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The AFN Guide to Business Term Loans

Whether you have big expansion plans or simply want to cover some operating expenses, a business term loan is one of the most popular business financing choices out there. Here’s what you need to know about business term loans.

What is a business term loan?

A business term loan gives you an immediate lump sum of capital that you will be required to repay with interest over a set period of time. Each lender and lending platform has its own rules, but at Advance Funds Network, we offer loans with repayment terms ranging from six to 18 months.

How does a business term loan work?

There are a number of features that are part of a business term loan agreement, including:
  • The loan amount that the lender will provide to you upfront
  • The interest rate that you will pay on an annualized basis
  • Any fees that may apply, such as an initial fee for underwriting and providing the loan
  • The term or amount of time within which you will repay the loan
  • The payment amount that you will make on a daily, weekly or monthly basis

Business Term Loan Example

Carla’s Cafe needed $30,000 to build a patio. Carla applied for a business term loan and was approved to borrow $30,000 at 14% interest with a 12-month term and payments of about $619 per week. Carla expects her increased revenue to cover the payments. And, since the money was invested in her business, she was able to deduct the interest portion of her payments from her taxable income.

How is a business term loan different from a line of credit?

One of the main considerations when trying to decide between a term loan and a line of credit is how much money you need and when. With a business term loan, the lender provides you with the full amount of the loan right away and payments begin immediately. With a line of credit, you can draw money when you need it, and only make payments on the amount you have drawn, which can lead to lower interest costs over time.

Here’s a comparison of a term loan versus a line of credit:

Phil’s Physio took out a business term loan for $20,000. Phil signed a loan agreement saying that he would pay the loan back over 12 months at 16% interest. After making 52 weekly payments, Phil paid off the loan, and his total interest cost was roughly $1,659.

Mary’s Massage took out a business line of credit for $20,000, however she only drew $10,000 from it at first. Six months later, she drew the other $10,000. She had the same 16% interest rate as Phil, but because she had only borrowed $10,000 for the first six months, her total cost of borrowing at the end of 12 months was less – about $1,244.

Is my business a good fit for a business term loan?

A business term loan can be an excellent fit if you need funding for your business and you can demonstrate steady monthly revenue and a fair credit score. A business term loan can be used for just about any purpose, and may be obtained at a relatively attractive rate of interest.

What can a business term loan be used for?

There are no restrictions on how you use a business term loan, but there are two common types of uses:

1. You need to cover operating expenses. This could mean repairing a piece of equipment, renovating or repairing physical premises, restocking inventory, obtaining raw inputs needed for manufacturing, paying an unexpected or rush expense, or anything else that is required to operate your business.

2.You want to expand your business. This could mean buying new equipment, vehicles, or machinery, acquiring another business, moving into a larger space, investing in a timely sponsorship or marketing opportunity, hiring a key person, or anything else that you expect will spur your business to greater success.

How do I qualify for a business term loan?

The main qualification for a business term loan is to have an existing business with at least a year of revenue and a moderately good personal credit score. At Advance Funds Network, there are three minimum requirements for a business term loan:
  • One year or more in business
  • 650 or higher personal credit score
  • $20,000 or more in monthly business revenue
One other thing to keep in mind: many business term loan providers will be reluctant to lend if you have too many outstanding debts with other lenders. Many will want to be the first or second lender in line on your balance sheet.

Can I qualify for a business term loan with bad credit?

You will likely need a “fair” personal credit rating to obtain a business term loan. If you do not meet the credit requirements for a term loan, you might wish to explore other options, such as short-term business financing, which is a cash advance against your future sales and typically does not depend as much on your credit rating.

How do I apply for a business term loan?

Not every provider is the same, but at Advance Funds Network, you can apply online in minutes, speak to a dedicated Financial Advisor almost any time of the day or night, and potentially receive funding in just a few business days.

Here are the typical steps to apply for a business term loan:

1.Application. You’ll be asked to provide basic information about your business, consent to credit check, and submit tax returns if you are borrowing $150,000 or more. You’ll need to have been in business for at least one year, have sales of at least $20,000 per month, and have a personal credit score of 650 or higher.

