Building your dream house for buying your favorite car requires you to have a huge sum of money. Individuals may not have the amount of capital necessary to make significant investments, so they opt for taking loans. However, there is a huge difference between applying for a real estate loan and a business term loan. While real estate loans are taken for building a house or buying a property, business term loans are commonly used by small businesses to purchase fixed assets like office space.
What are business term loans?
Owners of small or enterprise-level businesses mostly prefer business term loans because they offer more flexibility and a low rate of interest. After applying for a term loan, the borrower gets a lump sum of cash in exchange for specific borrowing terms. A repayment schedule is made and agreed upon by the lender and borrower, which includes the loan amount as well as the floating interest rate. A business term loan required substantial down payments, which gradually reduces the payment amount and the total cost of the loan.
Mainly small businesses apply for business term loans as they need cash to purchase equipment and start their new business or keep it going. Many banks have established term loan programs significantly to help small businesses flourish. However, similar to other types of loans, the borrower has to provide proof of financial evidence and statements that demonstrate their creditworthiness. After the lender is fully satisfied that the borrower has a consistent cash flow, they will approve your business term loan application. According to a fixed repayment schedule, the borrower has to make monthly or quarterly repayments of the loan amount.
What are the types of business term loans?
The types of business term loans listed below are categorized according to the lifespan of a loan:
1. Short term loans
Short-term loans are usually given to businesses that fail to qualify for a line of credit. Short-term loan loans are primarily for a few months or maximum up to a year and shall be repaid within a fixed time period.
2. Intermediate-term loans
Intermediate-term loans range between 1 to 3 years, and similar to de short-term loans, these also have to be paid in monthly installments regularly.
3. Long term loans
Long-term loans can cost between 3 to 25 years, but since a risk factor is involved, the lenders usually use the company’s assets as collateral. The borrower has to pay monthly installments from the company’s revenue to repay the loan amount.
When to use a business term loan?
Availing business term loans for financing long-term capital purchases like land, building, equipment, or business spaces is the best choice. However, businesses must make sure that they generate enough and consistent cash flow through their business to pay back the fixed loan amount timely. Furthermore, it is essential to ensure that the life of assets is longer or equal to the term of financing before applying for a business term loan. As a business owner, you must track all the expenses involved with your business that will add to the monthly expenditure and the loan repayment. The total monthly expenditure is a critical factor that must be considered before applying for a particular loan amount.
If you are wondering how to apply for a business loan, get in touch with Lendzi for further information!!