Term Loan: Definition, Types, and Best Options

What Is a Term Loan?

Ever found yourself in need of cash to pay off a vendor, bridge the gap between seasons, or pay for materials before a big job?

A term loan could help bridge that gap and keep things running smoothly.

A term loan is simply another word for a standard business loan that offers a one-time lump sum of cash, “term” specifically referring to its repayment terms which can be either:

• Short-term
• Medium-term, or
• Long-term

Below we’ll break down the difference between each of the 3 main types of term business loans as well as:

• How they work
• Types of business loans and where they sit on that repayment term spectrum
• And how to qualify and apply for a term loan

Let’s dive in…

Types of Term Loans: A Comparison Between Short-Term, Medium-Term, and Long-Term

Before we talk about the different types of term loans, let’s talk about the three category of repayment terms.

Term loans split up into 3 primary categories, each based on how long it will take to repay the loan:

• Short-term: Up to 2 years
• Medium-term: Between 2-5 years
• Long-term: 5+ years

Within those 3 major buckets, there are several different types of business loans. The most common types of business loans are:

• Short-term loans:
  • Merchant cash advance
  • Invoice factoring
  • Unsecured business loan (short-medium)
  • Business line of credit (short-medium)
• Medium-term business loans:
  • Asset-based lending
  • Term loans
  • Equipment financing (medium-long)
• Long-term business loans:
  • SBA loans
  • Traditional bank loans
  • Equity funding

Keep in mind that some types of business financing don’t fall strictly into one bucket but take up 2 or all 3 (some of those are notated above with short-medium or medium-long).

The repayment period for equipment financing, for example, can be 1 year but it’s often 2-5 years.

Short-Term Business Loans

Now that, we’ve broken down the different types of business loans and the three types of repayment term “timelines” they all fall into, let’s break down each type of business loan.

Below are the 4 major types of short-term business loans:

Best for quick funding and limited paperwork: Unsecured business loan

Unsecured business loans are the closest to a traditional bank loan amount the 5 types of short-term business loans on this list.

That’s because an unsecured business loan is a lump sum you receive in exchange for a promise to pay back that amount at a specified interest rate.

That interest rate is typically higher than a traditional loan. However, that’s because unsecured business loans don’t require hard collateral such as cash savings or property like traditional loans do, so your risk is greatly reduced.

Best for cash flow: Business line of credit

A business line of credit is unique from the other short-term loan products because it’s not a single lump sum.

Rather, a business line of credit is a consistent source of cash which you can tap into at any time, very much like a credit card.

The maximum loan amount and credit requirements are higher for business lines of credit.

However, the flexibility and peace of mind you get knowing you always have access to the capital you need to keep your business running smoothly– especially in case of seasonality or an industry such as construction where you have to purchase materials before you’re paid– is invaluable.

Best for business owners who accept credit cards: Merchant cash advance

A merchant cash advance (or MCA, split funding) works like a traditional loan on the front end. However, where it differs from traditional loans is primarily in how its repaid.

With a merchant cash advance, how much a lender will approve you for is based on your credit card transactions. The more revenue you generate through credit cards, the more you may be approved for.

Once you’ve been funded, that MCA is repaid by auto-deducting a small percentage of your daily credit card transactions.

What’s great about an MCA is because that amount is a percentage, it fluctuates with your business. When sales are down, that amount is lower. That makes it easier to stay consistent with repayment.

Best for business owners with outstanding receivables: Invoice factoring

Invoice factoring is possibly the most unique of short-term business loan products.

That’s because the lender is essentially purchasing your invoice at a discount.

The lender buys your invoice from you, typically for around 90% of the invoice amount, and they then act as the collector for that invoice, communicating directly with your customer to collect payment.

Invoice factoring is great for business owners who don’t like the idea of (or aren’t in the position of) taking on additional debt since you’re simply collecting on invoices you’re already owed by your customers.

Medium-Term Business Loans

Below are several of the most common types of medium-term business loans:

Best for businesses with low or seasonal cash flow: Asset-based lending

Asset-based lending is a broad term that includes several types of financing options with one thing in common: they’re secured by tangible (hard) or liquid assets. That amount you can borrow is also based on the same asset(s).

Those assets can be tangible such as property or equipment or liquid assets such as cash savings or accounts receivable. The loans can be structured as either a medium-term loan or a line of credit.

There are three major types of asset-based lending:

• PO financing: Purchase order financing can be highly useful for businesses who need to pay to produce product long before getting paid for it, making managing cash flow difficult. With PO financing, the lender pays your supplier for the goods and you then repay the lender directly.
• Hard money: A hard money loan is a short-term “bridge loan” whose terms are based on the value of a commercial property as collateral. Hard money loans are typically used to bridge the gap in long-term projects where cash is needed to complete the project before getting paid.
• Equipment financing: Equipment financing, or equipment factoring, allows you to get brand new equipment with the equipment itself serving as collateral. You then repay the lender for the advance.

