A typical Business Loan Terms range from 1 to 5 years. And a long-term business loan can last for about 10 years. When applying for a term loan, you will be provided with a set loan amount that you are required to pay off in given period.
By default, the wide range of term lengths can be very complex to small business owners, mostly for first-time business loan applicants. This is why you should have to research on different business lenders and their term options. Although loan terms are very important, it is very difficult to determine the best business loan term.
Business Loan Terms
For example, you need some money to finance the construction of a small apartment that you plan to sell. The life of the loan should end by the time you have gotten revenue from the sale of the building. Then, you can repay the business loan with sales proceeds and stop paying interest for the loan.
Business loans can be used for different funding’s from inventory and marketing to mergers and acquisitions. It is very important to consider your preferred loan term before you start the application process.
How Does It Business Term Loan Work?
Small business loan terms is a period between the date the loan closes (the Closing Date) and the date the loan is repaid or terminated. If you get a mortgage on you home, then your loan traditionally has a 30-year term. Meaning that your loan payments will be made during these 30 years, making it a long-term personal loan.
Types of Business Loans
As a small business owner in need for extra financing, then you will come across terms like short-term, medium-term, or long-term loans. You should know exactly what they mean and how to select the best term that suits your needs. Not selecting the right term can affect your business financially in the future.
Short-Term Business Loan Term
It is a loan for a period of one year or less. Examples of such loan term include line of credit, bridge loans, microloans, etc.
Medium-Term Business Loan Term
It is a loan term for the period of one to five years, and examples include students’ loans, equipment financing, etc.
Long-Term Business Loan Term
You can use this loan for a term of above five years. Some examples of such loan include traditional business loan, mortgages, and SBA 7(a) loan.
Business Loan Term Factors
There are factors and options you need to consider when weighing your business loan term. You should consider two major factors which are potential interest costs and cash flow.
Other factors to consider include:
Interest Costs and Your Loan Term
Interest payments is one key factor during loan application. Since there is an interest to be paid over time, the loan term affects the interest you pay. You should ensure to avoid going for loan term that has high-interest rates.
Matching Cash Flow to Your Business Loan Term
Keeping a healthy cash flow is a complex challenge for small business owners, regardless of your industry. Loan applicants must endeavor to choose a business financing term that suits their current and future cash flow needs.
With short loan terms, you are required to pay back your loan faster. So, your payments are expected to be relatively large. You can have smaller repayments with a long-term loan, but it will extend over longer periods.
Consider Your Credit Score
Whenever you borrow money, the offer of business loan or business line of credit is likely to make impact your credit score.
Business loan lenders prefer working with business owners that have a strong credit history. This is usually because these set of people keep a good track record of paying off their balances.
You can improve your credit score, by carrying out the below measures:
- Make bill payment in full and on-time
- Consolidate debt
- Ensure there is no mistakes on your credit report. If there are any errors, quickly contact the credit bureaus to fix them
- Ensure to improve on other aspects of your business’s finances
Finding the right small business loan term is a challenging act. Choosing a long-term loan might yield more interest payments. Long term loan allows for larger loan amount, and it is advised for small business owners who need a large amount for expansion of projects, purchasing expensive equipment’s, etc.