Term loan is mainly used as a working capital during a particularly busy season or for the purchase of new equipment & machinery. Such kind of loan can also be used for the purchase of more expensive equipment, or for an expansion or re-structuring of your existing setup, Term loans can be used to start up a business, open a second location, or make significant capital improvements it is offered for period of 5 to 7 yrs

Obtaining the term loan is a bit more challenging. Typically, banks lend money to businesses that already have money, which makes it very difficult for a new business to secure a term loan.

The big question that a lender wants answered is, What can you offer in collateral for the loan? in general an established business can put up accounts receivable, property, or equipment as collateral. While lenders will also look at the credit history of the borrower and/or the business. For the small business that is a sole proprietorship or partnership and is not yet established (and unable to put up collateral), the responsibility to repay the loan will fall on the owners, who will likely be asked to provide a personal guarantee. It is therefore very important that before signing such a guarantee, you carefully determine what the loan is for, how it will benefit the business (from the perspective of increased profits), and how you could repay the principal if you had to.

Applying for a term loan can be a time-consuming process. Typically you are asked for following details:

• Financial statements for past 3 years
• Tax returns for the past 3 years
• document of collateral you want to provide
• Incorporation papers if your business is a corporation
• A personal guarantee for a new business, or if the collateral provided is insufficient
• Your business plan with projection for 3 years

Personal investment made till date in your business is more important in acquiring loan. Banks are more apt to give loans to business owners who have invested their own money in their business and are therefore less likely to default on the loan.

Banks look very closely at the borrowers credit history, much in the same manner that they evaluate a potential borrower for a home loan or mortgage loan. If you have a good loan history and have repaid it quickly, it opens the door to obtaining other such loans much more easily, as you build up your credit rating and establish a relationship with the lender.

Term loans can be advantageous because you will have liquidity and greater financial flexibility while preserving your working capital. However, you must stay on top of the payment schedule. You will also want to be aware of all fees involved, which should be about 1 percent of the overall loan. Review in advance all the loan terms, including what fees will be charged. This will help you when shopping around for a loan and comparing not only interest rates, but overall term loan packages as well.

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