Tech startups are often focused on a variety of high-profile funding options to help get their small businesses off the ground.
Angel investors, incubators, and accelerators are sought-after sources of seed money for very early-stage companies. Raising a Series A round from venture capital investors is often seen as the next goal after those, with little consideration as to whether that funding structure is the most advantageous.
While entrepreneurs know there are other financing solutions, such as from banks and online lenders, they often don’t consider them promising options. However, a term loan can be an excellent way to get your small business off the ground, whether you’re the hottest new tech startup or a mom-and-pop corner store.
What is a term loan?
A term loan in business terms is a loan that is repaid in regular payments over a predetermined timeframe. Upon securing a term loan, a business receives a set amount of money that is borrowed and that must be paid back over the predetermined amount of time at a set level of interest. Typically, the payments will consist of a fixed monthly principal amount, plus all interest that was earned on the loan balance during the prior month.
Furthermore, with a forward commitment, businesses will know it will be able to draw additional capital and have the assurance that there’s more in the future, without paying interest until the money is needed and drawn.
What is a forward commitment?
A forward commitment is a contractual agreement in which the lender agrees to fund up to a specific additional amount of principal after the initial funding commences through one or more draws within a defined time horizon.
The forward commitment terms are agreed upon at the time of initial funding and outlined in the initial loan documents. There may be specific criteria, typically financial thresholds, necessary to take the additional draws.
This varies from the typical follow-on structure where there is no guarantee of a future loan and any pricing or amount are not specified. It also varies in that it doesn’t require an updated underwriting approval to have the funds issued, assuming no material adverse condition occurred.
The advantage of term loans
Term loans have the advantage of being predictable. Borrowers don’t have to hit a certain growth trajectory to manage the loan; instead, they just need to make sure they can comfortably handle the monthly payment at the time they borrow. The straightforward nature of term loans is also easy for borrowers to understand and feel comfortable with, unlike more complex lending methods such as equity financing.
This type of borrowing is good for businesses with predictable monthly revenue, since a standard monthly payment is due each month. Those with highly variable income may find other types of funding for small businesses, such as revenue-based financing, to be more advantageous.
Who provides short term business loans?
Banks are the traditional purveyors of short term business loans, including term loans backed by the Small Business Administration (SBA) that can be particularly accessible to startups and other small businesses. In recent years, the term loan space has also become increasingly crowded with online lenders who often provide extremely fast and accessible lending but tend to charge higher rates for the service.
Despite the competitive nature of the lending field, banks and online lenders often don’t make a good fit for SaaS businesses. In fact, Lighter Capital CEO, BJ Lackland, has gone so far as to say that banks “hate” SaaS companies.
“To a bank, IP is hard to value and nearly impossible to liquidate,” he writes. “The bankers will smile and politely refuse to lend against it.”
So what’s a SaaS startup with a hankering for a term loan to do?
Tech startups that plan to use term loans as their primary mode of borrowing seem to be left out in the cold.
The Lighter Term Loan
That’s why Lighter Capital recently launched its Lighter Term Loan, which is set up to provide tech startups and other small businesses up to $3MM in debt capital. The Lighter Term Loan comes with a traditional funding structure and many of the same benefits of other Lighter Capital financing solutions, allowing entrepreneurs to retain ownership and control of the business without requiring personal guarantees or board seats. A Lighter Term Loan is very similar to revenue-based financing, however, term loan payments are fixed and predictable.
And with a forward commitment, startup founders will be able to draw additional capital (a larger loan) in the future. As a non-dilutive borrowing option, the Lighter Term Loan is a low-cost alternative to equity and traditional venture debt.
How to get a business term loan
If you’ve found a bank or online lender that seems like a good fit for your needs, then the application instructions should be clear and straightforward. You’ll need basic information about your business, as well as some solid financials.
The SBA recommends preparing a business plan, an expense sheet, and financial projections that cover the next five years. You’ll want to have a clear justification for how much you’re asking for and why you need it.
To apply for a small business term loan from Lighter Capital, start by connecting with our investment team – or have a look at our startup financing solutions to learn which options will get your business to the next level. Our application process is fast and straightforward; we work using proprietary algorithms that allow us to vet applications based on your data, and can provide you a term loan in as little as 10 working hours.
Once you’ve received your term loan — whether from us or another lender — your repayment begins right away and continues each month predictably until the end of the agreed-upon term. For many businesses, including SaaS innovators, this traditional type of funding is all they need for a solid start.
Seeking a small business term loan? Be sure to compare financing solutions
Download our 30-page eBook in which we explore the changing landscape of tech startup financing, highlighting the growing trend of alternative financing options like revenue-based financing. This industry report is intended to educate entrepreneurs, early-stage investors, startup board members and industry observers about this emerging form of financing.