Click to Print

A Basic Guide to Bank-Term Loans

December 1, 2005
URL: http://www.entrepreneur.com/article/52728

What it is: Term loans are the standard commercial loan, often used to pay for a major investment in the business or an acquisition. The loans often have fixed interest rates, with monthly or quarterly repayment schedules and a set maturity date.

Bankers tend to classify term loans into two categories: intermediate- and long-term loans.

Intermediate-term loans usually run less than three years, and are generally repaid in monthly installments (sometimes with balloon payments) from a business's cash flow.

Long-term loans can run for as long as 10 or 20 years and include additional requirements such as collateral and limits on the amount of additional financial commitments the business may take on.

Upside: Term loans are often the best option for established small businesses. If your financial statements are sound and you're willing to make a substantial down payment, you can receive financing with minimal monthly payments and total loan costs. The loans are best used for construction, major capital improvements, large capital investments, such as machinery, working capital and purchases of existing businesses.

Related: Why Business Loans Are Up for Grabs

Downside: Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing.

Also note that when it comes to loans more than $100,000, you need a complete set of financial statements and must undergo a complete financial analysis by the lending institution.

Related: 3 Signs You May Need to Ditch Your Bank

How to get it: Large U.S. banks are active in business lending. But it is also worth checking out local community banks with a focus on business lending because they have more leeway when it comes approving loans. Their officers can also be a wellspring of useful advice about how to secure financing.

The degree of financial strength required to receive loan approval can vary tremendously between banks, depending on the level of risk the bank is willing to take on. Search for a prospective bank on the FDIC's website and then click on "latest financial information." 

Find "performance and condition ratios" and zero in on the "total risk-based capital ratio," which regulators require to be above 10 percent if a bank is to be considered well-capitalized. The higher ratio, the more secure the bank is financially.

Additional guidelines to consider when selecting a business bank:

Banks consider the following "five C's" when making decisions about term loans: