Term loans vary in amount and length of repayment; even various lenders approach term loans differently. In this post, we’ll weigh the pros and cons of term loans so you can decide if term loans are right for your business.
When looking for a large, lump-sum injection of cash into your business working capital, term loans can be a viable funding option for businesses of any size to take the next big step in business growth. However, many kinds of term loans are only offered to businesses which have been profitable for some time.
Carefully weighing the pros and cons of a term loan and evaluating it in the context of your business goals can help you understand if a term loan is suitable for you.
The Pros and Cons of Term Loans
Before pursuing a small business loan, you should review the most notable pros and cons. That way, you can determine what most lenders that offer term loans expect and determine if this is the right funding option for you.
The Pros of Term Loans
1. Predictable Repayment Schedules
A term loan traditionally means you receive an unchanging amount that must be repaid on a pre-defined schedule. Depending on your lender and the details you have negotiated, this can be monthly, weekly, or even daily repayments.
Merchant cash advances, by contrast, don’t offer repayment predictability. With a cash advance, you’ll receive a loan that your business repays based on its fluctuating daily sales.
For some business owners, having a predictable repayment amount and schedule can help with financial projections, operational planning, and budgeting.
2. Pay off a Term Loan Early
In most cases of a term loan, early repayment without penalty is possible, depending on the terms you agreed to with your lender. Early debt repayment means you pay less interest over time and can help you get another loan if needed. Short term loans usually work to pay off the balance of debt quickly without spending so much on interest fees.
The flexibility to repay loans earlier allows you to restructure repayments and pay less monthly in case your interest rates decrease.
3. Lower Interest Rates & Repayments
Longer term loans offer lower interest rates, but it is balanced by the amount accrued over time.
Though you’ll be paying more in total interest over time, your scheduled payment amounts will be lower, which gives you more cash flow to work with.
It is essential to work with your lender to find the right balance between regular payments and total interest paid to ensure you’re getting a term loan that works for your business.
The Cons of Term Loans
1. Rigid Repayment Schedules
At the cost of having a predictable repayment schedule comes inflexibility. Unlike invoice factoring funding solutions, which means you are settled up when your customer pays their balance, term loans are owed until every last penny is repaid by you.
With term loans, you are expected to pay on time, regardless if your business is doing poorly that month. If this repayment structure isn’t viable for you like if you run a seasonal business, consider merchant cash advances. Instead of a fixed repayment schedule, you remit payment for an MCA based on your credit or debit sales volume. That way, your repayments increase and decrease when sales grow or diminish.
2. Difficulty Getting
Lenders are warier to approve smaller, newer businesses because of the usually more significant amounts involved in term loans. Even non-traditional lenders have higher eligibility criteria for businesses to be approved for a term loan.
Having good credit (a minimum FICO score of 600+) is what banks and online lenders look for in approving a business. Otherwise, building your credit might be the first step before securing business financing.
3. Slower Funding Times
The application process and lender background checks usually take longer than other loans. In many instances, it can take a few business days for you to receive funds, sometimes longer.
While this delay in term loan funding is typical across the industry, we suggest you do the research and ask various lenders how long their process generally takes before funding.
Is a Term Loan Right for You?
While the above pros and cons are a generalization of how lenders approach term loans, there are many variances from lender to lender. Speak to your lender about your interest rate, repayment amount, early repayment option, and approval process times.
If you’re considering a term loan, compare your options between a few lenders and hear them out so you can select the most beneficial term loan for your business growth.Find out how Capital Quickly can help your business secure term loans by calling 1-888-709-7446 or emailing us.