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Whether or not you realize it, there\u2019s a high likelihood that you know what a term loan is. Or at least understand the concept.\u00a0(We\u2019ve talked about them before here at Forwardly)<\/em>\u00a0Term loans are the most traditional type of business financing available, where you work with a lump sum of capital and repay it in fixed installments along the way.<\/p>\r\n\r\n\r\n\r\n Term loans are great products \u2014 but not for every\u00a0use case<\/a>\u00a0or every business owner. There are, however, ways to know if and when you should apply, or if there\u2019s a better\u00a0alternative<\/a>\u00a0available.<\/span><\/strong><\/p>\r\n\r\n\r\n\r\n With a business term loan, you work with a lender to obtain a lump sum of capital that you borrow for a predetermined amount of time. You work out terms with your lender that are contingent on your\u00a0creditworthiness<\/strong><\/a>, business history, and the amount of capital you ask for. And, once approved, you receive all of the cash at once.<\/p>\r\n\r\n\r\n\r\n Every lender will want to know what you\u2019re doing with the money before you get the green light. But some term loans have restrictions on what you can and can\u2019t do with the money, while others don\u2019t.<\/p>\r\n\r\n\r\n\r\n But, essentially, term loans are business loans in the most traditional sense that most are used to when they think of financing. You borrow money, and you repay it through fixed payments, with interest, until your set term is up.<\/p>\r\n\r\n\r\n\r\n Term loans come in a few flavors, so to speak.\u00a0Short- and long-term business loans<\/strong><\/a>\u00a0differ in \u2014 you guessed it\u00a0\u2014 their term (how long you have) to pay back the money.<\/p>\r\n\r\n\r\n\r\n With\u00a0short-term loans<\/strong>, you\u2019ll generally have faster access to capital with shorter approval processes and less stringent requirements for qualification. The tradeoff is that the terms are less favorable. That means a higher interest rate and a shorter period by which you\u2019ll need to pay back the cash. A short-term loan is generally a loan that lasts less than a year, though they can sometimes extend to around 18 months. Repayment on short-term loans is also usually daily or weekly.<\/p>\r\n\r\n\r\n\r\n With\u00a0medium- or long-term\u00a0<\/strong>loans, the process slows down. As you\u2019d expect, these have longer repayment periods than those of their shorter counterparts, sometimes by several years. They often lower interest rates, too.<\/p>\r\n\r\n\r\n\r\n As a result, though, these loans only go out to more qualified borrowers, and the underwriting process takes longer. After all, a bank or alternative lender doesn\u2019t want you to have their money for years if you\u2019re not going to be responsible with it. On these term loans, you\u2019ll generally have monthly repayments.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n Although the most traditional type of business financing, term loans aren\u2019t the only kind, of course. These are a few common alternatives and their most relevant uses:<\/p>\r\n\r\n\r\n\r\n You can seek a term loan to finance a lot of different scenarios over the life of your business.<\/p>\r\n\r\n\r\n\r\n For one, a term loan is a good source of working capital. In other words, you\u2019d borrow from a lender in order to have a source of money to spend freely on general day-to-day operating costs (as opposed to directly investing into an asset). If business owners are in a cash pinch, it\u2019s fairly common to seek out short-term financing in order to supplement their cash flow.<\/p>\r\n\r\n\r\n\r\n Times when short-term loans make sense include:<\/p>\r\n\r\n\r\n\r\n Longer-term loans are also good for specific investments or asset purchases. You can also use a term loan to\u00a0refinance existing debt<\/a><\/strong>\u00a0\u2014 meaning if you have an existing loan and you\u2019re in a better financial position with better credit history, you can work with a lender to refinance into a less expensive product with more favorable terms.<\/p>\r\n\r\n\r\n\r\n Taking on debt is never preferable, of course. But if you\u2019re going to apply for business financing, the benefit of a term loan is its predictability. You apply for a fixed amount of money. And, when you work with a lender, you\u2019ll know up front how much you\u2019ll owe each month, plus how much the loan will cost you by the end in terms of its interest plus principal.<\/p>\r\n\r\n\r\n\r\n If you\u2019re not entirely certain that your investment will yield results, or you\u2019re in a somewhat precarious financial position, taking on a term loan might not be advantageous. There are other financing instruments, like those we mentioned above, that could be a better fit for you.<\/p>\r\n\r\n\r\n\r\n Additionally, term loans almost always require collateral. You want to make certain that you don\u2019t put your business in a situation in which you\u2019re taking on debt that you aren\u2019t sure you can afford. That puts your collateralized assets at high risk \u2014 and could ultimately jeopardize your entire company, especially if your lender requires a\u00a0blanket lien<\/strong><\/a>\u00a0on your tangible assets.<\/p>\r\n\r\n\r\n\r\n If a term loan is a fit for your business\u2019s needs, you\u2019ll need to work with a business lender to obtain financing. You have a few options: You can go directly to a bank or credit union, or work with an online lender (alternative lender).<\/p>\r\n\r\n\r\n\r\n A bit of context is helpful before we go further, though. Small business lending took a big hit during the 2008 financial crisis. And although Main Street lending rehabilitation was meant to be a\u00a0 mandatory provision within the government\u2019s Troubled Asset Relief Program (TARP) bailout, rehab help\u00a0never quite made it into practice<\/a><\/strong>. Ten years later, the vast majority of American small business owners\u00a0still find it very difficult<\/strong>\u00a0<\/a>to get loans from institutional lenders like banks. They can be picky with their candidates \u2014 and they are.