A business term loan is what most small business owners think of when they hear the words “small business loan.” The repayment terms and fee structure are straightforward. Borrowers receive this money and agree to pay it back in regularly scheduled payments over a set period. The period is known as a loan term. In most cases, you make fixed monthly payments for a set repayment term. In addition to the loan amount, known as the principal, borrowers agree to pay interest, which is the fee lenders charge for borrowing that money. The principal loan amount and the interest/factor rate determines the amount of your payments. This rate also determines the total amount you’ll be paying back over the loan term. Business term loans can come with fixed or variable rates. A fixed interest rate means lenders won’t change the rate during the term, while variable rates change with the WSJ Prime Rate in most cases. Many small business owners prefer the stability of fixed interest rate business loans. SBA Loans (Small Business Administration) are prime examples of long-term loans that are hard to qualify for. Small business term loans generally carry lower costs and higher borrowing amounts than other small business financing products. However, they are also the hardest to qualify for.
How it Works
Let’s say you want to purchase a large one-time inventory order for $100,000. This would let you expand your in-store product offerings to meet your existing customers’ demands and reach new customers. Yet you don’t have $100,000 in your bank account. So, you apply for a small business loan. You negotiate a five-year term at a fixed interest rate of 8% with monthly repayments. You get the money and buy your inventory now. And the cost of purchasing that inventory gets spread over sixty months – this type of term loan is easier on your cash flow than, say, a merchant cash advance with a higher factor rate and payback that is due within six months to one year.