Editor's note: In the video Brian describes ClearValue Lending as offering these products and shows an approval-probability tool. ClearValue Lending is an education and comparison platform: a request goes to the funding partners whose requirements it fits, and they make every credit decision. Today's self-check is the no-credit-pull funding readiness check, which does not predict approval.
So right now, like I'm talking about this very moment. You may not need a small business loan, but that's actually the best time to learn about this critical information because it could make or break your small business in the future. And I'm telling you this as you know from one business owner to another. And this is coming from someone that thought that I would never need financing for my small business, but of course I ended up needing it. But when you end up needing that money in the future for your business and your livelihood depends on it, then time is going to be of the essence.
And just knowing this critical information ahead of time is going to be so helpful. And it's going to help you answer these questions like should you get a term loan, a line of credit, an MCA, or something else. You know, what's your best option and how do you get one?
Now, in today's video, we're going to focus on business term loans, which in my opinion is a really good option. you know, how they work, the pros and cons in comparison to other types of loans and financing, how to qualify, and where to get the best terms. And I just want you to know from the start that I'm going to be very fair and honest and give you a proper assessment of the business term loan. Like, I'm not going to be biased because I have a lending company. We help small businesses get financing. And we offer term loans, lines of credits, SBA loans, and MCAs.
So, we offer all of them. So basically, I'm not going to try to persuade anyone which one, you know, what type of financing is better or worse. I just want people to get the type of financing that best suits them. So I'm just going to tell it to you like it is without an agenda. Okay?
So what is a business term loan? And I'll explain it to you like this. With a term loan, you receive a lump sum of cash and then you pay it back in regular fixed payments over a set schedule. So you can think of it like a mortgage payments or an auto loan. So this is as opposed to a line of credits or a credit card where you just borrow as needed. So a typical term loan might last one to five years, but some can be as short as 3 months and others may go up to 25 years. And also you can generally pay off a business term loan early. Okay.
What do small businesses use a term loan for
watch from 2:07
Now, what do small business owners generally use a term loan for? So this is a great question. So term loans are great for one-time investments or big ticket purchases and these are common reasons. So buying equipment, renovating or expanding a location. So when it comes to hiring, this is usually for growth purposes. So expansion also for buying real estate, consolidating debt, and restocking inventory before like a busy season. All right.
Term loan vs line of credit vs merchant cash advance
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Now, let's see how the term loan compares to a line of credits and a merchant cash advance, an MCA. So, if your top priority is flexibility, then honestly, you would be better off with a line of credit because with a line of credit, you could draw on it like you could borrow the money, you know, when you need it, as you need it. So, I just want to think I just want you to think about it practically like what's the point of getting a term loan and receiving a large amount of cash that you don't need, you know, at the moment and paying interest on it, then that would be, you know, a bad move.
Now, here's another situation that I want you to think about. If your business needs money as quickly as possible, so we're talking about the speed of funding, then a merchant cash advance, so an MCA would be your quickest option. So from application to funding, the term loan is generally going to be a slower option. Okay, so a term loan is not the most flexible and it's not going to be the quickest way of getting funding either. However, a term loan will generally have the lowest cost of financing. So in other words, the interest rate will be lower. So essentially, it's a give and take. Like you can't have the best of all worlds.
So, if you want your money fast, you know, with an MCA, then you're going to have to pay a higher financing cost. If you want more flexibility with a line of credit, then you're going to have to pay a higher interest rate. And as mentioned, with a term loan, you pay it back in regular fixed payments over a set schedule. And a term loan is best for making planned one-time and larger investments.
Okay. So, I would summarize the pros and cons of a business term loan as such. So, you're going to have lower interest rates, which is very straightforward. That's going to be a huge benefit. But there's also that aspect of predictability, which is great for planning things out because of the fixed payment schedule. Large loan amounts are going to be available. And of course, just having a term loan, you know, and making the payments on time is also going to build your credit. Now, the cons include a tougher qualification to get a term loan in comparison to other types of financing. It's not going to be as flexible as the repayments start right away. It may require collateral and prepayment penalties are possible.
Now, as a review and just to make sure that you get it because again, we're doing this for planning purposes. I want to give you a quick pop quiz. You tell me which one is your better option. So, here's a scenario. Like if you need cash as quickly as possible, like an emergency, you tell me which is better, a term loan, a line of credits, or a merchant cash advance. So in that type of situation, a merchant cash advance or an MCA would be your best bet because you want speed of funding. If that's your top priority, then an MCA is going to be your quickest option.
