If you’re an established, growing business with highly predictable cash flow, a term loan might be a good way to optimize your finances.
What are term loans?
A term loan is a one-time lump sum of cash that’s repaid with interest over a set period of time, or term. Hence the name: term loan.
If you’re familiar with how a home mortgage works, a term loan is very similar. Businesses use term loans to make investments like purchasing additional inventory, expanding to new locations, or improving their operations.
These loans can range from a few thousand dollars paid off over several months to millions of dollars with multi-year terms.
What are the benefits of a term loan?
- Lower cost of debt
- Customizable financing options
- Financial and operational optimization
- Predictable repayment schedules
Lower cost of debt
Term loans tend to have lower interest rates compared to other forms of business financing, like revolving lines of credit or cash advances. In other words, a term loan can be a less expensive way to borrow money to make improvements to your business.
Customizable financing options
Some term loans offer you the flexibility to customize your rates, loan amounts, and repayment schedules. For example, you might find that monthly repayments help you optimize cash flow. With certain term loans, you can tailor the loan to your business needs.
Financial and operational optimization
Term loans provide sizable injections of working capital into your business to help you make big improvements. A business might use a term loan to invest in expanding a product line, hiring additional staff, or upgrading their tech stack.
Predictable repayment schedules
Repayment of a term loan is usually split over regular weekly or monthly installments. This makes planning to repay a term loan fairly straightforward as a regular business expense.
LOAN REPAYMENT TIP: Want to know how much it will cost to take out a loan? Try our free Business Loan Calculator.
How term loans work
Term loans can theoretically offer any amount of financing over any period of time. They tend to range from tens of thousands of dollars to millions, and come with repayment terms from several months to multiple years.
To give you an idea of what a term loan looks like in practice, here’s an example. Let’s say you want to take out a $3 million loan with a 12-month term at a 12% fixed interest rate. What would your monthly payment look like, and how much would it cost to borrow?
Let’s look at this example using a business loan calculator: To borrow $3 million over a 12-month term at 12% interest, you’d pay $266,546.37 a month, and $198,556.39 in interest over the lifetime of the loan. Your total cost of borrowing would be $3,198,556.39.
How to get a term loan
When it comes to how to get a business loan, there are a number of factors to consider, including how much funding you need and repayment terms. For term loans, you’ll also need to demonstrate profitability and longevity, plus meet the eligibility requirements, such as a minimum credit score.
One of the most important decisions is choosing which type of lender you want to work with.
2 types of lenders that provide term loans for commerce
Banks
Many private banks offer term loans for businesses. They tend to offer low interest rates, but securing those rates often involves stringent requirements, like a history of profitability, a high credit score, and even collateral. These factors take time to verify and approve. What’s more, some banks might only offer large term loans, refusing to lend less than $500,000.
Fintech companies and online lenders
If you’re looking for a quick infusion of cash into your business today, there are a number of financial technology (fintech) companies and online lenders. They offer same-day or next-day approval for short- and medium-term loans, without the requirements traditional banks might ask for. This convenience comes at a cost, usually in the form of higher interest rates and fees, as well as shorter repayment terms.
8 examples of how businesses use term loans
- Purchasing repeat stock, inventory, and supplies
- Offering repeat seasonal promotions like Black Friday or back to school
- Adding more physical retail store locations
- Hiring more full-time staff
- Expanding product lines and continued market expansion
- Redesigning your website
- Enhancing logistics
- Upgrading technology
Purchasing repeat stock, inventory, and supplies
Term loans help established businesses stay ahead of expected expenses. You can add new products, keep your bestsellers in stock, avoid supply chain delays, or buy products in bulk to predictably grow your business.
Offering repeat seasonal promotions like Black Friday or back to school
Gearing up for the busy season gets easier when you have the funds to do it. With term loans, you can proactively prepare for and make the most of business-critical events.
Adding more physical retail store locations
Term loans allow you to invest in real estate, so you can meet your customers where they are with more locations.
Hiring more full-time staff
Many businesses use term loans to expand their teams and work with consultants to bring even more predictability to their operations.
Expanding product lines and continued market expansion
Terms loans help growing organizations branch out into new markets with products that meet more customer needs.
Redesigning your website
Investing in your digital presence can pay dividends by delivering a more engaging customer experience and attracting new customers to your website.
Enhancing logistics
Businesses can use term loans to streamline inventory storage, packaging, and shipping. Improving logistics empowers you to fulfill orders quickly and efficiently.
Upgrading technology
Optimize your tech stack with financing to help your business run more smoothly and predictably. With term loans, you can invest in the tools you need to grow.
Term loans offer quick, predictable financing to scale your business today
For growing businesses with a proven track record, term loans are a simple, inexpensive way to secure capital and invest in expansion. They’re great for buying additional inventory, ramping up production, or expanding your business’s footprint.
Read more
- How To Finance a Growing Business: Guide for Large Retailers
- Shopify Lending: Compare Financing and Calculate Cost of Debt
- What Is a Revolving Line of Credit? Definition and Guide
- Business Loan Requirements: 6 Things You Need To Get a Loan
- How To Get a Small Business Loan: 6 Steps To Take in 2024
- Funding Female Founders: Small-Business Loans for Women and Where to Apply for Them
- 5 Top Options for Working Capital Financing
Term loan FAQ
What is the length of a term loan?
The length of a term loan typically ranges from one to ten years, depending on the agreement between the borrower and the lender. Factors such as the purpose of the loan, the borrower's creditworthiness, and the lender's policies influence the duration. For example, longer terms may be used for more significant capital investments.
What are the 3 types of term loans?
Short-term loans tend to range in the thousands of dollars, with one to two-year repayment terms. Medium, or intermediate, term loans are larger, typically capping out around $500,000 with two to five-year terms. Long-term loans are often the largest, and they can be in the millions of dollars and can have longer, multi-year terms.
Why are interest rates on long-term loans higher than interest rates on short-term loans?
The longer a loan term is, the higher the chance the borrower might default on it, so a lender compensates for that with a higher interest rate. With short-term loans, the borrower is required to pay it back faster. This poses less risk to the lender, which leads to a lower interest rate.
What are the disadvantages of a term loan?
Term loans come with rigorous requirements, which means they’re often only available to businesses who’ve established themselves. Depending on the lender and the type of term loan, verification can take days, or up to a few months in some cases.
What are the advantages of a term loan?
Terms loans offer a range of benefits for established businesses. The top advantages of term loans are lower cost of debt, predictable repayments, the ability to optimize finances and operations, and the ability to customize your loan rates, sizes, and repayment schedule.
*Shopify Capital loans must be paid in full within 18 months, and two minimum payments apply within the first two 6 month periods.
This article is focused on industry standards and descriptions are not specific to Shopify's financial suite of products. To understand the features of Shopify's lending products, please visit shopify.com/lending.
Available in select countries. Offers to apply do not guarantee financing. All financing through Shopify Lending, including Shopify Capital and Line of Credit products, is issued by WebBank in the United States.
