Term Loans: Is a Term Loan Right for Your Business?
Are you looking for cash funding to grow or maintain your business? When business owners think about financing from a bank, they’re usually thinking about procuring a “short term loan.” A term loan offers a business owner a cash payment that is to be paid back in installments over a specified period of time. For the duration of the loan, the amount owed will accrue interest — which will also need to be paid. Banks and other financial institutions generally offer term loans to businesses that are completing expansion or development and need capital assets.
How Does a Term Loan Work?
There are three major aspects of a term loan:
- Amount borrowed
- Loan Term
- Interest Rate
The amount of money that is borrowed will need to be paid back over the term of the loan: for instance, $10,000 over the course of 5 years. The interest rate is the amount of interest that must be paid alongside the loan principal amount — a 5% Annual Percentage Rate (APR) on a $10,000 loan will accrue $500 in interest over a year. For most term loans, the borrower will immediately receive the amount of money that is borrowed. They will then need to begin their monthly installment payments the following month (or a later date, if otherwise specified). A term loan is generally considered to be a secured loan; it is secured with business assets and occasionally personal assets.
What Are the Advantages of a Term Loan?
- A term loan gives a business expansion capital immediately upon acceptance. The business owner can then invest this money in their operations and make payments
- Attracting investors instead of getting a loan, may have additional restrictions on the management of the business.
- Term loans tend to be less expensive than other forms of equity line or loan, as they are secured by the value of the business.
What Are the Disadvantages of a Term Loan?
- Term loans do need to be paid back on a schedule or they will go into default. Once a term loan is in default, business assets can be seized and legal action can be taken.
- A term loan may need to be secured by the business owner, if a business is new or does not have significant assets. This could put the business owner’s assets at risk in the event that the business does not thrive or continue.
Business owners will also need to have their financial documents and business credit in order to apply for a term loan with a reputable financial institution. The accountants at Hogg, Shain & Scheck can help your business navigate all the requirements of applying for term loans.
Still not certain whether a term loan is the right solution for you? There are many options for business funding, ranging from business loans to equity lines of credit — which is best for you will depend on your company’s current financial situation and needs.
Contact Hogg, Shain & Scheck today to find out more about your company’s borrowing options. HSS offers full accounting services for organizations throughout Toronto and Ontario.