Should Your Business Apply for a Medium-Term Loan? | Fora Financial
Should Your Business Apply for a Medium-Term Loan?
December 02, 2020

Should Your Business Apply for a Medium-Term Loan?

As a small business owner, opportunities often arise to improve or expand your business. Of course, you don’t always have enough capital at the right time to fund these projects. Fortunately, a variety of business financing solutions exist that allow you to bridge these gaps in cash flow and grow your company.

A popular solution for many business owners is a medium-term loan. This type of financing can be a great way to fund near-term projects while giving yourself flexibility to pay back the loan over several years.

However, this type of small business loan isn’t for everyone, and it might not be the right financing option for you. It’s important to consider all the pros and cons of a medium-term loan to determine whether it’s right for your business.

Everything You Need to Know About Medium-Term Loans:

What is a Medium-Term Loan?

Medium-term loans are business loans offered by banks and alternative lenders. They typically offer fixed interest rates and flexible payback terms that last between one to five years. Depending on the loan, you typically have the option to repay in monthly or bi-monthly installments with no penalty for prepaying. While collateral generally isn’t required, lenders may request a personal guarantee to secure the loan.

When is a Medium-Term Loan Beneficial?

Medium-term business loans are useful when your business is past the startup phase and you need capital to fund an acquisition or other expansion project.

In comparison, short-term loans usually provide a quick injection of working capital and must be repaid within a year. Two popular examples of short-term financing are merchant cash advances and business lines of credit.

With long-term loans, the recipient will be expected to repay the loan over a longer time period.

Medium-term loans, on the other hand, may take one to three weeks to secure but offer longer repayment periods. Typically, lenders offer medium-term loan amounts up to $500,000 with interest rates ranging from 9 percent to 40 percent APR, on average.

In addition, the lender may also charge an origination fee. Since repayment terms can be extended up to five years, the project you’re funding has time to mature and generate the cash flow you need to pay off the loan.


Medium-Term Loan:

Medium-term business loans can be efficient financing solutions for your small business, especially if you’ve been operational for a few year and have a high credit score. They have several advantages over short-term financing, including:

  • Fixed APRs: Medium-term loans typically require a strong credit score and proof that your business is profitable. In return, you may secure a more favorable interest rate that’s locked in over the loan’s lifespan.
  • Larger loan amounts: In general, medium-term financing can give your business access to up to $500,000 in cash in as little as a few weeks. This will allow you to quickly pursue projects and in turn grow your business.
  • Lower monthly payments: Since medium-term loans offer flexible loan terms, you can extend the payback period up to five years and make smaller payments each month.

Medium-Term Loan Disadvantages:

Medium-term loans aren’t without their limitations, just like any type of financing. Several features of medium-term loans may not make them the right choice for your small business, including:

  • Stringent approval process: Since repayment of a medium-term loan can take place over several years, lenders are more likely to scrutinize your creditworthiness. Standard qualifications include a credit score of at least 600 and annual revenues of $25,000 or more. In addition, you must be in business for at least a year before applying. Qualifications vary depending on the lender you’re working with.
  • Longer application process: The application process for a medium-term loan can be time consuming. Lenders often require extensive documentation to ensure that you’re capable of responsibly repaying the loan on-time.
  • Possibility of accrued interest: Depending on your interest rate, extending the payback period several years can result in a good bit of accrued interest. This can make the loan significantly more expensive than a short-term business loan with comparable terms.

Conclusion: Ask Yourself If You Pursue a Medium-Term Loan

This type of small business loan can be a great solution to finance your next growth project, especially if you need a large amount of capital and flexible repayment terms. Still, these loans are most appropriate for established businesses with good credit. It’s important to evaluate all options to determine the best choice for your small business. In some cases, a short long-term loan might be a better option for your situation.

Have you utilized medium-term financing for your small business? Tell us about your application experience in the comment section below!

Editor’s Note: This post was updated for accuracy and comprehensiveness in December 2020.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].