No two small business loans are exactly alike. Because every business is unique, with distinctive goals, operation strategies and financial interests, loans should be tailored by business leaders and lenders to ensure that individual businesses gain the advantages they need.
Fortunately, there are several terms that leaders and lenders can alter to ensure that their loan is working hard for them. Here are a few aspects of small business loans for new entrepreneurs to consider before they take out money to finance their dream.
Loan Repayment Terms
Perhaps the most important term for business leaders to learn about a loan is the time their company has to pay back the borrowed amount. Because businesses typically borrow large sums, repayment terms can extend for several years and even decades, as borrowers accept that it takes time for young businesses to see returns on their investments. Still, there are loans that must be repaid every month, or at least at the end of only a handful of months, which can help business leaders avoid taking on more debt than their organization can handle. There are pros and cons to both long- and short-term loans, and leaders should work with lenders to craft the financing that most suits their business goals.
Faster than reading the fine print on every loan, business leaders can learn the typical terms of the most common types of business loans. Then, when an organization is in need of a loan with specific terms, leaders can immediately gravitate toward the type of loan that offers those terms to borrowers. Some typical loan terms that every business leader should know include:
Term loans. With a typical term loan, businesses receive a lump sum of cash, up to about $1 million, which is repaid with interest over a period less than 10 years.
Microloans. Similar to a term loan, microloans involve a lump sum of cash, typically $500,000 or less, and they have shorter repayment periods.
SBA loans. Offered by the Small Business Administration, these generous loans can amount up to $5 million and must be repaid in a period from seven to 25 years, depending on the loan’s use.
Business lines of credit. The amount available through a line of credit depends on a business’s (and its leadership’s) creditworthiness, but financing is typically available for five years or less.
Invoice financing. This type of lending provides businesses access to money due through invoices for just a few months.
Equipment financing. Specifically to help organizations afford equipment, these loans are paid off over the course of 10 years.
Loan Maturity Dates
The phrase “loan maturity” typically refers to the same concept as a loan repayment term; a business has a certain amount of time to repay a loan with interest, and during that time, the loan will mature. However, a loan maturity date is a specific term that pinpoints the final day of the repayment term. On the maturity date, a business leader must complete the payment of the entirety of the loan as well as any associated costs or fees. Failure to repay the loan in full by the maturity date will subject an organization to late payment penalties outlined in the loan’s terms.
Business leaders should be familiar with the concept of fines for late loan repayment, but being penalized for paying a loan too early is likely brand-new. Many lenders charge business borrowers a fee for paying a loan ahead of schedule, called a prepayment penalty. Because lenders plan to receive a certain amount of interest from full-term business loans, organizations that pay the loan early are depriving the lender of the income they expect. Prepayment penalties help to offset the lost interest.
Not all lenders impose prepayment penalties, but business leaders need to be aware of any loans that carry these terms. Then, leaders should balance the advantages of paying off a loan early with the disadvantages of paying penalties; in some cases, it might be beneficial to pay the penalty to offload the loan early.
The more a business leader knows about a loan before they get their organization into debt, the better. Business leaders should take their time to understand every aspect of a loan’s terms, so they can maintain financial control over their company’s future.