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Term business loans

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If you are getting a business loan, it is important to understand the various types of loans available, and what those loan types mean for you. Will you have a revolving loan, such as a line of credit, or a fixed, term loan? The following is a look at term business loans, and what they will mean for your business:

The first thing you have to know about a term loan is that it is a one time loan. It is not like a credit card or revolving line of credit that you can continue to use as you pay off. It is based on cash flow of a business and certain collateral pledges against the loan. The time you have to pay it off and the payment amount is fixed.

The next thing you should know is how it can be used. Term business loans should be used for major expenditures, not things like daily expenses of a company. It is not money you use for cash flow problems, rather for major needs like equipment. They are often used to purchase things like real estate, equipment, expansion, franchises, etc.

When a term business loan closes, all of the funds become available at once. It is not like a circulating loan. You get the loan, and then have to start making payments on it, and these are comprised of interest and principal calculated on the amortization set forth in the terms of the loan.

The collateral that is used to secure the loan is going to become bank owned for the course of the loan, which means you can’t transfer it or use it for collateral on something else, or liquidate it.

In order to secure a term business loan your business needs to be able to show a history of cash flow. The lender has to be able to see that your business will be able to make the payments based on past cash flow, and that the payments will not have an adverse effect on your company. In other words, in order to get this kind of loan, you have to be able to afford to make the payments.

In some cases, you can use a line of credit like a term loan, and if it reaches its limit, it will be converted to a term loan, so that the business can no longer use it, and has to make monthly payments on it until the line is paid off. Because it is converted, the business will not be able to gain access to what would have been additional funds, as it is paid off, as they would a line of credit.

Understanding term business loans, and what they mean for your company, will help you determine the kind of loan you need, and whether or not a term loan is right for your needs. If you are looking for something to help with daily cash flow until you are more on your feet, this is not the loan for you.

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Posted by DK
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