Term loans have a fixed interest rate (although some loans offer a variable rate). A personal guarantee from the borrower and/or collateral (business, personal, or both) is usually required to secure the loan. If the loan has collateral attached to it, then it is considered a “secured loan.” If the loan is solely based on the reputation and creditworthiness of the borrower, then it is an “unsecured loan.” (Now you know why your credit score is so important.) These loans carry a monthly or quarterly repayment schedule and have a pre-determined maturity date. Term loans are classified as:
Intermediate-Term Loans
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The loan has a maturity date of less than three years.
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It is generally repaid in monthly installments.
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Repayment of the loan is tied to financed assets.
Long-Term Loans
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The loan has a maturity of more than three years. Maturities are usually from three to ten years, but can be as long as 20 years.
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Loans are collateralized by business assets.
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Repayment is based on current or projected monthly or quarterly profits, or by cash flow.
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Wording on the loan contract limits the amount of new debt the project can undertake, as well as how much of the company’s profits should be set aside for loan repayments.
Term Loans are inexpensive and most banks require that the business have a degree of financial strength. Banks have different requirements for these types of loans, so there is not one set of criteria that will work for all banks. However, the following general rules usually apply:
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For small-sized loans under $100,000, you will need a good credit score and personal investment into the business (from 20 to 50%). Special cases may apply.
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For loans over $100,000, a business plan, financial, and possibly most likely personal collateral will be required.
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If your credit score is below average (usually below 678, although from 600 to 700 may be okay), you will need to explain the problems with the credit score and provide both a business plan and financial projections. The lender may also require collateral.
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In some cases, if you have recently declared bankruptcy or have otherwise bad credit, you can opt for an alternative-financing source such as non-profit lenders, community developers, or other independent lenders. Remember, however, the loan will likely have higher rates than what you would pay at a regular bank.
Most business people use term loans for large capital investments such as machinery, purchases, initial business set-up, working capital, construction, or acquisitions. The rates for term loans are between 2.50 to 2.75% above the prime rate. Fees are usually 1% of the loan disbursement amount.
© 2006 Guideye.com
