Understanding Business Term Loans and How They Can Help Your Business
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We understand that getting business loans is tough—the process is outdated, clunky and frankly at times it can be stressful. Making the business loan process better (in every aspect) is a problem we’re absolutely in love with and why we created Levr.ai.
As a business there are a ton of great loan options when it comes to leveraging and securing financial capital to grow your business and reach your goals. In this post we’re going to focus on one of the most popular and accessible loans for small business owners.
Some of what we’ll cover is:
- What are business term loans?
- Common benefits and advantages of business term loans
- What can you use a business term loan for?
- Who and what you’ll need to qualify for a business term loans
Let’s jump right in and learn more about one of our favorite and most commonly used loans—Business Term Loans.
What are business term loans?
A business term loan, or sometimes referred to as term loan, is one of the simplest forms of borrowing money for your business.
A business term loan is a lump sum of money borrowed from a lender with agreed upon repayment terms over a specified period of time. Lenders usually provide flexible payment schedules weekly, bi-weekly, monthly, bi-monthly that can align to your specific cash flow cycles.
Business term loans are extended for periods of 1 to 10 years, while there are instances when a lender is willing to lend money for longer periods of time – Business Term Loans tend to be borrowed over a shorter time frame.
Business Term Loans are used for specific business objectives like Real Estate (property purchase, renovations etc), purchase of Equipment to make consumer packaged goods, or even working capital. Due to the straightforward application of these funds, it’s easy to agree on clear and upfront repayment timelines.
What are the benefits and advantages of a business term loan?
Business term loans offer a ton of benefits to small businesses and lenders. They’re typically one of the easiest kinds of loans to secure.
They provide fast funding at critical times for business owners. Some lenders can make funding available in as little as 1-2 weeks. Rates and fees tend to be affordable and flexible due to the transparent nature of both lender and borrower having a clear understanding of what the funds will be used for in the business.
Business term loans, especially for newer businesses are a great tool for business owners to build business credit. Too often business owners use their personal credit lines and credit history to secure financing that is used for their business. Having a business term loan in your business name allows for quick and purposeful business credit building and improving your company’s credit score.
One of the best benefits of a business term loan is that the payments are predictable and the same amount each time, as they’re usually extended on a fixed interest rate. This helps businesses when it comes to managing cash-flow and monthly operating expenses. Knowing how much you need to pay to secure working capital makes it easy to manage business finances throughout the life of the loan.
Business term loans are great for emergencies, and sometimes those can be growth opportunities. As your small business scales up over you also build an excellent reputation for product quality and service. Business term loans can assist businesses to realize revenue growth opportunities to fulfill a bigger purchase order or meet the needs of a new client and seal the deal before work can start and be delivered at a profit.
Given there are a number of options available to businesses to raise financial capital, business term loans are one of the few that allow businesses and business owners to maintain control.
Often when companies are standing at the intersection of growth – they seek out funding from investors. To bring investors into the mix business owners and founders typically will need to relinquish ownership and decision making authority. You worked hard to build your business, and so business term loans allow for you to get the funds you may need without losing any control of your business.
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What can you use a business term loan for?
For most businesses there is usually a never ending list of expenses and bills to be paid. Some of these expenses are necessary evils in running your business and some of these expenses are activities that allow you to grow your business profits through increased gross revenue or implementing efficiencies.
Some of the most common applications of secured Business Term Loans are working capital, improvements such as renovations, headquarter expansion and upgrades, purchasing new and more efficient equipment or machinery that may cost less to operate and produce more product improving profit margins and productivity.
Small business owners often use Business Term loans to launch new products or divisions of their business whether that could be opening new offices and hiring staff in new expanded locations and territories. Or doubling machinery on site to produce new products without slowing down the production on an already steady flow of existing product sales.
In fact, when businesses have a clearly negotiated growth opportunity to deliver on, have good credit, it can make more sense to secure additional, low-interest, funding via a Business Term Loan than put the company at risk by drawing-down on funds used for cash-flow and monthly operating expenses.
The Government of Canada released data stating that equipment and leasehold improvements were the most common assets financed through business loans. With equipment loans making up $513 million and $380 million in lending respectively.
The beauty of business term loans is that they can be used for virtually any business related activity that demonstrates a clearly defined need for the business and the output or result that by having additional financial capital will deliver increased profits.
Allowing lenders easily envision the business’ ability to make good on loan repayment terms, and also leave additional cash-flow for day-to-day business operational expenses, makes the loan a great business decision. In short, as long as you’re using a business term loan for a legitimate business (growth) need, and not personal debt or expenses, this type of loan is flexible funding to get nearly any job done to grow your business.
How much can you borrow with a business term loan?
What you can borrow against a Business Term Loan generally ranges from business to business, need to need and year to year depending on the economy growth and health.
There are a number of agencies that compile data and stats related to business funding, one of the most regulated and trusted sources of data is published annually by The Canada Small Business Financing Program (CSBFP).