Now, let me run this scenario by you. So, let's just say that you need or you want a cash cushion for your business just in case. So, which is going to be better, a term loan, a line of credit, or an MCA? It's going to be a line of credit because in this situation, this is not something that you plan for, and there's just going to be so much uncertainty around this type of situation. Now, in this type of scenario, let's just say that you're buying a building. you know, which is going to be better, a term loan, a line of credit, or an MCA.
So, in this situation, it's going to be a term loan because you're going to want the predictability of the payment schedule and also the lowest interest rate possible. So, if you know what you need, a term loan is often going to be the most affordable and best option for you.
Now, a very good question, this is very important, is where can you get a term loan for your small business? So, I'm going to give you your main options, and each of these are going to have their pros and cons. So, you can get a term loan at a traditional bank. So, we're talking about your Chase or Bank of America, Wells Fargo, etc. If you go with a traditional bank, you're generally going to get a lower interest rates. However, the requirements, they're going to be stricter to qualify and it's also going to be a slower approval process. If you want to go with a credit union, you certainly can.
And generally, I understand that this could be subjective. A credit union in this case may offer a better service experience. Now, if you want to go with an online lender, again, there's pros and cons. So, with an online lender, you're going to have a faster approval process and it's going to be easier to qualify for. However, generally, the rates are going to be higher. Now, if you want to go the SBA route, like with an SBA lender, then the benefit is that it's going to be government-backed and you're going to get competitive rates. And I've dedicated a video about SBA loans. But the issue is the biggest issue is that the processing time is just much longer.
But listen, I'll tell you this. If you don't know where to begin with this whole process, like the first thing I would do, the absolute first thing would be to make sure that your business qualifies to receive a term loan.
Make sure your business qualifies
watch from 7:40
So, you can come to my website and we made a custom-made free tool, absolutely free, and you can check out your probability of getting approved for a business loan for the amount that you want. So, come check it out. It's really cool. It's easy to use. Again, it's free and I'm going to leave a link for you down below.
But here's what most lenders look at when you apply. So, they're going to look at your credit score. So, banks generally want to see a credit score, your personal credit score of 680 or above. Online lenders might accept lower scores. So, it's typically going to be a minimum of 600. So, 600 plus. They're going to want to see annual revenue from your small business. So, most lenders want to see at least $100,000. So, 100K or more. Online lenders, they're generally going to have a lower threshold. Again, it's, you know, give and take. They're also going to look at your time in business. So, banks want to see two plus years.
Online lenders may accept, you know, as little as 6 months. Now, when it comes to cash flow, yes, they're going to want to see cash flow. Lenders want to see proof that you're going to be able to make the payments. And for collateral, so some loans will require it, especially for bigger amounts.
You know, equipments, inventory, or real estate can be used as collateral. Now, when it comes to the documents that you're going to need to present to receive the loan, it's going to be pretty standard. It's not going to be as thorough as like an SBA loan, but it's pretty standardized stuff. Now, I just want to conclude with this advice.
If you ever plan on getting financing, there are a few smart things that you can do right now. And again, that's even if you're not applying today. So, the first thing is please avoid overdrafts and negative ending balances. So, lenders are going to look at your business bank statements, right? And if they see low balances or frequent overdrafts or, you know, you being in the red, you know, your account balance, and that's going to be a huge red flag. So keep your account healthy and even a small cushion in your bank account it can make a big difference. So the second thing is that you don't want to procrastinate.
You don't want to wait till the last you know moment and wait until it becomes an emergency for you to get that money. If your business is in a cash crunch then your your business is going to look riskier and then you're going to either get rejected or you're going to get worse terms. So the best time to apply is when things are more stable and that's when you're going to have leverage. And the third thing that you can do is to build your credits. So this one move can give you access to better rates, bigger approvals, and more options. And trust me, you don't want to be fixing your credit when you are really in need of that money.
So start setting yourself up now so when the time comes, you're going to be good to go. You're going to be ready. So that is your introduction to the small business term loan. I've already made separate videos covering other financing options for your small business. And again, I just want to make sure that you're getting the appropriate type of financing that best suits you and your business. So, please subscribe. I thank you for the support and I wish you a very nice [day].
