If you’ve ever taken out a mortgage or personal loan, then you’re already familiar with how a term loan works. It is a one-time upfront payment you receive from a bank, credit union or online lender.
The lender provides the funds, and you repay the loan with interest over a period of months or years. The interest rate can be fixed or variable and tends to be lower than the rates for other types of financing.
Term loans can be used for both personal and business expenses. Many business owners apply for a term loan to fund a one-time project or as a means to achieve long-term business growth. [In need of a small business lender? Check out what we recommend as the best loan options for small businesses.]
How do term loans work?
You apply for a term loan through a bank, credit union or online lender. Banks and credit unions tend to offer the most favorable rates, but they have more stringent requirements and can be harder to qualify for.
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In comparison, an online lender may have higher rates, but the application process is more straightforward, and you’ll often receive faster approval and funding. And if you choose to apply through a lending marketplace, you’ll submit your application just once and receive offers from multiple lenders.
Once you’ve chosen a business lender and been approved for the loan, you must agree to the rates and repayment terms. The rates you’ll receive depend on various factors, including your personal and business credit history, cash flow, and time in business.
The repayment terms for a business loan typically range from three to 10 years. If you receive a fixed-rate loan, your interest rate will stay the same over the life of the loan. With a variable-interest loan, your rate will change periodically.