How a Term Loan Works:

If you’ve ever had a car loan or a home mortgage, you’re likely familiar with the basics of how a term loan works—a small business loan may share many of the same characteristics. The word “term” refers to the period of time during which you make the periodic payments (30 years is a common term for a home mortgage, for example). Like a home mortgage, every term loan has a specified repayment period. A typical term loan for a business loan could be four, five, 10 years, or longer. The term is determined based on the specific business purpose.

How Term Loan Payments Work:

Loan payments typically include a combination of interest and a portion of the principle balance in every loan payment. The amount of interest and principle in the loan payment will vary and is identified in an amortization schedule determined by The Link. Typically, more interest is paid in the beginning of the term and more principle is paid as the loan approaches the end of its term.

The fees associated with term loans can either be paid up front or added into the loan balance (depending upon your lender). Annual Percentage Rate (APR) is a reflection of the interest cost and fees charged expressed in an annual percentage rate. Auto loans, mortgages, credit cards, and other consumer debt is expressed in APR to make comparison shopping for consumers easier. Small business term loans from the bank may also be expressed in APR—making it one of several ways to compare small business loans. When comparing business loans with vastly different terms, however, using APR alone may not tell the full story.  Instead, it should be considered along with the total loan cost, which will typically be lower on a shorter-term loan and help determine whether a loan is the right fit for a given business need.

Collateral

The Link will require specific collateral to secure a loan. Collateral is an asset of value the lender will take ownership of should our client default on a debt. If the loan is intended to purchase some kind of asset, like a piece of equipment or real estate, the lender might use the asset being purchased as collateral, like in the case of an auto loan or home mortgage.

The Link will also require a client to insure an asset being purchased over the course of a loan (with an insurance policy acquired for that purpose), to protect the value of the asset being purchased with the loan proceeds. This may apply to a business loan for purchasing equipment or other similar asset. If the client fails to purchase adequate insurance, the bank may add those costs to the balance of the loan.

Why Would a Term Loan Make Sense for a Small Business?

With all the options available for business borrowing today, a term loan could be a good fit for those businesses that meet The Link’s criteria because a term loan will often include the lowest interest rates. A term loan could be a good fit for specific, high-cost purchases that will provide value to your business over a long period of time:

• Equipment, machinery, and other tools for manufacturing, service, and repair businesses
• Technology and other office equipment, such as computer equipment, phone systems, copiers, furniture, and other similar technology
• Real estate, office space expansion, renovations, and new construction