Small Business Term Loan Explained
A term loan can be a great option if you have an urgent need for cash for your small business. In general, a term loan will let you borrow cash upfront and you need to pay it in installments, with interest, within a specific period of time. A lot of small businesses use this type of loan when seeking access to more funds than what they can produce on their own, without posing cash flow issues.
Secured vs. Unsecured Term Loans
Unsecured term loans are those that do not require collateral. On the other hand, secured loans are loans that must be secured against a property owned by the borrower – for example, a car, real estate, and many others. Sometimes, a loan secured against real estate may be used for business instead of the purchase of the property provided as collateral.
Types of Small Business Term Loans
There was a time when term loans, with the exception of loans secured by real estate, ran for two to five years. However, this has been cut to a year or less for some short-term loans, along with SBA 7(a) loans for financing commercial real estate, which can normally go up to 25 years. Ultimately, a loan’s term will depend on its purpose and the type of collateral.
Short-Term
Those who are looking for cash to invest in a project that is likely to give an immediate return should consider getting a short-term loan. This loan can have a term as quick as half a year and is useful for those seeking some fast cash for business or those who want to begin or restore business credit. With a short-term loan, daily or weekly payments are usually made, which offers two key advantages: the balance gets paid off sooner and financing becomes less expensive overall.
Medium-Term
Two to five years is the typical timeframe within which medium-term loans are paid. They can be unsecured or secured any asset owned by the borrower or by the item to be purchased with the loan. Growing businesses that are in need of new equipment or other tangible assets will do well to consider getting a medium-term loan.
Long-Term
Finally, the common period for long-term loans is from 10 to 25 years, and loan amounts can go from a few thousand to a few million dollars. Generally, the purpose of the loan – opening a branch, buying a building, and so on – will determine the amount that may be borrowed as well as the term of the loan.
Selecting the Right Loan Type
If you’ve been contemplating getting a loan, except you don’t know what particular type, go back to your plans. Also, whichever type you want to go for, remember that financial stability is always the main requirement.