Business term loans are lump sums of capital that you pay back with regular repayments at a fixed interest rate. The “term” comes from its set repayment length.
Bankers tend to classify term loans into two categories: intermediate- and long-term loans.
- Intermediate-term loans usually run less than three years, and are generally repaid in monthly installments from a business’s cash flow.
- Long-term loans can run for as long as 10 or 20 years and include additional requirements such as collateral and limits on the amount of additional financial commitments the business may take on.
Who Qualifies for Business Term Loans?
Most businesses can qualify for a business term loan — as long as you have been in business for at least two years, have good credit and are generating revenue.
Not all business term loans are the same, as the interest rate, length of the term and maximum loan size depends on your business revenues and credit rating.
Business term loans are often the best option for established small businesses. If your financial statements are sound and you’re willing to make a substantial down payment, you can receive financing with minimal monthly payments and total loan costs.
Many business term loans require collateral and a relatively rigorous approval process, but can help reduce risk by minimizing costs.
Banks consider the following “five C’s” when making decisions about business term loans:
- Character: How have you managed other loans, both business and personal? What is your business experience?
- Capacity: Lenders will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay.
- Collateral: This is the primary source of repayment.
- Capital: The bank does not want to be left holding the bag. So what assets do you own that can be quickly turned into cash if necessary? The bank wants to know what you own outside of the business — bonds, stocks or apartment buildings — that might be an alternate repayment source.
- Confidence with the business plan: How accurate are the revenue and expense projections?
What are the Uses of Business Term Loans?
The point of a business term loan is to help you finance something big for your business.
Whether you need to make a specific equipment or inventory purchase, want more working capital, need to refinance other business debts, are looking to meet tax or payroll obligations or something else entirely, a small business term loan can help you out.
Business term loans can help you push your business to the next level —introducing new equipment, locations, products or marketing campaigns into your toolbox.
How Do You Apply for a Business Term Loan?
A business term loan, like any business loan application, is evaluated on Three Pillars – your personal credit, your business credit and your business financials.
Personal Credit
Have you ever wondered how your credit score is determined? There are five factors considered by the credit reporting agencies – Experian, Equifax and Transunion:
35% Payment History
• Timing of delinquencies – was it last month or 3 years ago.
• Level of delinquencies – 30, 60, 90, 120 days late.
• Last activity date.
30% Amount Owed
• What is your total debt?
• How many accounts with balances?
• What is your overall installment and revolving utilization?
• What is your individual account utilization?
15% Length of Credit History
• How old is the oldest account?
• What is the average age of accounts?
• What is the mix of newer or older accounts?
10% Mix of Credit
• What kind of credit do you have in your file – mortgages, credit cards, loans, etc?
• The combination of credit – all the same type of credit does not look as favorably as a healthy combination of different types.
10% Inquiries
• How much new credit are you acquiring?
• The time interval between each new credit acquired – acquiring many new credit cards or loans in a short time can affect your score negatively.
• How many new accounts are on file?
FICO Scores range from 300 to 850.:
- Excellent: 760-850
- Very Good: 700-759
- Good: 660-699
- Fair: 620-659
- Poor: 580-619
- Very Poor: 500-579
- Horrible: Less than 500
Your FICO score can be a very important consideration to qualify for a business line of credit. If you carefully manage your payment history, credit utilization, credit history, mix of credit and inquiries, you can improve your personal credit score.
Business Credit
There are three business credit reporting agencies – Dun & Bradstreet, Experian Business and Equifax Small Business. While personal credit scores range from 300 to 850, business credit scores range from 0 to 100. A higher score is an indicator of your business credit worthiness.
Dun & Bradstreet
D&B uses a Paydex score that ranges from 1 to 100—the higher the number, the better shape your business’s credit is in. D&B looks at one specific factor to calculate your business credit score – how timely you are when paying vendors? It is important to pay your debts early so your vendors report a good history of payment to raise your business credit score.
Experian
Experian calculates your business credit score based on your credit obligation from lenders and suppliers, any legal filings for your business, and background information about your business. The Experian credit report is called the “Intelliscore Plus” and is also based on a score from 1-100. Additionally, an Experian business credit score includes a risk classification from 1-5, with 1 being the least risky.
Equifax
Equifax collects information about your business and evaluates your payment trends, business credit history, public record and demographics. Their business credit report gives you three scores—a payment index score, a credit risk score, and a failure risk score.
Business Financials
In order to qualify for a business term loan, your business financial history and current situation will be closely scrutinized by any lender. The starting point always begins with a close look at your business legal documentation. In addition, lenders will review your business financials. tax returns, trade references and bank references.
Your business financial review will require two years of financial statements, including your balance sheet and income statement, also often called your profit & loss or P & L statement. Your balance sheet should accurately reflect your assets, liabilities and equity on a specific date, usually the end of a month, quarter or year, while your income statement should detail your revenue, expenses and net profits over a period of time, usually a calendar year reported on a monthly basis.
In addition to annual financial statements for the past two full calendar years, you should also prepare year-to-date financial statements for the most current month when applying for a business term loan.
Tax Returns
You will need to submit the most recent two years of business tax returns. Although it may be beneficial to report operating losses on your tax returns to minimize your tax liability, you will need to show profits on your business tax returns to qualify for a business line of credit.
Trade References
You will need a minimum of five trade references that have provided credit to your business and report a favorable credit history. Although this can be a challenging step in building your business credit, the sooner you start, the sooner you will be able to qualify for a business line of credit.
Bank References
Of course you will need a minimum of one bank reference to qualify for a business line of credit. Your business bank account should be at least two years old and have an average daily balance of $10,000 or more during the past three months.
Get Started
A business term loan offers easily accessible cash, longer terms and typically low interest rates. If you are like most businesses, business term loans provide a great way to grow your business.
