Should Your Business Apply for a Medium-Term Loan?
A popular solution for many business owners is a medium-term loan. Medium-term loans can be a great way to fund near-term projects while giving yourself flexibility to pay back the loan over several years.
However, they’re not for everyone. It’s important to consider all the characteristics 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 have fixed interest rates and flexible payback terms that last 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 Needed?
Medium-term loans are great options when your business is past the startup phase and you need capital to fund an acquisition or other expansion project. Short-term loans usually provide a quick injection of working capital and must be repaid within a year. Medium-term loans, on the other hand, may take one to three weeks to secure but offer longer repayment periods.
Typically, medium-term loans generally offer loan amounts up to $500,000 and have interest rates ranging from 9 percent to 40 percent APR, on average. 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 Advantages:
Medium-term loans can be efficient financing solutions for your small business, especially if you’ve been in business for a few years or more and have a high credit score. They have several advantages over shorter-term alternative loans, 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 loans can give your business access to up to $500,000 in cash in as little as a few weeks, allowing you to pursue projects that may take your business to the next level.
- Lower monthly payments: Since medium-term loans offer flexible repayment 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. Several features of medium-term loans may not make them the right choice for your small business, including:
- More 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 lender.
- Longer application process. The application process for a medium-term loan can be time consuming. Lenders often require extensive documentation in support of your financial capacity to repay the loan.
- 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 loan with comparable terms.
Conclusion: Should You Apply for a Medium-Term Loan?
A medium-term 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.
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.