What You Need To Know About Term Loans For Businesses
Author: Woodsboro Bank
When a business needs funding to cover various expenses such as operational costs, investments, property acquisitions, and general expenses, a term loan can be a valuable source of capital. Term loans typically have repayment schedules ranging from 3 months to 10+ years.
These loans are accompanied by broker fees and an initial interest rate percentage determined at the time of origination. It's important to note that fees and adjustments to the variable interest rate may be applicable throughout the loan agreement. Here is a closer look at what a business loan can do for your company, and what options are available.
Term Loan Financing
A credit card can be a means to provide quick cash for certain purchases; the repayment terms may be somewhat flexible, but the interest rate is typically subject to fluctuation. Term loan financing provides supplemental cash flow at a lower interest rate, repayable on an established schedule for a set period of time. Common reasons businesses apply for business loans:
· Enterprise expansion
· Commercial property purchase
· Building construction or remodeling
· Increased hiring
· PP&E or software purchase
· Operations expenses (i.e., inventory or project costs)
· Overdraft protection
Term Loan Types
The repayment term determines the type of financing a business can qualify for:
A short-term loan provides a borrower with quick cash in exchange for repayment within one year or less. These loans tend to have higher interest rates and are usually easier to qualify for than extended term loan types.
Most commonly, medium-term loans are suitable for business expansion plans, and equipment and software purchases. These intermediate term loans offer 3-year to 5-year agreements, with bi-weekly or monthly repayment schedules.
Appropriate for financing commercial real estate and major construction projects, long-term loans can be used to offset building remodels, and large equipment purchases at a low interest rate. Lenders generally require applicants meet strict credit requirements for approval.
Reasons to Apply for a Term Loan
The term loan application is simple, with an approval process as limited as a few days. Other reasons businesses may apply for a term loan:
· Business incentives: Tax deductible interest on term loans, as well as the credit building capacity of installment agreement repayment, are incentives for applying to a term loan.
· Cash flows: Loan financing adds liquidity to business operations and investment.
· Interest: APR is lower for term loans provided by banks, than those assigned to subprime, short-term loan agreements.
· Repayment: A budget friendly, monthly, weekly, or bi-weekly repayment schedule may be available depending on the lender.
· Solvency: Debt financing boosts liquidity without reducing the existing equity value or ownership percentage of a business.
What to Consider
Not all loans are the same. Differences may be seen in the rates, the requirements, and the repayment structure among other conditions. What to consider when applying for a term loan:
Secured loans require the borrower to place an asset (collateral) of equal value to the principal of the loan against the financed amount requested. If a borrower fails to repay a loan according to schedule, the asset transfers to the lender.
Unsecured loans are approved based on an applicant’s credit record and are not backed by a collateral asset.
The debt service coverage ratio (DSCR) = Net Operating Income/Debt service, indicates the ability of a borrower to pay off a loan.
Fixed interest rate agreements are not subject to change for the entire term of the loan. Variable interest rate loan rate assignment may fluctuate based on benchmark index rate adjustments.
Brokers fees, commitment fees, origination fees, monthly or annual loan servicing fees, prepayment penalties, and late payment penalties can all impact the full amount owed. Closing fee costs pay for a lender’s lien on collateral, should the borrower fail to pay as owed.
Preparing for Loan Application
Loan approval is usually contingent on review of a loan applicant’s business plan, assets, cash flows, revenues, and investment income. The following is a step-by-step preparation process for successful loan application:
1. Research lenders: Compare potential lenders for term loan product offerings including interest rates and eligibility requirements.
2. Credit score check: Lenders typically evaluate borrower eligibility with FICO and Vantage credit score reporting; having knowledge of it in advance can be beneficial.
· Bank statements: Monthly bank account statements to demonstrate money management.
· Business plan: The business charter of record, including its mission, goals, and strategic financial objectives.
· Debt schedule: Schedule of debt obligations, (i.e., contracts, leases, loans, payroll).
· Financial Statement: The company balance sheet including the statement of shareholder equity, as well as income statement and statement of cash flows.
· Funding Statement: Part of the business plan, the statement of a funding specifies the organization’s fundraising strategy for growth.
· Tax Record: Individual or business tax returns depending on filing status and classification with the Internal Revenue Service (IRS), and Employer identification number (EIN) if applicable.
Local Woodsboro, MD Bank and Commercial Lender
Woodsboro Bank is a local commercial lender of business loans in Woodsboro, MD. Our bank recognizes the value of supporting the local community and provides commercial clients with the financing they need to realize business growth. Request a quote by scheduling an appointment to speak with a loan specialist today about business term loan options.