well as your business. They also want to know what your experience is. For example, if you want a term loan to open your own bait and tackle shop, yet have no retail or fishing industry experience then you may have a tough time.

Another factor taken into account when seeking a term loan is your credit capacity. Credit capacity is how the bank views your ability or likely ability to pay back the loan. They will look at your business records, personal finances, and even your former business ventures to get a clear picture.

Most banks will want collateral for a term loan. They will, in fact, probably want more in collateral than what the loan is worth in the first place. This is to ensure that if you do not pay back the term loan that the bank will be able to recoup their loss in some form.

As a final point, they will look at your overall capital. They will want to see your cash holdings. They will also look at what you have available that can be liquidated. Essentially, the bank wants to make sure that they will get their money even if your business struggles.

When your business has to look at a term loan, there are actually a couple of different types to consider. They vary not only in length, but also terms of function. An intermediate term loan is one such option you may explore depending on what your needs are versus what your situation is.

In terms of length, intermediate term loans are basically what they sound like. Running somewhere under 3 years in most cases, an intermediate loan is repaid in monthly installments. These are usually interest only or with small amounts of principal. So at the end of the loan, there is generally some sort of balloon payment.

An intermediate term loan is tied directly with what you are financing with it. In fact, the most common situation that you will see with these loans is that the length of the loan coincides with how long the useful life is of what you are financing. A formula of some sort is generally put together that will take into account what you are financing and when your loan will mature.

As a final point, an intermediate term loan is also paid from the cash flow of a business. It is not tied to you, per say, personally. Instead, it is tied to your business and its flow of cash. It is an important distinction to make.

Another option you may consider for your business is a long term loan. Term loans are considered long if they are for more than three years by the definition of most financial institutions. However, most long term loans are for more than ten years, and, in fact, can be as long as twenty years. They differ from the intermediate term loans in a few different ways.

Instead of tying the loan to your business’ cash flow, a long term loan has a different connection. Your long term loan will generally be put up against collateral of assets in your company. Whether it is property, equipment, or some other asset, there usually has to be something securing your long term loan.

Secondly, a long term loan has additional terms. The most common is some type of wording in the loan agreement that prevents your business from taking on a certain amount of additional debt. This wording often includes debts as well as things like salary and dividend. Additionally, you may be required, as a business, to set aside a predetermined amount of profit for loan repayment.

As a final point, long term loans can vary on repayment schedules. Some will, like the intermediate term loans, offer a monthly payment plan. Others, though, may ask for a quarterly payment to be made. Many times, this is dependent on the length and amount of the loan you take out.

As you can see, there are some very real differences between a long term loan and an intermediate. When you go in search of a term loan for your business, consider these differences. They can be a real factor in whether you make a good or poor financial decision as well as whether or not you can qualify for what you need.

Finding a bank to get your business a term loan is something you should take very seriously. There is a great deal of difference in bank service, rates, and even efficiency. If you want to increase your chance to get approved for a term loan, get the right loan, and achieve what you want with your business, then consider some of these ideas for choosing a term loan bank.

The first step in choosing a bank for your term loan is to simply ask around. Talk to other business owners and friends to find out where they have gotten their term loans. Find out if they are happy and why they are or are not. What did the bank do well and not do well? Asking questions and talking to actual customers gives you an authentic feel for what the banks are about.

Secondly, you should have already been getting relationships together with a bank. As you build a relationship and get to know the people who work in a bank, you will know how they treat people. A relationship built through even conversation is a good way to gauge how a lending relationship will go.

Third, visit several banks. When you visit tell them that you are seeking a term loan and that you are looking at a number of banks. This can help you get their best offer early on. Listen to what they have to say, get things written down, and then you can compare what everyone has offered you.

As a final point, check the newspaper to find out who is producing the type of term loan you need. Not every bank offers the best in term loans. Finding out who is offering the best in term loans as opposed to other types of loans is well worth the time reading and even getting on the phone.

