In reality, bank term loans are often short-term, but because they are renewed over and over, they become longer term loans. Bankers prefer self-liquidating loans where the use of the loan money ensures an automatic repayment scheme. Most term loans are in amounts of $25,000 or more. Many have fixed interest rates and a set maturity date. Payment schedules vary. Term loans may be paid monthly, quarterly, or annually. Some may have a balloon payment at the end of the term of the loan.
Types of Term Loans
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The American Bankers Association generally recognizes two types of term loans. The first is the intermediate term loan which usually has a maturity of one to three years. It is often used to finance working capital needs. Working capital refers to the daily operating funds that small business owners need to run their businesses.
Intermediate term loans can also be used to finance assets such as machinery that have a life of around one to three years, such as computer equipment or other small machinery or equipment. Repayment of the intermediate term loan is usually tied to the life of the equipment or the time for which you need the working capital.
Intermediate term loan agreements often have restrictive covenants put in place by the bank. Restrictive covenants restrict management operations during the life of the loan. They ensure that management will repay the loan before paying bonuses, dividends, and other optional payments.
Long-term bank loans
Banks seldom provide long-term financing to small businesses. When they do, it is usually for the purchase of real estate or a large business facility. The bank will only lend 65% - 80% of the value of the asset the business is buying and the asset serves as collateral for the loan.
Other factors that small businesses have to deal with in bank loan agreements are interest rates, creditworthiness, affirmative and negative covenants, collateral, fees, and prepayment rights.
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