Let’s Talk About Term Loans for Small Businesses
Term loans are loans provided to applicants that entail fixed repayment terms to be paid off long-term. While many loans adhere to similar models, term loans contain distinct differences that are important to note prior to applying. While established businesses may benefit from such rigid repayment terms, newer businesses, expanding businesses, or businesses that have yet to establish significant returns can struggle to meet the demanding payment plans.
Term Loans for Small Businesses: Initial Considerations
You pay a fixed amount monthly, regardless of business returns. For new businesses, this can create a significant problem, as it may take weeks or months to begin establishing the necessary returns. This could result in loan default, which will significantly damage your credit score and hinder your eligibility for future loans.
They don’t offer loan deferment. You may be meeting the payments at first, but suddenly business comes to a screeching halt, and yet you still have to make a fixed monthly payment. This could significantly damage your business finances, making you worse off financially than you were prior to taking out a loan. Getting locked in to long-term fixed payments can be challenging for new businesses, and many entrepreneurs opt for revenue-based repayment plans as they work to build their finances.
They typically include long-term repayment plans. This is an attractive trait to many business owners, as repayment terms vary from 1 to 10 years. However, keep in mind that the longer you spend repaying a loan, the more interest you will pay over time. Particularly with fluctuating interest rates, term loans can increase overhead costs considerably.
They are for smaller loan amounts. For businesses in need of large quantities of investment capital, a term loan isn’t the best option. They are typically smaller loans that are geared toward covering routine operational costs, such as equipment costs and store repairs.
They have floating interest rates. Rather than the fixed interest rates of some loan options, term loans offer floating interest rates, which can fluctuate randomly. This means your interest could suddenly increase without notice, burdening you with greater debt in the process.
Alternative Repayment Plans
Many loan options utilize fluctuating repayment terms that cater to the needs of your budget. Venture capital investors and revenue-based loans determine a loan amount based on your income. Agencies negotiate a percentage of your sales that will be deducted monthly from your account, so your repayment terms are in accordance with your business earnings. This way, you have no fixed repayment term to adhere to and can pay the money back at a speed that coincides with your fluctuating profit margins. For new business owners, this is often a safer option, as it considerably reduces the risk of defaulting on a loan.
While term loans are a popular method of securing necessary business funds, there are some critical aspects to consider prior to applying. With the fluctuating interest rates, the rigid repayment structure, and the lengthy repayment plans, you may end up paying far more for your loan than is necessary. Take your business to the next level by applying for the financing you need to expand your company. For modern business funding solutions, contact Credibly.