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An Overview of Term Loans
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Term loans are the most common loans for financing arranged by commercial banks for businesses and
typically carry a fixed interest rate. A term loan is a fixed-term business loan in which the loan note matures
after a specified period of time, typically more than one year and less than fifteen. The most common loan maturity
is between one and ten years and the loan amounts are paid back from profits generated by the business on a fixed
payment schedule, also known as an amortization schedule. Term loans provide business enterprises with working
capital to acquire company assets, inventory, and equipment or to finance plant or service generating cash flow.
Term loans fall into two classifications, intermediate-term loans and long-term loans.
These loans usually run less than three years with monthly payment installments and often end in a balloon payment, which is a
large sum final payment that is greater than the preceding payment installments and pays the loan in full. Repayment of this
type of intermediate term loan is directly tied to the useful life of the asset or assets being financed.
Long term loans are usually loans of 3 or more years and typically less than 10 years. Some may run as high as 15 or
even 20 years, but these are the a-typical cases rather than the norm. With long term loans, payments are made against
the profits or cash flow of the business being financed, typically in quarterly installments. To protect against loan
terms and conditions violations, most long term loans contain affirmative and restrictive covenants that allow for
acceleration on the maturity of the loan. The loan conditions may also put limitations on the amount of additional financial
commitments the business may take on (such as additional debt for equipment) and sometimes requires profits be set aside to r
epay the loan.
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Who Term Loans Are Appropriate For
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Term loans are not consumer loans, nor are they recommended for up-start businesses without collateral or a strong
credit history. Term loans are targeted toward well established small businesses that can leverage current financial
status to minimize the monthly payments on the loan amortization schedule. Qualifying for a term loan requires a sound
credit history and a rigorous approval process, but can greatly reduce risk by minimizing costs. Before going through
the loan process to purchase equipment, it's important to analyze your needs and ensure you can make full use of
ownership-benefits, such as depreciation. It's also a good idea to weigh the cost benefit of owning the equipment vs.
leasing it. Another good rule of thumb is to shop around for the best interest rate as it will vary across
banking institutions.
Understanding term loans isn't all that difficult. It's the qualification process that is. Fortunately, businesses with a
strong financial history and the right vision can secure these low interest rate term loans to help grow their
businesses today!
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