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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.
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.
You can calculate the costs of various amounts of loans at Fundera.
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.
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.