Pros and Cons of Business Term Loans

by | Oct 18, 2021 | Business Finance | 0 comments

Small business owners across the country usually will consider going for financing at one point or another. Maybe times are tough, and you need additional working capital. Perhaps you are considering expansion and need the funds to do so. Whatever the reason, whatever the amount required, there are options out there that can help you get the money you need.

Among the more prevalent business financing solutions are terms loans. What is a term loan for business? A term loan is a lump sum amount of cash that a company receives, which they will have to pay back. The repayment period is generally a set period, and the rate at which you are paying is most often fixed with a term loan. Depending on the type of term loan you get, the repayment period can last a few months, or it may extend to a few years. A term loan is generally the most common form of business funding and is a popular option, especially for those companies working with alternative or online lenders.

As with any financing, there are some things that you will want to consider before applying for and receiving a term loan. While it seems that the benefits of this kind of funding tend to outweigh any drawbacks, doing your research and knowing what you may be getting into before signing on the dotted line is so crucial for the overall financial health of your company. Below we examine some of the pros and cons of business term loans.

Some Term Loan Basics

For those unfamiliar with what exactly a business term loan is, here are a few key things to know about this type of financing:

– Term loan payments tend be equal payments throughout the duration of the loan

– Interest rates vary, depending on loan amount, lender and a business’s overall creditworthiness

– Businesses most often will use these loans for one-off purchases

– Rates for this type of loan product generally fall somewhere in the 7-30% range

Term Loan Pros

Ask most small business owners and they will tell you that term loans can be incredibly helpful in a number of key situations. Below we’ve compiled a list of some of the more notable benefits of this kind of loan.

1) Can be used for a wide range of business purposes

The flexibility associated with a term loan is perhaps the biggest draw for many business owners. As mentioned, for instance, borrowers can use this type of loan to weather the storm during more difficult financial times simply. If you’re a seasonal business, and during the slower months, you are scrambling trying to come up with the money to cover your bills, here is where a term loan could be the perfect solution. Among the other uses for this type of loan are hiring employees, purchasing equipment, expanding your office, rolling out a new product, and launching a marketing campaign. The list is reasonably endless regarding how you might use a term loan.

2) Funding is quick

We should clarify that by saying funding with a term loan is quick as long as you work with an alternative or online lender. In getting the money through a conventional bank, you might discover that the process can take weeks, if not longer. Alternative and online lenders tend to have less stringent criteria, and they also get the money to the applicant fast—sometimes in as little as two days, if not sooner.

3) Can help to build business credit

This is another important aspect of term loan financing. If you are approved for a loan of this nature and make your payments on time, this goes a long way toward establishing a positive credit history and thus helps you build up that business credit. The key again is to pay on time. Late payments or defaults can work against you and hurt your credit score.

4) Can help with an emergency

Most business owners have been there at one time or another…Something happens, something goes wrong, something arises that you were not expecting, and suddenly you need to come up with the cash to address the situation. Using the money you have on hand will all but deplete any reserves. This is where getting a term loan can save you. And given that there are short-term loans available, you are only looking at a few months’ repayment periods.

Term Loan Cons

Just as with any loan, you want to know all terms and conditions. There are a couple of drawbacks to term loans that you want to consider before you apply for one.

1) With a shorter term loan you may pay more

Pay attention to the interest rates when applying for a term loan. You will likely notice that often with a shorter-term loan, the rates can be higher than with other loan products. Make sure that you can comfortably handle the repayment in light of the rate you get.

2) You may have to put down collateral

This will depend on the lender and also on your overall credit history. If for example, you don’t have the best credit score and there are some red flags in your credit history, if you do get approved the lender may require collateral. In the event of a default, this then means the lender can seize the assets pledged to try and recover their losses.

3) Check for prepayment penalties

Again, this will depend on the lender and the loan type and terms. In some cases, for example, with a short-term loan, you may not be able to pay it off early without incurring penalties. If you want to pay the amount off early, check to see what the loan terms stipulate.

First Union Lending Has A Financing Solution For You!

We work with a variety of small businesses across the US. Our term loan programs are fully customized for each individual client—no one size fits all approach with us. Call today and let’s get started!