2.Approval. You can expect a yes or no answer very quickly. If you are using a business lending platform like Advance Funds Network, you may receive offers from more than one provider.

Funding. Once you accept an offer, your business term loan proceeds will be deposited to your business bank account and, depending on the terms of your financing, you will start to pay back the loan on a daily or weekly basis.

What are the advantages of a business term loan?

Business term loans are one of the fastest and most predictable ways to secure funding for your business. Here are some of the main advantages:
  • Quick funding. You can potentially receive funds within a few business days.
  • Lower rates. Business term loans generally enable a lower cost of borrowing than cash advances, credit cards and other funding sources.
  • Predicable payments. A fixed interest rate and payment schedule makes it easy to plan your cash flow and repay the loan in a timely manner.
  • Tax benefits. When you borrow to invest in your business, the interest portion of your loan payments is deductible from your taxable income.
  • Stronger credit. Repaying a business term loan may strengthen your credit score and give you access to more credit and lower rates in the future.

     

What are the disadvantages of a business term loan?

Here are some potential disadvantages of a business term loan:
  • Cost of borrowing. You will be required to pay interest on the loan as well as potential fees.
  • Short-term nature. You may be required to fully repay the loan in less than 18 months, which means you can’t stretch the payments out over a long time.
  • Personal guarantee. Even though the loan is for your business, it will be backed up by your personal credit score and financial assets.

     

Can I use a business term loan for CEBA loan forgiveness?

Yes, you can use a business term loan to pay back part of your CEBA loan and be forgiven up to $20,000 as long as you first applied for refinancing at your original financial institution by January 18, 2024. If you applied for refinancing by that deadline and were declined, a business term loan could be a good alternative to refinance your CEBA loan. Even if you applied and were approved, you can still consider using a business term loan to pay your CEBA loan instead. As long as you receive your a business term loan financing and make the required minimum CEBA repayment by March 28, 2024, you can have some of your CEBA loan forgiven.

How much of my CEBA loan can be forgiven?

If your original CEBA loan was for $40,000, the maximum loan forgiveness amount is $10,000. To claim this amount, you will need to repay $30,000. If your original CEBA loan was for $60,000, the maximum loan forgiveness amount is $20,000. To claim this amount, you will need to repay $40,000. There is a formula to help you calculate your CEBA loan forgiveness amount. If you applied for CEBA loan refinancing at the bank or financial institution that issued your original loan by January 18, 2024, you have until March 28, 2024 to receive your funding, make a repayment, and have part of your loan forgiven. A business term loan is one of the ways you can obtain the funding you need to refinance your CEBA loan.

What are some alternatives to a business term loan?

As a business owner, you have many financing options, and some of them might be a better fit for you than a business term loan, such as short-term business financing, a line of credit, or a credit card. Here are some of the main alternatives to consider:

Short-term business financing

Many business owners choose short-term business financing as an alternative to a term loan. Short-term business financing is not a loan so there is no collateral required. Instead, it is like selling a portion of your future receivables to a finance company in exchange for receiving cash today. The finance company will recoup the advance in daily or weekly installments that are based on your projected sales. This can make qualifying easier and payback more flexible than a conventional loan.

Line of credit

One advantage with a line of credit is that you are only required to pay interest on the amount that you actually use, unlike a business term loan, which will require you to take the full amount of the loan upfront. This can help you save interest and give you more flexibility with your cash flow.

Business credit card

A business credit card can be very flexible, as you are free to spend up to your limit without the need for approvals. However, the limit may not be enough for your business funding needs and the rate of interest will generally be high. A business credit card can be handy, but it may not be sufficient to replace a business term loan or other forms of funding.

How can Advance Funds Network help with a business term loan?

Advance Funds Network is your gateway to business funding solutions of all kinds. If your business has been running for at least one year and has sales of $20,000 or more per month, you could qualify for a business term loan. But why wonder? Apply online in minutes and you’ll hear from us soon with the best available funding options. You can also connect with a dedicated Financial Advisor now at (866) 480-2611.

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