A Comprehensive Guide to Small Business Term Loans
To make a significant investment in your business, you need a way to finance it without making a huge dent in your budget. One way to do that is by applying for a small business term loan. We offer the ultimate guide to how small business term loans work and how to request one without a hassle. In case you need assistance in writing a loan request letter, sign up for our app and get a personalized letter within minutes!
Small and medium-scale businesses often require financing solutions to deal with short-term and long-term expenses, such as salaries, operating costs, or equipment and real estate purchase. This is where small business loans come into play. You can use them to create startups and cover related costs or fund already established businesses. These funds can also help maintain your cash flow when dealing with large-scale investments.
A term loan is a subcategory of small business loans where the borrower receives a lump sum amount of money that they return in installments. These loans have repayment schedules with lower interest rates compared to other small business loans. Some term loans require a significant down payment to reduce the repayment period.
Term loans have the following attributes:
- Flexible repayment schedule
- Specified payments
- Set maturity date
- Fixed or variable interest rates
Business owners prefer term loans for long-term investments or fixed asset purchases, in particular:
- Real estate
These assets are usually bought to generate income, which in turn helps pay back the loan and increase the business’ profitability.
Some businesses acquire term loans to pay their operating costs or invest in working capital.
There are three types of term loans, based on their lifespan:
|Types of Term Loans||Brief Details|
|Short-term||These loans run for approximately 12 to 18 months and are offered to companies that don’t qualify for a line of credit|
|Intermediate-term||These loans have a lifespan of one to three years and are repaid in monthly installments from the company’s cash flow|
|Long-term||Long-term loans can last up to 25 years and use collateral to reduce the risk to the lender. They are usually repaid in monthly or quarterly installments|
Term loans are not the right solution for every business, so you need to consider the pros and cons before pursuing this option. Check out the advantages and disadvantages in the table below:
To apply for a term loan, you need to choose a lender:
- Online lenders
- Commercial and community banks
- Peer-to-peer lending sites
- SBA-funded lenders
Before applying, it is crucial that you research your chosen lender’s requirements to confirm that you are eligible for the loan. Most lenders have the following criteria:
- A business that has been fully operational for at least two years
- A good personal and business credit rating, especially if you require a larger loan amount
- A business plan explaining how you intend to use and return the money
To apply for a small business term loan, you need to follow these instructions:
- Find a lender
- Gather all the required paperwork, which usually includes:
- A valid photo ID
- Bank statements
- Business incorporation documents
- Income statements
- Cash flow statements
- Tax returns
- Credit ratings
- Collateral, if any
- Fill out the loan application
- Draft a loan request letter
- Negotiate the loan terms
- Business line of credit
- Cash flow loans
- Personal loans
- SBA loans
- Real estate loans
- Working capital loans
Are you having trouble drafting a loan request letter for your small business loan application? Worry no more because DoNotPay is here to help you out! With our Business Loan Request Letter product, we can assist you in writing a formal letter without breaking a sweat.
All you need to do is follow these instructions:
- Open DoNotPay in your web browser
- Select the Business Loan Request Letter tool
- Enter information about your company and the amount you need to borrow
- Upload the required financial documents
DoNotPay will help you navigate the application process from start to finish!
If you aren’t sure whether banks or other lenders offer better loan terms, input your requirements and details about your business in our app, and we’ll find the best lenders for you!
You can use our Find Online Business Loan Lender product to enlist DoNotPay’s help in finding the most suitable loan for your needs. This tool is also integrated with our Business Loan Request Letter feature, which means that we can find you the lender, draft the loan request letter, and send it to the chosen lender in your stead! How much easier can it get?
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