If You’re Considering a Medium-Term Loan, Read This First
Whether you are dreaming about owning a small business or if you have already started making that dream a reality, you have most likely dreamed (or maybe had nightmares!) about financing.
As a savvy business owner, you may even have started doing your research on the seemingly endless types of business loans out there. A traditional type of business loan you may have come across is the “term loan.”
Term loans are a great option for small businesses looking for a traditional loan with a set repayment time frame and set payments. The type of term loan that you can receive will vary based upon credit rating, cash flow, and many other factors.
While definitions vary, a medium-term loan is generally regarded as a loan with a payback period of about 1-5 years. Let’s look at a medium-term loan example.
A Medium-Term Loan Example
Maria of Maria’s Deli wants to purchase new kitchen equipment, including a new meat slicer, meat grinder, and a new refrigeration unit. All of the upgrades to her kitchen will cost her approximately $15,000. Maria applies for and receives a medium-term loan with a 9% interest rate and a 3% origination fee. Maria will need to pay the loan off in four years, so her monthly payment will be $373.28. The cost of the loan or interest is $3,367.23, unless Maria pays off the loan early.
Because of the flexibility and the ease of regular set payments, term loans are the most popular type for small businesses. A word of caution though, if you have bad credit, you may be required to put up collateral to receive the loan. If you don’t meet your responsibilities in paying back the loan, you may lose your collateral. Also be sure to talk with your financial institution about any penalties or fees that might be associated with the loan. Don’t be caught unaware and have to pay unexpected fees.
Let’s take a look at some advantages and drawbacks of medium-term loans.
Benefits of Medium-Term Loans
- Set Monthly Fees — Regular fees can be a great thing for businesses that are trying to budget for fixed costs.
- Fixed Interest Rates — Having a set interest rate on a loan helps a business owner to know exactly what that loan is costing them.
- Improved Credit Score — Receiving and successfully paying off a term loan will improve an owner’s credit score. As they move forward with their business, they will be more likely to get additional loans.
- Many Uses Covered — Term loans can be used for a variety of business purposes and, therefore, can be a business’ best friend.
Drawbacks of Medium-Term Loans
- Longer Application Process — Because a term loan is a great resource for business owners, there are a lot of hoops to jump through to get one. The application process can be tedious.
- Inflexible — If you don’t have great credit or cash flow, the interest rates and other terms can be less flexible. They may also require collateral.
- Penalties — Term loans can also have penalties so be sure to speak with your lender so you are aware of all your obligations.
As a small business, you may find that term loans like the medium-term loan are a great option when it comes time for expansion. Remember that your credit score will favor heavily in your loan terms. Talk all of your options over with your lender to be sure that you are getting the best deal for you.
Have you ever applied for a medium-term loan? How was the application process? Would you recommend this type of loan over another to other entrepreneurs? Tell us in the comments.
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