What Is A Term Loan And How Can You Secure One?

It’s no surprise to business owners that they need working capital to run their day-to-day operations. Unfortunately, many small businesses lack this much-needed working capital. Term loans create the perfect option to get it.

What is a Term Loan?

A term loan is simply a short or long-term loan that is approved by a financial institution. It typically comes with a fixed rate that requires a standard monthly payment until the end of the loan term. However, some term loans may come with a floating interest rate that alters the monthly installment payment that you have to make over the life of the loan.

How Do Small Business Term Loans Work?

Term loans can be taken out for short-term financing of 12 months or less. They also can be taken out for the long-term, meaning six or more years. Once approved for the loan, you’ll be given the amount of the loan, minus any fees, upfront. This means if you’re taking out a term loan for $20,000, then you’ll receive $20,000 at the start of your loan.

Each month, you’ll be required to make an installment payment. These are commonly referred to in the banking world as equated monthly installments or EMIs for short. These payments are made for the entire term of your loan. If you have a fixed interest rate, then your EMI payments are going to be the same every month. However, if you have a floating interest rate, your EMI payments are going to vary depending on the current market rates.

How to Obtain a Term Loan

If you’ve tried to obtain financing from traditional banks, you’ve probably discovered that it’s not the easiest thing to do. Rather, banks aren’t typically open to funding small businesses that haven’t been operating for at least two years. If you have a fairly newer business, you may want to look into SBA loans or alternative financing.

The Small Business Administration (SBA) offers a variety of business loans that are intended to help small businesses get the financing they need when traditional lending isn’t possible. According to Lantern by SoFi, “The Small Business Administration backs several types of small business loans, each with its own unique characteristics.”

Some of the most common include 7(a) loans, 504 loans, Microloans, and Economic Injury Disaster Loans. All of these loans must be approved by a lender that offers SBA loans and requires adequate payback, including SBA disaster loan payback. It’s crucial to note that some businesses have received Economic Injury Disaster Advance Grants due to the COVID-19 pandemic. Since these are grants, they don’t have to be paid back.

If you’re not sure what type of SBA loan you would qualify for, it’s best to check in with your local and online lenders. They can evaluate your business, your needs, and determine which loan is going to be the best for your individual situation.

Getting a term loan for your business can give you the funding you need to keep growing. Now that you understand how to secure one, you’re ready to apply.