Requirements for a Term Loan

If you're thinking of expanding your business, purchasing a new vehicle or equipment or simply need more working capital, you may want to consider a business term loan for your small business. Business term loans are one of the most popular types of loan programs available for small businesses. Term loans are made available to small businesses for many purposes and generally offer a fixed rate on the amount that is borrowed. In order to prepare for applying for a business term loan, you will need to know general requirements that may be associated with the loan application process.

General Credit Considerations

In order to qualify for most business term loans, your small business should already be fairly well-established; in most cases, banks like to see a business that has been in operation for two years or more before applying for a business term loan. There are, however, exceptions to this when the business owner is willing to offer a personal guarantee and has good or excellent personal credit. Furthermore, most term loan bank lenders will require that even established businesses have a good credit track record and payment history.

Collateral Is Usually Required

In many cases, the bank may require collateral for a business term loan. If you are purchasing expensive business equipment or a vehicle with the proceeds from a term loan, the bank may consider the equipment or vehicle sufficient collateral for the loan. However, if you are seeking cash for working capital, the bank may require that real property in the name of the business or the business owner be provided as collateral for the term loan amount.

The Approval Process

When applying for a business term loan, many banks have a strict process that must be followed for considering a business for approval; for example, in addition to checking the business credit history of a small business, the bank may do an independent investigation or evaluation on the business's financial and bank records.

Many banks may require that you allow them to access to your financial statements and bank records to verify revenue and sales figures as well as determine if your business will be able to repay the loan. Furthermore, the bank may require you to promise that your business will not apply for any other types of term loans before the loan has been repaid in full. Also, there may be a hefty processing fee involved with the loan application and approval process. Many times, banks will charge a percentage of the loan as a processing fee which will increase the cost of the loan itself.

Other Approval Considerations

Before you apply for a business term loan, you should always consider that many term loan document contracts can be rather restrictive and may require strict adherence to avoid the loan being accelerated or placed in the default. Also, you should be aware that most business term loans do not allow for prepayment without a substantial penalty. However, if you are relatively certain that you can follow the guidelines imposed by the bank for a term loan, then a term loan can be an excellent option for your financing needs.