How to Choose the Best Type of Business Term Loan for You
Ezra Cabrera | September 4, 2019
A business term loan is the most popular form of financing. In fact, it’s the first thing that comes to mind when people think about taking out a loan. Whether you need to renovate your office, purchase equipment, or additional working capital, a term loan can provide you with the funds needed to grow your business.
Business owners can apply for term loans from banks, credit unions, and online lenders. There are three types of term loans: short-term loans, medium-term loans, and long-term loans. The type of loan you choose ultimately depends on the needs and goals of your business.
1. Short-Term Loans
The repayment terms for a short-term loan are between six months to a year, depending on the lender. This makes it ideal for small businesses that need quick access to working capital to fund immediate needs. Other benefits of short-term loans include access to funds to build inventory in preparation for peak seasons; improve credit, which helps you qualify for larger, less expensive loans. Short-term loans have higher rates of approval because there’s a greater chance that borrowers will pay back the loan. More often than not, you don’t have to put up collateral for short-term loans.
Benefits of Short-Term Loans:
- Fast Funding: If you need immediate access to funding, short-term loans are your best bet. It requires less paperwork and has a shorter waiting period compared to traditional bank loans.
- Higher Chances of Approval: Short-term loans are typically offered by alternative lenders. Since online lenders assume most of the risk, it’s easier to qualify for a short-term loan.
- Simple and Convenient Application Process: Alternative lenders offer a quick and simple application process. All you have to do is to fill out an online form, wait for the lender’s response if you qualified or not, and if you did qualify, you’ll receive the money as soon as possible.
2. Medium-Term Loans
Medium-term loans have repayment terms of one to three years. Most borrowers use them for business assets that generally last for a few years, such as electronics, rather than long-term investments like properties. While short-term loans are usually for everyday operating costs, medium-term loans use them for capital expenses (equipment, machinery, commercial vehicles, etc.). The amount you can qualify for is greater than short-term loans, but approval can be challenging. Additionally, you will need collateral and/or a personal guarantee to secure the loan.
Benefits of Medium-Term Loans:
- Higher Loan Limits: Compared to short-term loans, medium-term loans have higher loan amounts. Lenders can give borrowers up to $500,000 in cash within a few weeks.
- Lower Monthly Payments: Medium-term loans are flexible. Aside from having higher loan limits, repayment terms can extend up to five years. The longer the repayment term, the smaller the monthly payments.
- Fixed APRs: To qualify for a medium-term loan, lenders often require a strong credit rating and profitable business. In return, lenders can grant you favorable and fixed monthly APRs. Having a fixed APR allows you to effectively budget your finances.
3. Long-Term Loans
For long-term loans, repayment terms often range from three to ten years or even more, depending on the lender. Unlike short-term loans, you need collateral to secure the loan, such as commercial property, inventory, equipment, or a combination of assets. It’s tougher to qualify for a long-term loan and the process takes longer compared to the other two. You’ll also be asked to submit financial statements and other documents that support your business claims.
Experts say that it’s better to use long-term loans for long-term business investments. For example, if you own a printing press, you can use the funds from a long-term loan to purchase new commercial printers.
Benefits of Long-Term Loans:
- Longer Repayment Periods: Obviously, long-term business loans have longer repayment terms. Repayment terms for this type of loan can last from two years or until 25 years.
- Lower Monthly Payments: As mentioned, longer repayment terms would mean lower monthly payments.
- Lower Interest Rates: Compared to short-term and medium-term, it’s harder to qualify for a long-term loan. Lenders need to make sure that the borrower is capable of paying the loan before they grant it. If you do qualify, you’ll likely enjoy favorable interest rates.
Which Type of Business Term Loan is The Best for Your Company?
At the end of the day, the answer to this question depends on the needs, goals, and capabilities of your business. Remember, you should only borrow enough money to take your business to the next level. Prior to applying for funding, be sure you can repay any loan you have been approved for.
If you can’t decide which loan is right for your business, it’s best to speak with a financial expert. They can work with you to assess your business’ financial standing, as well as your goals as a company. In this way, they can help determine which type of business term loan would work for you.