The Pros and Cons of Term Loans

Term loans are much like a personal loan. You take out a fixed sum of money at a specified interest rate — either fixed or variable — and then repay the loan amount in monthly installments.

Many businesses can make great use of term loans, but they certainly aren’t for everyone.

Let's get started.

The Pros and Cons of Term Loans

Term loans are much like a personal loan. You take out a fixed sum of money at a specified interest rate — either fixed or variable — and then repay the loan amount in monthly installments.

Many businesses can make great use of term loans, but they certainly aren’t for everyone.

Our goal at BCC is to ensure you get the best funding vehicle for your business. Of course, you’re likely too busy running your business to spend hours researching term loan details and jargon. 

To that end, we’ve compiled a list of the pros and cons of term loans. If you feel that a term loan could be right for you, please reach out to us. 

The Pros of Term Loans

  • Large Amounts Available

Term loans have long repayment times. You might be able to access a significant amount of capital by taking out a term loan.

  • Types of Interest Rates

Many term loans offer fixed interest rates. Locking in a solid rate keeps payments predictable and saves you money, should overall interest rates begin to climb.

However, others have variable interest rates. If overall interest rates are declining, variable interest rate loans can save you money.

  • Predictable Monthly Payments

Term loans have fixed monthly payments, making them easy to work into your budget. You can plan for your monthly payments for the loan’s entire life.

  • Ease of Building Business Credit

Thanks to payment predictability, term loans are an excellent method for a business to build a credit history. This will pay off in the future when you need larger loans for growth and expansion.

  • Available for a Variety of Uses

You can use your term loan for a wide range of activities, from purchasing more inventory to investing in new projects to refinancing other business debt.

The Cons of Term Loans

 

  • High Credit Requirements

Term loans require a high credit score. Strong financial data may work if your credit score isn’t great, but you’ll likely be stuck with a high interest rate.

New companies without an established history — such as startups — could have a tough time securing any term loans, let alone one with an affordable interest rate.

Fortunately, startups have plenty of other options. If you can’t get a term loan for your startup, BCC can help you find another financing source that fits your business.

  • May Require a Personal Guarantee

A personal guarantee is an agreement under which you, as an owner of the business, will be held personally responsible for business debt.

In other words: if your business can’t pay the term loan, you have to tap your personal funds to cover the debt.

  • Less Flexibility Than a Credit Line

Terms loans are flexible in terms of what you can use them for. However, you don’t have as much flexibility in access and repaying them as you do with credit lines.

With a credit line, you can spend as much as you need (up to your credit limit). As long as you pay down your credit line, you can continue to access more funds.

  • The Application Process

Banks often take days to get back to you about your application. When you need funding fast, the speed of the approval process may not cut it.

  • Industry Restrictions

Banks have to weigh the riskiness of your business against their return. If you operate in an industry the bank deems to be risky, they may deny your application.

Is a Term Loan Right For You?

Overall, term loans are best for more established businesses. Banks like to see strong credit and healthy financials — two types of data that younger firms may struggle with. Even if you have the data available, you have a business to run — there isn’t time to analyze different financing options.

Whether you’re a startup or an established enterprise, BCC can help you get funding that works for your business. By analyzing your financials and working with you to understand your business better, we can match you to the perfect source of funding — whether or not that’s a term loan.

We’ll handle the stress and tedium of the application process so you can get back to growing your business. Schedule your free 30-minute consultation with Business Capital Consultants today.

 

Business Capital Consultants is here to help if you aren’t sure which short-term financing source is right for you. We’ll deal with the paperwork and phone calls for you so you can get the funding you need without wasting valuable time.

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