When most people think of a typical bank loan, they think of a term loan. A term loan has a fixed length, often with amortization of principal. Amortization is the repayment of a loan with periodic payments of both principal and interest calculated to payoff the loan within a certain amount of time.
Short-term loans, typically lines of credit, working capital loans, or accounts receivable loans, usually reach maturity within one year or less. Long-term loans usually last one to seven years, although it is not uncommon for long-term loans to mature after 10 or 20 years.
Term loans sometimes require collateral to secure the loan, and loan amounts typically start at $25,000, with an industry average of 1 percent in fees. Should You Personally Guarantee a Loan to Your Small Business? The approval process for term loans is extremely thorough, so be prepared. Applicants must demonstrate strong character, good credit history, competence in and commitment to their business, and sufficient collateral and working capital. Just as with any other type of loan, banks take into consideration the same factors as with term loan applications. If you qualify, rates on term loans are generally lower than those of other types of loans.
Long-term and intermediate loans are most appropriate for established small businesses that can demonstrate the ability to make the required interest and principal payments. If you are thinking about financing equipment, make sure that you can claim ownership benefits on your taxes — comparing the overall cost benefits with leasing options is a good idea. Banks require complete financial statements for large loans of $100,000 and above. Read more about Bank Loans for Small Businesses.
Loans with longer maturities are designed for borrowers making large business purchases such as equipment, machinery, real estate, and furnishings. Long-term loans also help business owners fund construction projects, buy vehicles for business use or purchase existing businesses. An advantage to loans with longer timeframes is they can help businesses manage cash flow during slow times.
One thing to take into account when considering a term loan is that banks often limit the amount of additional liabilities a business can assume in addition to the loan. This includes employees’ salaries, which could affect your ability to attract qualified workers. In some cases banks will require borrowers to set aside a set percentage of profits to repay the loan.