A business term loan is perhaps the most traditional method of small business financing for borrowers in need of financing for longer than 12 months. Term loans for businesses can vary widely but they all have a few things in common. The borrower receives a lump sum payment from a lender, which is paid back at certain intervals over a fixed period of time. The financing arrangement is classified as a business loan on the balance sheet of the borrower.
“Money is usually attracted, not pursued.” —Jim Rohn
Business term loans are used for a wide variety of reasons. Generally speaking, business term loans are used to make longer term investments in your business, including the purchase of fixed assets, investment in new technology, and hiring staff. Best practice is to match the maturity of a term loan with the useful life of the asset being financed. For example, it is recommended you obtain a 10 year term loan to purchase a new piece of equipment with a useful life of at least 10 years.
Business term loans vary in:
- Interest rate – Typically variable (can fluctuate over time) or fixed (primarily for real estate)
- Length of time to repay – Short term: 1-3 years; Intermediate term: 3 – 5 years, Long term: 5+ years
- Repayment intervals – Typically monthly
- Types of Fees/Penalties
- Origination fee: Ranging from 1 – 5% of the loan amount to cover lender’s underwriting costs
- Closing fees: Ranging from 0 – 1% of the loan to cover third party expense related to closing the loan
- Prepayment penalties: Ranging from 0 – 2% for repaying balance prior to end of loan term
- Late fees: Ranging from 3 – 6% on the amount that is overdue
- Collateral – Typically secured by business assets, and often times personal assets
Why use business term loans?
Businesses tend to prefer term loans because repayment amounts are fixed, so you know what is due every month, and payment amounts tend to be lower because repayment is spread out over a longer period of time. Again, businesses use term loans to obtain longer term funding for the purchase of longer term assets. Be aware that a term loan is not the best way to cover short term/temporary financing needs such as working capital if there is a prepayment penalty.
Business term loans tend to carry a higher risk of nonpayment because repayment takes place over a longer period of time. Therefore, bank term loan lenders typically have higher requirements for (1) minimum years in business, (2) minimum annual revenues, (3) minimum cash flow coverage of debt service, and (4) collateral. The application is usually more detailed and the approval process is longer. As a result, the rate of approval for small businesses is not as high compared to other financing options. Typically, start up companies will not qualify for bank term loan financing. As a small business owner, you should know upfront about the lender’s requirements for approval before you apply. If approved, however, your interest rate can be significantly lower than some of the high cost, short term alternatives!
How do I calculate the true cost of a business term loan?
The true cost of a business term loan includes both the stated interest rate you pay plus all costs/fees you incur in obtaining the loan. In order to accurately compare loan options, you need to calculate the annual percentage rate (“APR”). To calculate the true cost of a term loan, you need to have the following information:
Loan Amount: The lump sum borrowed
Example: $50,000 Loan Amount
Interest rate: The percentage rate (%) paid on the amount you borrowed
Example: 12%, Variable rate based on the published Prime Rate
Origination Fee: The percentage (%) of Loan Amount you are charged upfront to process your loan.
Example: $50,000 Loan x 3% = $1,500 Origination Fee
Repayment Term: The length of time from when a loan is disbursed until the loan is paid back in full.
Example: 60 months (5 years)
Repayment Amount/Frequency: Fixed monthly payments
Example: $1,112 per month
Using this information in a loan calculator, you can calculate the true cost of your term loan. Your annual interest rate is stated as 10%. However, when you include fees, the calculated APR is actually 13.35%. Make sure to use this APR when comparing the different loan options available to you.
One of the more common choices for business financing, term loans provide businesses with a one-time lump sum of capital. These loans are typically employed by growth-stage businesses for larger, more expensive investments such as major equipment purchases, capital expenditures, renovations, or debt consolidation, but can serve a wide variety of purposes.
- Set payment structure
- Suitable for a wide range of business purposes
- Lower monthly payments than short-term loans
- Longer payment terms than short-term loans
- Acquiring long term debt
- All funds upfront, no flexibility or reuse of funds
- Potential prepayment penalties
If you are a small business owner in need of long term financing but do not qualify for traditional banking products, explore alternative financing options available through Sterlings Rowe Financial Group. You can start by learning more about our SmartLoan Program, which offers loans up to $500,000 with affordable monthly payments.
Short Term Rates
- As low as 9% Simple Interest¹
What is Simple Interest?
Simple Interest calculates the total amount of interest you pay as a percentage of your loan amount. This rate excludes any fees.
For shorter terms (12 months or less), Simple Interest lets you easily see the total payback amount of your loan.
Total Interest Percentage is also referred to as Fixed Simple Interest, and is not an annualized rate.
On a 6 month, $10,000 loan with 9% Simple Interest and weekly payments, your interest cost is $900, for a total payback amount of $10,900.
Long Term Rates
- As low as 9.99% Annual Interest Rate¹
What is Annual Interest Rate?
Annual Interest Rate calculates the yearly interest percentage you pay based on your average loan balance. This rate excludes any fees.
While you should always consider the total cost of a loan, for longer terms (more than 12 months) you can use the Annual Interest Rate to compare loans of similar duration.
On a 24 month, $100,000 loan with 9.99% Annual Interest Rate and weekly payments, your interest cost is $10,418.15, for a total loan payback amount of $110,418.15.
Simple Interest: Total interest you will pay, and given as a percentage of the amount borrowed, excluding fee
Annual Interest Rate: The interest rate in annualized terms, excluding fees
Annual Percentage Rate: The interest rate in annualized terms, including fees
Eligibility for the lowest rates is very limited, available only to businesses with the strongest creditworthiness and cash flows, and typically businesses that have shown an excellent payment history on prior loan products with us. The weighted average rate for term loans is 25.3% simple interest and 48.7% AIR. Weighted averages are based on loans originated in quarter ending June 30, 2018.
We’ve learned a thing or two by working with more than 1,200 business owners just like you. With us, you don’t just get money in your pocket, you also get credit resources, renewal benefits and, best of all, peace of mind.
It doesn’t matter if you’ve recently started your business or have been around for years, building a solid business credit profile is an important step to make sure you have access to all the financing options you need to build a thriving business. We help you build business credit by reporting your good payment history to the appropriate business credit bureaus.