<\/p>\r\n\r\n\r\n\r\n While that little recap covered the United States, SMEs around the world face similar challenges accessing funds through institutional lenders. Worldwide, there\u2019s an\u00a0unmet funding need<\/a><\/strong>\u00a0of $2.1 \u2013 2.5 trillion.<\/p>\r\n\r\n\r\n\r\n Let\u2019s start with those bank loans. If you have several years in business, strong and\u00a0consistent revenues<\/a><\/strong>\u00a0with a consistent track record, and excellent credit, you could be a good candidate for a bank loan. As a new business, you\u2019ll definitely need to look elsewhere. Because banks don\u2019t lend out much money to small business owners, they can be choosy \u2014 and they\u2019ll choose the least risky candidates. To them, that means ones with proven dependability with debt. An existing relationship with a bank is often helpful, too.<\/p>\r\n\r\n\r\n\r\n Alternatively, online lending has emerged in recent years as a response to the lack of available capital for small business owners. Qualifications won\u2019t be as stringent with most online lenders, but their terms will be slightly less favorable as a result. You can apply for term loans directly at lenders\u2019 websites, or through online loan marketplaces, who can submit your information to multiple lenders at once.<\/p>\r\n\r\n\r\n\r\n The most important thing to remember when trying to understand business loan application requirements is the lender\u2019s job. It\u2019s all about mitigating their risk.<\/p>\r\n\r\n\r\n\r\n There\u2019s no way to conjure the future in a crystal ball to know whether or not they\u2019re going to get back their money \u2014 that\u2019s impossible. So, when evaluating your application, they have to make the decision based on your\u00a0odds\u00a0<\/em>of paying them back. That\u2019s all derived from your track record. And, since they haven\u2019t known you for years and can\u2019t sample\u00a0just how good your product is<\/em>\u00a0or meet you to understand\u00a0just how trustworthy you are<\/em>, all they can judge are things including:<\/p>\r\n\r\n\r\n\r\n As with all business loans, requirements for term loans will vary from lender to lender.<\/p>\r\n\r\n\r\n\r\n As we mentioned before, banks and credit unions will require very strong financials. You\u2019ll nee high credit scores (generally very good to excellent) as well as more than a couple of years in business under your belt with good earnings so they\u2019ll have financials to analyze. Online lenders might require slightly less solid credit or revenue numbers and a little less time in business.<\/p>\r\n\r\n\r\n\r\n That said, term loans aren\u2019t the best options around for new businesses. Most lenders require some established financial track record for your business to qualify. Startups simply don\u2019t have that.<\/p>\r\n\r\n\r\n\r\n There\u2019s a deep connection between term loans and your cash flow. It starts before you even apply for one of these financing instruments, and continues after you\u2019re approved.<\/p>\r\n\r\n\r\n\r\n Cash flow is an extremely important metric for small business lenders and loan underwriters. It\u2019s a make-or-break factor that\u2019ll determine whether or not you get approved for your loan.<\/p>\r\n\r\n\r\n\r\n And if you think about it, that makes sense \u2014 your cash flow reflects the money you have available to cover your loan payments. Lenders will evaluate your\u00a0cash flow statement<\/a><\/strong>\u00a0to make sure you consistently have enough cash on hand to cover\u00a0both\u00a0<\/em>your operating expenses and your debt.<\/p>\r\n\r\n\r\n\r\n Before you apply for a small business loan, you\u2019ll want to have been keeping a detailed cash flow forecast. It\u2019s one of the only dependable ways to know if you\u2019re in a position to take on the financing you think you are. In other words, see what lenders see \u2014 don\u2019t be surprised!<\/p>\r\n\r\n\r\n\r\n Got approved for a term loan? Great! Make sure you know where it\u2019s showing up so you make sure you\u00a0do\u00a0<\/em>make those loan payments and don\u2019t fall behind. And, as we\u2019re sure you\u2019re unsurprised, your financing will appear on your cash flow statement, too.<\/p>\r\n\r\n\r\n\r\n What\u2019s called your cash flow from financing activities (CFF) encompasses these outflows. At Forwardly, we recommend running a cash flow forecast (like the one below) every month so you can see how your business\u2019s CFF is affecting you.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n No matter where you are in the term loan process, make sure you have your cash flow processes zipped up tight. An in-depth cash flow forecasting tool will help you on either end.<\/p>\r\n\r\n\r\n\r\nHow term loans work<\/strong><\/h2>\r\n\r\n\r\n\r\n
Short- and long-term business loans<\/strong><\/h3>\r\n\r\n\r\n\r\n
Term loans vs. other types of business loans<\/strong><\/h2>\r\n\r\n\r\n\r\n
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The best uses for a term loan<\/strong><\/h2>\r\n\r\n\r\n\r\n
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And when you wouldn\u2019t want to apply for a term loan<\/strong><\/h3>\r\n\r\n\r\n\r\n
How to apply for a business term loan<\/strong><\/h2>\r\n\r\n\r\n\r\n
Where to look for a term loan<\/strong><\/h2>\r\n\r\n\r\n\r\n
What lenders look for in a qualified term loan applicant<\/strong><\/h2>\r\n\r\n\r\n\r\n
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The relationship between term loans and cash flow<\/strong><\/h2>\r\n\r\n\r\n\r\n
Why lenders care about cash flow<\/strong><\/h3>\r\n\r\n\r\n\r\n
Where you\u2019ll see your loan payments reflected<\/strong><\/h3>\r\n\r\n\r\n\r\n
How to improve your cash flow position<\/strong><\/h3>\r\n\r\n\r\n\r\n