Businesses sometimes need a lump sum of money for different reasons. They may need to open a second store, remodel their property, or purchase new equipment. Whatever the reason, businesses can use a term loan for this and more. Business loans can be confusing. Here are three facts about these types of loans.
Reasons for a Loan
This type of loan comes with many perks. These loans have longer-term limits, lower interest rates, and a predictable payment schedule. The interest payments on this business loan can be deducted during tax season.
Repaying a term loan on time helps build the business credit score. But it is best to determine if the business can handle the payments financially. If the company can’t make the loan’s monthly payments, it will hurt their credit score more than help.
Types of Loans
There are a few considerations that must be taken into account when choosing the correct loan terms. Rates on a loan may vary, and there are fixed-rate loans. Fixed-rate loans will always be at the same rate, but variable rate loans have a different interest rate yearly.
There are secured and unsecured loans. A secured loan requires some collateral upfront to qualify. Fees involved in both loans vary. The business will bring in some cash up front as collateral with a secured loan. An unsecured loan doesn’t require an upfront investment or down payment.
Preparing For a Loan
Before applying, checking the business’s credit score is a good idea. Most lenders require at least a 660 score for businesses. The bank will look at three companies to determine creditworthiness. They look at Experian, Equifax, and Dun & Bradstreet. Seeing where the credit score stands helps save money on the interest rate or even the application fee for a loan. If the business doesn’t qualify, there is no reason to apply.
To get a term loan faster, the business applying for the loan must have all the paperwork you need together in one spot. The lender must look at personal and business assets, cash flow, and the business plan. Having these items beforehand will speed up the loan underwriting process and cut down on follow-up inquiries from the bank.
A business loan creates an opportunity for a company to expand and grow beyond its current constraints. Loans can help renovate and modernize a physical location or the business needs. These types of loans help accommodate growth.