Page written by Chris Godfrey. Last reviewed on July 11, 2024. Next review due April 6, 2025.
Term loans for businesses can be fast and simple to obtain and may let you pay the money back over many years. Often available with borrowing costs that are cheaper than other types of business finance, term loans can also be used for almost any purpose. No wonder they’re UK’s most common type of business loan.Â
With a business term loan, your organisation receives a single, lump-sum cash injection and then you pay it back in regular instalments, plus interest and any fees, over a fixed period of up to 25 years. Instalments may be weekly, monthly or quarterly depending on the type of business you operate.
Some term loans may be unsecured, so you do not provide collateral to protect the lender if you default. Other term loans – typically for larger sums or for riskier businesses – may require security. This means you pledge assets such as property, vehicles or machinery to protect the lender from loss. If your business defaults on the loan, the lender can seize these assets and sell them to recover their money.Â
Interest rates on unsecured term loans tend to be higher and the amount you can borrow will usually be smaller than you may find with loans where you provide collateral.
You can use a term loan for almost any business purpose:
Business term loans are quite simple in their basic structure:
Although all terms loans have the same basic structure – a lump sum paid back over a fixed period of time – there are also many tweaks and options that can impact the way the loan works:
Short-term loans are often used as emergency funding to cover unexpected costs, or to capitalise on a sudden business opportunity. You borrow a sum of cash for a short period, usually less than one year. Short-term business loans can be obtained very quickly, but interest rates can be high and the sum you can borrow will usually be smaller than you may obtain with other types of term loan. Collateral may be required.
Similar to above, but the term of the loan can be anywhere from one to three years. Intermediate term loans are a good option for businesses seeking to buy capital assets, such as machinery, as they still pay off relatively quickly, but usually come with lower interest charges and fees and deliver larger principal than their short-term counterparts. Collateral is often required.
Long-term business loans can take as long as 25 years to pay back. These types of loans generally provide much larger principal and will typically require the borrower to provide collateral. Long-term loans have the lowest interest rates and are suitable for major financial expenditures – such as buying property or paying for large-scale construction costs.
Is a term loan right for your business, or would you be better off with alternative financing, such as a business line of credit, or equipment financing? Here’s how you decide if a term loan is your best funding option:
Although you can use them to pay everyday expenses, term loans are best when you are using the funds to cover a costly purchase (such as machinery), or for a purchase that has good ROI. If you need cash to fill a gap in your working capital, you may be better off with a business line of credit, invoice financing, or a merchant cash advance.
It’s best to use a term loan that will help you generate more revenue or gain more customers. Calculate the potential return on investment. Will the loan improve your profitability or deliver a bump in turnover? If not, refer to the alternative loans suggested above.
Taking on a loan you can’t afford won’t help your business, it will only increase your problems. Crunch the numbers. Do you have sufficient cash surplus to make the payments every month? If not, a term loan is not for you.
Pros:
Cons:
Obtaining the best term loan for your business means preparing in advance:
Interest rates and terms and conditions for business term loans can vary significantly, so it makes sense to shop around before settling on a lender. You can do this by approaching banks, credit unions and online lenders one by one, or you can use the services of a loan marketplace that will immediately introduce you to a choice of term loans from different lenders. Some marketplace platforms can also give you advice and help you with the application process. This can be especially useful for borrowers who have never taken out a business term loan before.
It is common for mistakes to occur on credit reports – both business and personal. Incorrect information could have an adverse impact on your credit scores and your loan application. Check both reports and ensure the details they contain are all correct. If there are errors, get them fixed before applying for a loan.
If your credit score is poor, it may be worth taking steps to improve it before applying for a business loan. A better score will enlarge your pool of potential deals and may also reduce the interest rate and fees you pay. Unfortunately, despite big promises from the many ‘fast credit repair’ businesses you may see online, there is no quick fix for a poor credit score. It takes time and good financial management to get a poor score back into the good category. Key actions to improve your credit score include:
No two lenders are the same. Each will have its own terms and conditions. Make sure you meet all the lender’s requirements and have the necessary paperwork before you apply.
Lenders will need to review your key business information. Having the documentation ready in advance will speed up the processing of your application. Required documents typically include:
Once you receive a loan offer, you need to check the small print to ensure the loan is what you asked for and what you need. Carefully review the following:Â
Term loan amount – check the amount you’ve been approved for as it may be different from what you requested. If you are offered a lower sum than you asked for you should consider how that amount of funding can impact your business, and whether or not it makes sense given the total ROI.
Rate – the interest rate indicates the current rate of borrowing. The annual percentage rate (APR) is the total annual cost of a loan, including all interest payments, fees, and services charges. The APR reflects the true cost of the loan. Make sure it is affordable and makes economic sense.
Repayment term (duration of the loan) – is your repayment term realistic? Paying back a £250,000 loan over one year will be far more difficult than paying it back over five years. You need a repayment term that is feasible and fits with your income and cash flow. Note that some lenders may let you choose from several repayment plans, including paying off your debt in even amounts (which allows you to budget the cost easily) or increasing amounts (which allows you to pay it off faster and accrue less interest).
Personal Guarantee – lenders often require personal guarantees when granting loans to small businesses. Does your offer demand this? If so, it means you are assuming personal liability for your business’s debt. You must pay if your business cannot. Are you comfortable with this risk?
Fees – fees can vary significantly, so it’s critical to review them carefully. Here are some fees that may be tacked onto your offer:
Lenders will review your ‘income to debt ratio’ when considering your loan application. This means they won’t provide funds if they think you will be unable to pay them back because your total debts are already too high. To improve your chances of success, don’t ask for a bigger loan than you can afford to repay. You can work this out by looking at your monthly cash surplus and calculating how much of that you can put aside for an additional loan repayment. Remember that you must always keep a contingency cash float to cover emergencies or unexpected costs, so you should never allocate all your surplus cash to cover extra loan payments.
No matter if you’re seeking your first business term loan or you’re a seasoned borrower, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality term loans from a choice of lenders. Give your business the financial boost it deserves. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.
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