Types of Term Loans and what is best for you?
Term Loan varies in case of small businesses in terms of growth needs, credit rating, cash flow, revenue and such like. Term loans even vary in terms of length starting from 1 year to 5 years and payment structure which can be daily as well as monthly. The loan amount and interest rates vary on your business needs and repayment term depends on business financials. It is available from traditional banks as well as other financial lenders.
A term loan can be utilized for various business-related functionalities like purchasing inventory, work capital addition, refinance debts, meet tax or payroll obligation and much more. There are no loan usage restrictions as such. But the best thing to do with it is business expansion. In some cases, it is also referred to as medium-term loans in order to remove any confusion related to shorter-term alternatives.
The fee structure is not uniform for term loans. There are no equal payment parts in interest or principal payment on a monthly basis. If you plan to pay off the loan early you might still end up paying maximum part of the interest. The monthly payment amount may remain the same but the proportion of interest and principal within it varies. It is better to ask the lender for an amortization schedule for an overall understanding of the loan terms.
Before pushing forward with a loan, it’s important to take a step back and look over your company’s finances as they are. The ratio of money you’ve poured into the company versus the amount of you’ve already taken as loans is heavily considered by investors. Known as the debt to equity ratio, this number (if swinging poorly in one direction) can be the limiting factor in the number of options available to you. Still, even if this number is working against you, there are still ways to make the most out of the situation.When your company has more debt (money loaned) than equity (money invested), it’s a good idea to look into equity financing. This will provide an influx of cash that will increase the amount of capital you control as the owner. Equity financing essentially involves small business administration loans and is something worth looking into as a start-up because it provides advantages that debt financing cannot. Equity financing is about drawing up funds that won’t add further debt penalties to the company and are often less stringent about when they’re required to be paid back. If equity financing does not seem like a viable option, and your company has just recently been established, then the SBA supported micro-loan program might be the right one for you. These loans are relatively small, in the amount of fifty thousand dollars, but are dedicated to supporting newly established or recently expanding small businesses.