Chances are that if you are in a new business or company, you may have heard recommendations about applying for a term loan which has now become a very widely-used way to borrow money without having to worry about paying the money back immediately or very soon after as you normally would with other similar loans.

These loans can be incredibly useful for growing companies and businesses, who would benefit from receiving a sum of money to help them acquire all the resources, staff and facilities that they need in a much easier and more flexible manner when compared to other loans.

What Are Term Loans

But what exactly are term loans? And should you consider applying for one? Here is all you need to know about these loans so that you can know exactly what they are and how they work.

What Are Term Loans And How Do They Work?

A term loan is a lending agreement that has been mutually agreed between two parties where the borrower receives a fixed sum upfront which they must then pay off in fixed instalments over the term of the loan.

When applying for a term loan, the borrower will therefore agree to pay back small amounts across usually a lengthy period of time. Many borrowers will use term loans as opposed to other types of loans because of how flexible they are and because they incur lower interest rates.

Who Uses Term Loans?

These types of loans are usually utilised by businesses and companies that are new and just starting out who will use the up-front sum to pay for cash-generating assets such as resources and machinery that can then be used to generate more money to eventually pay back the loan.

A term loan therefore acts as a quick start-up resource for many businesses that want a head-start in establishing their services rather than building up the money over time.

Business owners will apply for term loans the same way that they would for any other credit facility, and that is by approaching the lender and providing statements and financial evidence to confirm their credibility and to prove that they would be able to pay back the loan over time.

It should also be noted that because term loans require a lot of trust that the borrower is going to pay the money back, you will need to have a good credit score to be eligible.

A score of 650 is usually seen as enough to be considered eligible, however you can still try applying for a term loan if your score is lower, it really depends on how willing the lender is to grant you the loan.

Advantages Of Using A Term Loan

While a lot of loans can cost a company precious time and effort, one of the major advantages of drawing out a term loan is that it can be done incredibly quickly, with the application process being simple.

As soon as you qualify, you will receive the entire agreed loan amount upfront, minus any fees charged by the lender.

The fact that you gain all this money upfront is another major advantage that comes with applying for a term loan.

While you will therefore need to pay this back in instalments, the large sum of money makes term loans far more ideal for small companies and businesses who need a quick boost of cash flow to get them off the ground, and once they start generating more money, they can easily start paying back across the agreed on dates.

There is also the benefit of having specified payments for each of these repayment dates that makes it a lot easier to manage.

Because these instalments also tend to be fairly small amounts when compared to the overall sum, it means that you will only need to put aside enough money for each payment which makes for easy budgeting.

Term loans are also much better for the lender since the risk of the borrower not repaying is far less likely since the loan balance is gradually reduced over time with each fixed payment.

Finally, there are the lower interest rates, and while this does depend on a few different factors such as your financial history and personal circumstances, if you have a good credit score, which is required to apply for a term loan, you will have a much lower interest rate.

How To Repay Term Loans

Generally, a term loan will have a repayment period of between 1 to 25 years, depending on the size of the loan and what you are planning to use it for.

There are three main types of repayment methods you can use to pay back certain amounts over a fixed period.

These methods are:

  • Even Principal Payments – The size of the principal payment will be the same for every payment, which is calculated by dividing the amount of the original loan by the number of payments that are to be made. A $10,000 loan for example being paid over 20 instalments would therefore require you to pay $500 each time.
  • Even Total Payments – The decrease in the size of the interest payment in this method is matched by an increase in the size of the principal payment so that the total loan payment remains constant.
  • Balloon Payments – Often used by companies and businesses who have a limited repayment capacity in early years but are able to repay after several years of operation, balloon payments mean that the remaining balance of the loan comes due after a portion of the annual payments have been made. It is therefore a lump sum principle balance that is paid towards the end of a loan term.

Summary

Term loans are one of the most common ways people will borrow money since they are fast, flexible, and allow you to acquire a big sum of money while paying the loan off over set periods, making it much more ideal for many companies who want an easy way to lift their services and reputation in the public sphere off the ground.

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