A wide range of fast business loan terms is threatening to small business owners, especially when applying for a business loan for the first time. For this reason, take the time to research different business lenders and their term options. Before choosing the ideal business loan terms, they must answer two key questions:
- How much additional working capital does your company need?
- What do you need the money for (equipment, real estate, inventory, etc.)?
This blog will discuss the ways to choose the correct term for a quick business loan.
How Do Business Credit Terms Work?
The term of a small business loan is the period from the date the loan is opened (Opening Date) to the date the loan is cancelled or repaid. For example, when mortgaging a house, traditionally, the term of the loan is 30 years. The loan payments are over 30 years, making it a long-term personal loan. Business loans typically do not have 30-year terms, but the concept is the same. You may also hear the term business loan called “loan repayment period” or “borrowing period”. While talking about credit terms, we are referring to the repayment period.
Types of Loan
Loans can be categorized based on the period in which the borrower takes the money. The classification of loans according to maturity is as follows:
1. Short-Term Fast Business Loans
If you require immediate cash to tackle a month-long liquidity crisis, a short-term business loan can help you get a quick cash injection. Having sufficient liquidity to repay debts on time helps ensure smooth operations while improving reputation management. These loans do not require much collateral and have a quick approval process.
Suppose there is a discrepancy between the timeframe in which the borrower generates the income and the expenses to cover. For example, an employer must pay salary every month to the employee, while a customer pays him within 60 or 90 days of receipt of the invoice. Short-term loans, such as working capital, demand loans and supply chain finance, help bridge the gap by accessing cash to meet business obligations.
2. Medium-Term Loan
If you need secured finance of one month to one year or more to purchase furniture and equipment, or an asset such as a laptop or IT system, a medium-term loan is perfect. Medium-term loans must be secured by collateral and have a predefined specific end-use.
A medium-term loan is ideal while purchasing capital or investing in fixed assets. But make sure that the investments will be profitable over the life of the loan. Otherwise, you may have problems handling term loan credit EMI.
3. Long-Term Loans
The lenders usually grant these loans for three to ten years or more. However, terms are flexible, and you can negotiate them. They must be backed by collateral and have defined terms and agreements for sanctions. The repayment terms of these loans are flexible based on end-use and sanctions terms. If you plan to acquire another company or expand your business into new territories, you will take a long time to pay off these investments. In such cases, long-term loans with flexible repayment terms can help manage runoff until the acquisition or expansion is completed, settled, and generate revenue.
Things To Consider When Considering Business Loan Term Options
Remember the following aspects while considering the term options for a business loan.
1. Align your cash flow with your fast business loan term
Maintaining healthy cash flow is a primary challenge for small business owners, regardless of the industry in which they do business. You must choose business financing terms matching your current and future cash flow needs. As already mentioned, the shorter the loan term, the faster the loan needs to be paid off. So the payments are relatively large. Long-term loans allow you to spread small amounts over a long period. In any case, you should ensure that the payment dates and amounts are in line with other cash inflows and outflows.
Otherwise, it can happen that you do not have the cash in hand to make the payment. If so, you could end up in a lot of debt, which could affect the financial future of your business. However, it is up to you as a business owner to be aware of all financial obligations and make sure you can afford to pay them all responsibly.
The majority of what you pay for a business loan is interest payments. However, since you will pay the interest over a long time, the interest amount will vary depending on the term of the secured finance. Of course, you want to avoid high-interest rates.
2. Consider your credit history
Whenever you borrow money, a business loan depends on your credit history. Typically, secured lenders prefer working with business owners with strong credit histories. It is because they have an excellent track record in paying back balances. While it is possible to get a business loan with poor credit, you may not get ideal loan terms.
Finding the correct loan term for small business owners is a balancing act. If you choose a term that is too long, you will pay more interest than you need. However, picking a secured finance term that is too short can make payments unmanageable. If you have trouble repaying your loan, you jeopardize your business’s creditworthiness and ability to qualify for future financing options. So, make a wise choice.