Understanding business term loans
What is a business term loan?
A business term loan is a type of financing that provides your business with a lump sum of money upfront, which you repay over a set period with interest. Term loans are designed to help businesses fund specific projects or long-term investments, such as purchasing equipment, renovating a workspace, hiring staff, or expanding operations.
These loans can be tailored to fit your business’s needs, with repayment schedules ranging from a few months to several years, depending on the lender and the loan type. Term loans offer predictability and stability, making it easier to plan your business budget and cash flow over time.
Whether you’re a growing business looking to scale, or an established company planning a major capital expenditure, a term loan can provide the structured financing needed to achieve your goals.
How do business term loans work?
When a business applies for a term loan, the lender evaluates factors such as the business's financial health, credit history, and the purpose of the loan. Upon approval, the business receives a lump sum of money, which is then repaid over a specified term, often ranging from a few months to several years.
The repayment schedule is typically fixed, meaning the business makes consistent payments over the loan's duration. Interest rates can be either fixed or variable, depending on the loan agreement. Fixed rates provide predictability in payments, while variable rates may fluctuate based on market conditions.
For example, a business might secure a $100,000 term loan at a 6% annual interest rate with a five-year repayment term. This would result in fixed monthly payments, making it easier for the business to budget and plan its finances.
Cons
Less flexible – Once the loan is disbursed, the business cannot borrow additional funds without applying for a new loan.
Interest costs on full amount / short-term loans can be costly – Paying interest on the total loan, or frequent repayments on shorter-term loans, can increase costs.
Collateral may be required – Some loans require an asset, like equipment or property, as security.
Cash flow pressure – Regular repayments can strain finances if revenue is inconsistent or you borrow too much.
Pros
Predictable payments – Fixed repayment schedules make budgeting easier and help businesses plan their finances effectively.
Larger loan amounts – Term loans can provide substantial funding, which is ideal for significant investments like purchasing equipment or expanding operations.
Longer repayment terms – Spreading payments over months or years can make big investments more manageable.
Builds business credit – Timely repayments can improve the business's credit profile, making it easier to secure future financing.
When should I consider a business term loan?
A small business term loan may be appropriate if your business needs:
Large, one-time funding – For significant investments like purchasing equipment, acquiring property, or expanding operations.
Predictable repayment terms – Fixed monthly payments that make budgeting and financial planning easier.
Lower interest rates – Especially if your business has a strong credit history, term loans often offer more favorable rates compared to other financing options.
Final Thoughts
Small business term loans can be a valuable tool for financing significant investments and fostering business growth. They offer predictable repayment schedules and often come with lower interest rates compared to other financing options. However, it's crucial to carefully consider the loan's terms, interest rates, and your business's ability to repay before proceeding.
Ready to explore your options? Start with Mona’s common app to see which lenders may be the best fit for your business.
