Understanding business loan terms can be daunting, especially for first-time borrowers. These terms affect the amount of money you will have to repay, your repayment schedule and the interest rate that will apply to your loan. Knowing how each affects you is important, so that you can make an educated decision regarding your loan.
The business loan terms you need to consider are:
- The length of the loan
- The interest rate and repayment schedule
- Any fees associated
- Any collateral required to secure the loan
- Any other conditions that may apply
You should also consider what size loan you need and over how long you need it.
There are a number of business loan terms for you to consider when getting funding.
The length of a business loan is usually expressed in months or years, and determines when the borrower has to repay their loan in full. Loan terms can vary from one lender to another and range from a few months to several years. Generally, shorter loan terms have higher monthly payments but less overall interest than longer loan terms. Knowing your loan term can help you budget for repayment and ensure you get the best deal for your needs.
When you apply for a loan, the lender typically offers you several loan terms. Standard loan terms are usually between 12 and 72 months, but shorter and longer loans may be available depending on the type of loan and your individual circumstances. Depending on the lender, the length of time that is considered short, medium and long will also differ.
Short-term loans
Short-term loans are beneficial as they allow you to manage your finances more accurately. Short-term loans generally have lower interest rates than long-term loans and are repaid in under two years. If you get a loan over ten years, you may regret being bound to the loan payments by the sixth or seventh year - but face early repayment fees. Opting for a short-term business loan will let you avoid this situation.
Short-term business funding can be used to cover emergency expenses such as repairs or debt, pay staff on time, or bridge the gap until payday.
The higher monthly repayments can make it more challenging to budget.
Short-term loans can also be easier to process, making them a good option for businesses that need funds quickly.
Medium-term loans
Medium-term loans can help borrowers spread out payments over an extended period, generally two to five years. Medium-term business financing may come with slightly higher interest rates than short-term options due to the additional risk the lender takes. Borrowers could use this type of loan to fund a vehicle or equipment.
This is probably the least common term length, as the terms end up overlapping into short or long.
Long-term loans
Long-term loans are best for borrowers who need more time to repay their debt. They are best suited for businesses that want to invest in growth and expansion over an extended period.
Long-term loans often have much lower interest rates but are typically harder to qualify for. Businesses can repay long-term funding anywhere from five to thirty years.
It's also important to remember that while longer loan terms may provide more manageable monthly payments, they will also result in higher overall costs due to additional interest accrued over time.
As with any loan, it's generally best practice to only borrow what you can afford and pay off the debt as quickly as possible.
The longer the loan term, the more flexible it tends to be. For example, if you're getting a loan only over a couple of months, then it is likely being used for a specific purpose; whereas if the loan spans many years, then it is likely it is just being used to give the company some extra cash flow.
You need to consider your individual business needs when determining the right loan term for you.
Before signing any agreements, thoroughly research all options to understand the terms and conditions. This will help ensure that you get the best deal, maximising your benefit while minimising your risks and costs.
No matter which loan term you choose, it's important to consider all the available options and make sure that you're comfortable with any commitments or fees associated with your loan agreement.
To get an idea of your monthly payments across different loan lengths, use our business loan calculator. You can adjust it based on how much you want to borrow and over how long, and see how this would impact your monthly payments.
This should help you decide which makes sense for your needs and goals.
Business loan terms also include a repayment schedule. This refers to how often you'll need to make payments and can influence your ability to pay the debt promptly. For example, if you choose a loan with monthly payments, it may be easier to track and manage over time than one with quarterly or bi-annual payments.
You can often decide your own repayment schedule - to some degree.
You'll need to consider the repayment terms and what happens if you want to pay the loan off early. Early repayment can save you money on interest, and means that you no longer have to think about repayments etc. However, some lenders may charge you an early repayment fee.
Business loan terms also include collateral - assets you pledge as security to guarantee payment of the loan. Collateral may consist of property, inventory, accounts receivable or other assets, and is typically required for larger loans.
Collateral provides lenders with additional protection. It may make it easier for them to approve your application since they will have some assurance that if you fail to make payments, they'll be able to recoup their losses by seizing whatever assets are pledged as collateral. A long-term loan poses a more considerable risk to lenders, so they will likely ask you to secure it with collateral.
Some lenders may require collateral such as your house or business assets - this may mean you can borrow more money or get a longer term, but it is a risk.
If you go with a lender that requires collateral, it's important to note that you'd still be responsible for any amount beyond what the collateral was worth when seized. Ensure that this is feasible for you and beneficial in the long run.
As the longest loan Love Finance offers is over five years, we don't require you to provide collateral.
Finally, it's important to consider any additional fees associated with the loan. These can include upfront or origination fees, late payment, or prepayment penalties. Ensure you're aware of these to avoid getting hit with unexpected charges later on.
You need to make yourself aware of any additional fees and how these will affect you.
A business loan can offer a great way to finance your business goals; however, understanding the different terms available is key to finding the right loan for your needs. Consider all factors involved in the loan agreement, such as the term length, interest rate, repayment schedule, collateral requirements and other fees, before making any decisions. With this knowledge, you can make an informed decision about which type of business loan – and corresponding terms – makes the most sense for your business needs.
Now you know everything you need to know about business loan terms! We have an additional blog on business loan rates so you can be in the best possible position to get your business loan.
