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Every business goes through ebbs and flows, in other words, periods of highs and lows. When a business goes through a low period, it could be for many reasons. Perhaps cash is tight, the business isn’t as necessary in the market as it used to be or simply needs to make some upgrades. In these situations, a business owner may need to make an investment to turn things around. Although, these investments can be expensive, which is where business term loans come into play. 

A business term loan is a form of financing designed for businesses and their many unique requirements. If you’re a business owner and are considering taking out a loan to meet your goals, you’ve come to the right place. In this article, we will explore what a business term loan is, the features of a business term loan and how you can go about obtaining one.

How to incorporate a business in Canada.

What Is A Business Term Loan?

A term loan involves a lender, such as a bank or credit union, extending a lump sum amount of money which is repaid over a fixed period of time through regular payments. A business term loan is simply a term loan designed for businesses. Business term loans are very commonly used by small and medium-sized businesses in Canada trying to achieve their business goals. 

How Do Business Term Loans Work?

During the application process, you’ll decide how much money you need and how long you want to repay it. Lenders typically have minimums and maximums on how much money you can borrow as well as a variety of repayment periods to choose from. Using these limits, you can find the sweet spot that works best for your business. 

Business term loans will also have an applicable interest rate. Interest rates can be either fixed or variable. Fixed interest rates do not change throughout the business loan’s term, but variable interest rates do, as the name implies. Variable interest rates fluctuate with the prime rate. Usually, variable interest rates are expressed as, “prime interest rate plus 5%”. This means as the prime rate increases or decreases so will the interest rate on your term loan. 

The shorter your repayment period is, the higher your payments will be but the less interest you will pay. On the contrary, the longer your repayment period is, the lower your payments will be but the more interest you will pay. 

Thinking about securing your business loan with collateral? Read this article first.

What Can You Use A Business Term Loan For? 

Business term loans can be used for an array of purposes since it is essentially a large amount of money upfront. What a business term loan is used for depends entirely on the business’ needs, which can be very unique and diverse. Some common examples of business term loan uses include: 

  • Equipment purchase
  • Facility purchase
  • Working capital or cash flow
  • Renovations
  • Growth and business development
  • Inventory purchase
  • Refinance debt

Who Is A Business Term Loan Best Suited For? 

The first obvious factor is you should own a business. Other than that, you should be in a position where you can afford to make loan payments and have a clear use for the business term loan. 

Is a brick and mortar business or an online business right for you? Click here.

How Does Each Attribute Of The Loan Affect Your Payment? 

Financing is an excellent way to fulfill your business goals, but it definitely isn’t free. There are numerous aspects to business term loans that you should consider before going through the process because they will cost you something with every payment. Consider the following factors below:

  • Interest Rate. Interest is essentially the cost you pay to borrow money, so this cost is unavoidable. The lower your interest rate is, the less you will pay with each payment. 
  • Term Length. The longer your term is, the lower your payments will be, but you’ll end up paying more interest. On the other hand, the shorter your term length is, the higher your payments will be, but you’ll end up paying less interest. There is obviously a trade-off here which can impact other aspects of your business. 
  • Amount. The more you borrow, the more you’ll owe on each payment date. This is why it’s important to borrow only what you need, not more. If you can use some internal funds from your business, that would put less financial stress on you. 

What do business owners need to get approved for funding? Check out this article.

What Do Lenders Look For When Assessing Applicants? 

Every lender has a unique set of requirements for their loan applicants. Before applying, ask potential lenders for these requirements as they are often public information. Knowing what the lender wants ahead of time will help you avoid filling out applications for loans you won’t qualify for. Below are some common prerequisites that lenders require: 

  • Basic information on your business
  • Credit score (personal and business)
  • Bank statements
  • Business plan (includes the intended purpose for the business term loan)
  • Financial statements (minimum annual revenue may be a consideration)
  • Minimum operation time 

Can I Get a Business Term Loan If I Have Bad Credit? 

The short answer is yes bad credit business loans do exist, but you will face some challenges along the way. Business loans tend to involve more money than personal loans which naturally makes lenders more strict. You will likely have some problems securing financing with banks and other traditional lenders. If this is the case, you have two options: an online lender or a business loan broker. 

Online lenders are known to be more lenient with their borrowers when it comes to credit scores but might charge a higher interest rate. Business loan brokers work with many different lenders to help you find an option that satisfies your needs. Either way, it’s not impossible to secure financing with bad credit, you will simply need to be more patient and work with what you can get.

Everything you need to know about your business credit score and report.

The Funding You Need To Achieve Your Goals

Business owners are usually never shy from a goal, but they might be shy of the money to achieve those goals. Business term loans are a great way to make your dreams a reality, so long as you can afford the payments and the commitment. If you’re interested in being matched with the right business financing for your needs, Loans Canada can help.

Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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