Equipment factoring is one of the more common and useful types of asset-based financing, and its terms can vary a bit, so let’s take a minute to highlight it:

Best for businesses who need funding to replace or upgrade equipment: Equipment factoring

If a critical piece of equipment breaks, it could mean the difference between being open for business… or closed indefinitely.

On the flip side, if your business is growing, you might not have the cash on hand to purchase new, expensive equipment– and that would hinder growth.

Those are both two of the primary reasons that equipment factoring is so useful. In both cases, you’re able to get the brand new equipment you need within as little as 1 week and keep business moving forward without a hitch.

With equipment factoring, you get cash for a specified equipment purchase with that equipment being used as the collateral itself.

You then pay that loan back with interest, typically with terms between 2-5 years. Though, as we mentioned, this can sometimes be a short-term loan– repayment in the 1-2-year range– in rare cases.

Best for those who need a quick infusion of cash: Term loans

Not to be confused with the categorizing of the various business loan types based on term length (as we’ve done throughout this page), this refers to a specific loan product often used to fill an immediate short-term need for capital.

These types of loans can be structured as either short-term business loans or medium-term and have a predetermined payment schedule.

Because this is a very general type of business loan, it’s important to check with the lending institution you’re working with as language can vary from one to another regarding the loan terms and other specifics.

Similar to unsecured business loans in that they’re a lump sum of cash, term loans may be even more like traditional bank loans. That’s because they typically require some kind of hard collateral such as liquid savings or property.

The upside to this is that these loans tend to be very quick and easy to acquire and you can use the funds for virtually any business need.

Long-Term Business Loans

Long-term business financing tends to be in a category of their own.

None of the medium or short-term business loans we’ve mentioned thus far usually have terms above 5 years, so those loans and other types of business financing that do are unique among business loan offerings for more than one reason.

The most common types of long-term business loans include:

SBA loans

SBA loans are loans offered by the Small Business Association in partnership with a lender.

What makes SBA loans unique is that the SBA guarantees their loans with the lenders it works with.

As a result, lenders are able to pass on lower rates and terms.

SBA loans can have shorter terms, as short as 1 year in some cases. However, they tend to have much longer repayment terms depending on the loan product, lender, and borrower’s qualifications.

Learn more about how SBA loans work.

Traditional banks loans

The most well-known of business loan types, you can still walk down to your local bank branch and obtain a loan. However, although bank loans are insured by the FDIC, they’re not as attractive as they once were.

Since the financial crisis, banks have become much stricter about who they approve and what they require from those that apply.

In addition to this, compared to most private lenders, banks move much slower and require a ton more paperwork. It can take 1+ months just for approval in most cases.

Equity funding

The final type of long-term business funding is equity funding. With equity funding, others invest in your business through a variety of means.

Typically, a firm will hold an investor’s funds for up to 10 years in a variety of stocks (companies of your choice), during which case depending on the type of funding you’ll then either repay the loan (if it’s a crowdfunded loan, for instance) or do nothing if it’s an investment.

Learn more about how equity funding works.

How Term Loans Work

Term loans are a common type of business financing used to solve short-term cash flow issues, such as:

• Getting through a slow season
• Paying for equipment
• The cost of a new hire
• A down payment on a new facility
• Or pay for supplies (i.e. the construction business, where you have to finish a job before getting full payment)

These are just a few examples, but all cases where a business loan could mean the difference between your business faltering or being able to keep on with normal operations (or take a brand new step forward). 

Applying for a term loan is straightforward, but what you’ll need to qualify and apply different greatly depending on the financing vehicle you use (for example, equipment financing vs. a business line of credit) as well as where you apply. 

How to Apply for a Term Loan

The short and medium-term business loan categories include a wide variety of loan types, so application requirements do vary a bit between each.

However, paperwork is minimal and qualification requirements are the same across loan products for the most part.

Here are the basics you’ll need to apply for most types of business loans:

• Short application
• 4 Months of your most recent bank statements
• 4 Months of your most recent credit card processing statements
• Driver’s license
• Voided business check

And here are a few types of documents that may be requested if additional information is needed:

• Most recent business tax return
• Profit and loss statement
• Balance sheet
• Business licenses
• Debt schedule
• Proof of ownership

While more may not be required than the basic documents listed above, it’s best to get everything together that you have just in case. That way, you can expedite the approval process, which will get you your funds quicker.

Get Quick and Straightforward Business Financing from Excel Capital

Each business financing option is somewhat different from one another, with their own unique benefits and trade-offs.

Whether you need something with no minimum credit requirement, something that you can tap into on a regular basis, helps you avoid additional debt, or makes repayment flexible, Excel has a solution for you.

Not sure which type of term loan best fits your needs? Fill out our short application and we’ll help you find out the funding solution that’s ideal for you.

Apply today:

Get the capital your business needs. Apply with Excel Capital: Apply Now