Small business financing can take many forms, but it generally falls into two broad categories: debt and equity financing. Debt financing involves borrowing money from a lender, while equity financing means raising capital from investors in exchange for an equity stake in your business. A term loan is a specific type of debt financing.
When you take on a term loan for business, you're borrowing a set amount of money, which is repaid over a fixed period of time. The amount you can borrow depends on the lender, your creditworthiness and your business financials, but generally it's possible to finance up to $1,000,000 with a term loan.
Short term loans may have repayment periods of just a few months or extend up to one year. Intermediate term loans typically have repayment terms lasting from one to three years. A term loan guaranteed by the Small Business Administration may have a repayment term of up to 10 years.
Term loans can be used to benefit your business's bottom line in a number of ways. For example, you could use a term loan to:
- Upgrade your computer or point-of-sale systems
- Launch a brand-new website for your business or overhaul your existing one
- Open a second location
- Renovate your current business premises
- Hire and train new employees
- Purchase vehicles or other equipment for your business
Regardless of how a term loan is used, the overall goal is the same: to make an investment in your business that will create a steady stream of cash in the near future. The longer repayment period makes term loans perfect for longer-term growth investments.
If, for example, you need to purchase inventory or just cover payroll for a few weeks, it wouldn't make sense to be repaying a loan over a period of years. In those types of scenarios, another financing option — such as an inventory loan or a working capital loan — would likely be more appropriate since these kinds of loans are designed to be repaid fairly quickly.
Evaluating your potential return on investment can help you decide whether a term loan is a good fit for your business objectives. Before applying for a term loan for business, you'd want to take a close look at your revenues and expenses to make sure your cash flow can sustain the payments. You should also consider how your business fits the lender's requirements. Getting your financial statements and tax returns in order and taking a look at your credit can give you an idea of how likely you are to qualify. We'll dive into more detail as to how to prepare for a small business loan in the next part of our series.
SIGN UP FOR THE THRIVE NEWSLETTER