Introduction
What is Term Loan? A borrower gets an amount of money to finance his established small business with proof of worthiness. He has to agree to a repayment schedule and follow it. Along with the money he borrowed, he has to pay some interest as well. The interest could have a fixed or floating rate depending upon the situation of the market, but it is lesser as compared to the interest rates of other loans. The loan is then a financing source for any small business and could be used to purchase equipment. It can also be used to build some building or kept in the form of a fixed asset that would keep the business going and is required for its healthy working.
Along with proof of trustworthiness, the borrower goes through a tough and rigorous process while applying for it, and if then he gets selected, they would lend him cash. This process is to make sure that the borrower is going to pay. The loan could be for temporary purposes like some personal need or to prosper a long-term business.
Types of Term Loan
The Duration of the loan decides different variations of it.
- The first one is short-term, and as the name shows, they run for a very short period of time, almost for a year or up to eighteen months. They are usually lent to small industries or companies.
- Next is the intermediate-term loan. They are for a duration of one to three years, and the borrower is required to pay back within a scheduled duration in affordable monthly installments.
- The last type is the long-term loan. They have a duration of three to twenty-five years. The borrower gives something as a security to the lender or the bank, and then the repayment happens in the form of monthly installments.
It is always suggested that for business financing purposes, you should select a long-term loan as the other two types sometimes end up in the final payment being greater than all the previous ones.
How Do These Loans Work?
Small businesses require an instant supply of capital for equipment, infrastructure, or maintenance of a business. A few of such businesses require monthly payments. Banks have devised and scheduled programs for every type of business. The application process requires the borrower to visit the bank in person, fill out a form and provide proof of trustworthiness, a statement, or some other requirement according to the band program. The interest rate is usually four percent to six percent, and the program is devised in an affordable way with monthly installments. The only difficulty here is the rigorous process through which the borrower has to go through to get selected. The requirements are quite strict about making sure the person is going to pay back in time.
The other option is lending money from an online lender. The application process in such a case is different and quick. The approval is provided within no time. As soon as you place an application to look for lenders, a lot of them will appear on your screen, and the approval happens in no time. But a drawback is higher interest rates. If you pay time and with complete interest, the confidence of the bank increases, hence your chances of getting a quick approval next time you apply the increase.
Benefits or Pros of Term Loan
Term loans, specifically long-term ones, have myriads of benefits like:
- They reduce the time spent on saving and collecting money for investments, and hence the outcome or potential of the business could be visualized sooner. The flexibility of assets or capital invested increases in this way.
- Hiring private investors binds you to share your shares and make them an owner too. Lending from a bank removes this drawback from the table.
- The repayment schedule is devised according to the financial condition of the borrower, and the schedule is quite affordable. If you keep that money in the same bank and pay on time, it can help you build profit out of it too.
Conclusion
Certain circumstances make a person borrow some money from a certain institution. It is always suggested that you go for a long-term one and pay the loan back in time to avoid any kind of unwanted situation.