A term loan, like most financial loans, is not for everyone or for every business. You should carefully consider your own situation before ever moving forward with a term loan. Not only is there danger of not qualifying, but also of putting your business into a debt it cannot handle.

Usually the best candidates for a term loans are established small businesses. You need to be able to show good financial statements. Having some working capital available for a down payment is also essential in most cases since a term loan is usually a method of financing something. Bear in mind that your repayment schedule is usually linked to the item you finance.

As a final point, if you are going to finance equipment with a term loan, you should make sure your business has taken everything in to consideration. Look at depreciation as well as length of the loan. You may even want to explore leasing first. The key to good financing is to make sure it is necessary, you can handle it, and that the term loan is what is best for your business.

The approval process on a term loan is grueling. Make sure you are up to it as a company and as an individual before entering into the process. Failing to get through it can mean wasted time and a bad mark on your company’s credit for future applications.

If you decide to seek out a term loan for your business, you want to make sure you get approved. Since the approval process is long and difficult, it is a good idea to have some idea of what you should do to help your chances. Here are a few tips on getting approved.

First of all, make sure your business plan is rock solid. Your plan is where a lot of the investigation will take place form the lender. Not only should it be solid, but also is should be well presented and laid out. Make sure you have a well polished one to three page summary of the plan on the front. This will be your hook.

Secondly, lenders like to see that you have a stake in your own business. A term loan for equipment or the business as a whole will be more likely to be approved if you have at least a 24% stake in the business. Lenders see this as motivation for you to do everything you can to succeed.

Unlike with a home, it is better to rent than to buy. A term loan lender would rather you were spending your money on revenue producing equipment and inventory. Rent your building so that you tie up less money and accumulate no more business debt. Term lenders like to see less debt.

For a small business, sometimes bigger is not better. When seeking your term loan, try the smaller local banks. They may be more likely to take a chance on a local. Additionally, a smaller bank is likely to give you more individual attention than a large financial company.

Scam artists are not above taking advantage of small business owners. In fact, in some cases, they are an easier target than individuals are. When it comes to term loans, there are scams out there for which you should be on the look out. Remember that if something is too good to be true, it probably isn’t.

First of all, watch for any lender that is coming from another country. Often times you will get an unsolicited email, mailer, or flyer that offers term loan financing of equipment. Often times these scam artists are located outside of the country in order to make it harder to track them. You send them money or personal information and never hear from them again.

Secondly, it is always important to be wary of any unsolicited request for money or information. If you are going to send money to someone, make sure you have established their reliability and legitimacy. Otherwise you may just be funding a vacation for some scam artist.

Remember that term loans require painstaking research by the lender. There will be a lot of information requested from you, reviewed, and possibly more. If someone claims to need only a possessing fee and some information about your company, that should put up a red flag. It is never that easy, and if they claim it is, then they are likely trying to take you for your money or your information.

While there are many reasons your small business may want to pursue a term loan, there are also reasons not to. When it comes to financing, you should always make sure you are taking into account the pros and cons of every option. By understanding the cons of term loans, you may prevent yourself from making a tough financial mistake.

The first disadvantage to a term loan is the amount you can secure. As you may recall, a term loan is usually limited by the product you are financing. In fact, it is usually a percentage of the value of the equipment. What the amount is exactly depends, of course, on the individual loan, but you are definitely going to be limited.

Secondly, prepayments are often restricted. In fact, if they are allowed at all, prepayments of a term loan are usually heavily penalized. This is something that can cause a problem if you are used to loans that allow you to pay off the balance when you have the money available.

As a final point, there is usually a processing fee. In fact, that fee can be fairly substantial. With most term loans, the fee is a small percentage of the total loan. So in addition to paying the interest rates and being limited by the financed piece, you have to pay a fee for processing the loan. Getting the loan, then, can be hard on your capital in itself depending on the size of the loan.