Advice on the advantages of midterm vs. short-term business loans — which amount to nearly $600 billion across 7,000 lenders — can be hard to find. While a search for financing usually means growth and should, therefore, because for celebration. It often feels like plodding through a sea of options, jargon, and aggressive promotional material. This guide will clear the confusion by helping you determine. Which term loans are right for your business, and lay out all you need to know at each step of the process.
Step 1: Start with the basics
Let’s begin with a working definition. A term loan is a lump sum (the “loan amount”) borrowed from a lender and paid off at certain intervals over a set amount of time (or “term”). If you’ve bought a car or a house, you probably have experience with term loans. Like mortgages and car loans, business-term loans are among the most common forms of financing available.
Step 2: Know your reasons
Term loans serve specific purposes. Offering lower interest rates than credit cards, they make investments in long-term business growth possible. However, using a term loan covers a cash shortage when you don’t expect business growth soon. Or using one to cover an expense you expect to repay in a few weeks may drag down rather than boost your business.
A term loan is perfect for investing in an opportunity that will create a steady cash stream soon.
Common term loan use cases include:
- Moving into a new office to accommodate increasing employees and clients.
- Opening a new store, renovating an existing space, or purchasing inventory.
- Refinancing high-interest debt.
- Revamping a business website.
- Hiring new employees.
- Invest in new technology, space, and employees to enter new markets.
- Getting working capital to cover seasonal fluctuations.
Step 3: Understand your options
Now that you know what a term loan is and what purposes it’s best suited for, it’s time to get into the nitty-gritty.
UNSECURED VS. SECURED
An asset or collateral protects secured loans; the lender holds the title to this asset until you pay all debts. Like credit cards, unsecured loans involve greater risk for the lender and therefore incur higher costs and shorter repayment terms for the borrower.
Unsecured loans are an appropriate way to get small amounts of fast cash that can be repaid in weeks or months; secured loans are usually the only way to get large amounts of money for significant investments.
SHORT-TERM VS. LONG-TERM
Short-term loans are usually an unsecured sum to be repaid within a year in larger, often daily payments. Because these are easier to obtain and have higher interest rates than longer-term loans, you must only seek short-term funding for expenses you will immediately receive the cash flow to pay off.
Intermediate-term loans like BitX Funding run from one to three years. And are repayable from a business’ cash flow on a bi-weekly or monthly basis. These loans are perfect for opening a new location, expanding your team, purchasing equipment or inventory, and refinancing debt.
Long-term loans are always collateral and run from 3 to 10 (or sometimes 20) years. They are most appropriate for undertaking large construction projects and purchasing capital equipment, buildings, or other businesses.
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FIXED VS. FLOATING INTEREST
A floating interest rate, also known as a “variable” or “adjustable” rate, changes with the market over time. At the same time, a fixed interest rate holds steady throughout the loan term. If an increase in market interest rates is imminent, a fixed rate is likely the wiser choice. However, if market rates decline, the loan would cost less over time with a variable rate.
Some institutions allow you to choose from several repayment plans. Perhaps the most important consideration is whether the plan involves paying off your debt in even amounts (allowing you to budget the cost easily) or increasing amounts (allowing you to pay it off more quickly with less interest).
For loans with an interest charge on a compounded basis, the interest from each payment cycle is capital, thus raising the principal and, consequently, the interest charge in the next payment cycle. If you can repay a loan with compound interest early and without fees, you may be able to circumvent the extra interest that would accumulate over time.
Step 4: Assess your qualifications
Every business has a unique story and unique attributes. The rates and terms lenders offer you depend on their assessment of your business according to specific criteria. While the importance ascribed to each of these characteristics depends on the lender, all banks and financial institutions will consider your character, your business’ capital or cash flow, credit rating, collateral, and business plan.
To qualify for BitX Funding, for example, your business should be profitable. It should generate over $200,000 in revenue annually and have more than two years of operating history. As the business owner, you must be willing to guarantee the loan and, preferably, have a personal credit score of at least 660. However, other factors may favorably outweigh a lower score.
Step 5: Find a lender
Multiple institutions offer term loans, including large banks, community banks, credit unions, and online lenders like BitX Funding. As a business owner, your primary considerations should be the terms of the loan, the time required to decide on your application, and the speed of disbursement of funds.
In the wake of the financial crisis, large banks have been especially hesitant to offer loans smaller than $1 million to businesses that do not meet stringent requirements. While community banks have historically had higher approval rates than their larger counterparts, ongoing consolidation in the industry means fewer such institutions are offering finance. Many small businesses seek loans financed by the government’s Small Business Administration (SBA), but SBA loans require extensive paperwork and frequently take months to get review, approval, and funds.
Recognizing the market gap and the burden small business owners face, we at BitX Funding have implemented a simple, transparent, and fair process. Our application can be completed in 10 minutes; approval and disbursement occur in less than 7 days.
Step 6: Compare offers
In addition to interest rates, each lender charges fees. Loan fees typically include one or more of the following:
- Origination fee: The lender charges this upfront fee for processing a new loan as a commission.
- Processing fee: This is a catch-all term for the miscellaneous costs of underwriting a loan that lenders sometimes pass on to the borrower.
- Utilization Fee: A lender bases these annual fees on the amount of credit a borrower uses [in instances where the loan is drawn down in smaller advances].
- Documentation fees. Some banks charge a documentation fee (in the $100-200 range) for filing a loan application.
- Prepayment or early loan closure fees: Some lenders require premiums based on the percentage of the principal being paid ahead of schedule, especially if the source is refinancing (if allowed).
- Late fees are charged when payments are not made on time.
- Brokers’ fees: Small businesses need to be careful if using a broker to acquire a loan.
- Commitment or “ticking” fees: Some lenders charge this fee, usually a fixed percentage of an undisturbed loan amount, to guarantee a future loan.
- Closing fees: These are the costs of the lender’s lien on loan collateral. Most institutional-term loans do not require closing fees.
While fees and interest rates are significant, the key to comparing diverse loans is the annual percentage rate or APR. The APR tells you what the loan costs each year, considering fees. While a loan may appear to have a low-interest rate, a high APR gives away the underlying fees and the actual loan cost over time.
Armed with everything you need to know about finding and comparing term loans for specific financial needs, you can confidently decide your business’s future.
Advantages of a Mid-Term vs. Short-Term Business Loan
Let Us Help:
BitX Funding is an online marketplace for small business owners looking to fund a project. We specialize in connecting small business owners with lenders who will compete for your business. We believe small business owners drive the economy and are passionate about helping your company reach its full potential.
You can reach a loan specialist toll-free at 1-800-824-2407, email [email protected] or apply online here and we can guide you on which loan is the best fit for your business.