While in this article we don’t go into detail about the CSBFP, this government organization works closely with private lenders for approving and distributing any registered loans with the CSBFP.
In its published data, over 2021-2022 over 5 thousand loans were extended to Canadian businesses valued at $1.2 billion. Year over year both the number and value of loans increased by 34% and 41% respectively. In its data set, the average CSBFP business loan was $246,507 and increase of 4.3% from 2020-2021.
While this data doesn’t include all funded Business Terms Loans in Canada, it’s a reliable enough data set to inform the conversation we’re having about how much should you borrow with a business term loan? Well, the average small business participating in this program borrowed roughly $250k. Is that how much you should borrow? The answer to this question is always—only borrow as much as you need.
Most business owners live and breathe every aspect of their business. And so, they have the best first-hand knowledge to know how much money to borrow. Consulting with business financial analysts, controllers and/or accountants will help you make dollars and sense of what to borrow, when and for how much.
Business owners, along with trusted staff and operators will be tasked with right-sizing the needs of clients and what output is required to meet profitability goals set for the business. These teams, financial statements and growth/operating plans inform not only how much to borrow but how to responsibly use that funding to achieve what you set out to do.
Who and what you’ll need to qualify for business term loans?
As a business it’s always good to have financial records up to date with the latest financial snapshot of your business health. When looking to apply for a Business Term Loan what lenders will ask of you will vary, but typically you can count on the following list of items:
- Most recent business and personal tax returns
- Current business and personal credit history
- Bank statements (3-6 months)
- Proof of business ownership, verification of business address (lease agreement if applicable)
- Key financial statements i.e. Balance Sheet, Income Statement, Cash-flow Statement, Inventory on hand (and aging) reports and supporting financial forecasts
- Business Plan and Payroll & Org Charts
Aside from standard paperwork, important health metrics considered by lenders also include how long you’ve been in business. Generally speaking lenders are looking to extend Business Term Loans to those who have been in business for 2 or more years.
Lenders will use established business income and revenue to determine if they will fund/underwrite your business term loan. Minimum annual revenue varies from lender to lender for instance OnDeck requires at least $100,000 in annual revenue whereas bigger banks typically require more.
Along with financial statements outlined above, lenders will carefully review any already existing outstanding loans. Terms, interest rate and payment history. It’s not uncommon for businesses to seek loans throughout the lifecycle of their business. And depending on the size of the loan and the project/goal it’s being used to fund – there could be outstanding borrowed capital that is currently working. This can be both good and bad for business loan applicants.
If your business has demonstrated significant revenue growth since the last loan was secured, and the terms of outstanding loans are being met – then it might not be a problem for a new lender to extend you additional capital under a new Business Term Loan. In these instances it will be important to outline cash-flow projections and plans associated with the good use of this borrowed capital to ensure underwriters of ability to repay.
Be sure to review all your options
Now that you have a better understanding of what a business term loan is and how they can help your business it’s important to review all your options. If you have experience applying for a business loan (really any kind of business loan) you will already know the work involved can be time consuming.
Levr.ai is designed to make this process easier, faster and more straightforward. A safe and secure platform allows you to collaborate with the key members of your team i.e. accounting, financial planner, and business operators to organize all the required financial statements and necessary business forecasts, plans and documents. Having everything in one place makes it easier to apply with multiple lenders to secure the rates and loan repayment terms that are best for your business.
In addition to making the process of getting a loan better, Levr.ai’s free loans marketplace allows you to review options and compare offers from multiple lenders based on what is right for you and what allows you to achieve your growth goals.
Using the data you provide in your profile in tandem with our team’s financial industry experience—Levr.ai provides the data intelligence to customize options to review that are best to consider. Levr.ai also can negotiate exclusive loan rates with its expert team of certified financial advisors and loan industry partnerships.
If you’re looking to grow and finance a tech company and would like to dive deeper into Business Term Loans for Tech, visit our blog post Financing a Tech Company’s growth with Term Loans – It’s all about Timing.
Businesses should also consider other options such as merchant cash advance, accounts receivable (A/R) financing, venture debt financing, or SRED financing along with business term loans before making a final decision.
To learn more about Levr.ai and business term loan options in the free loans marketplace, create a free account today.
Important information: Levr.ai provides financial education services in the form of blogs, posts, templates, and support documents and are intended to inform and educate readers on various financial topics, including but not limited to budgeting, investing, and small business finance. Levr.ai’s website and/or blogs etc. (mentioned above) are not to be confused with a certified accountant or financial advisor, and the information provided should not be construed as professional advice.
Clients are solely responsible for their financial decisions and actions, and Levr.ai is not liable for any damages or losses that may result from such decisions or actions. The information provided is general in nature and may not be suitable for all individuals or situations.
Clients are encouraged to seek the advice of a certified accountant or financial advisor for specific financial advice tailored to their individual circumstances. Levr.ai does not endorse any specific financial products or services and is not responsible for any third-party information or links provided.
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