June 21, 2021

Should Your Business Apply for a Medium-Term Loan?

As a small business owner, opportunities often arise to improve or expand your business. However, you may not have enough capital to fund these growth projects.

Fortunately, there are a variety of business financing solutions that can help you to bridge these cash flow gaps.

A popular solution for many business owners is a medium-term loan. This type of financing can be used to fund near-term projects, and you'll repay the loan over several years.

However, this type of small business loan isn’t the right financing option for everyone. Due to this, you should consider the pros and cons of a medium-term loan to determine if it’s right for you.

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 program, you typically have the option to repay in monthly or bi-monthly installments. In addition, these loans usually don't have prepayment penalties.

While collateral generally isn’t required, business lenders may request a personal guarantee to secure the loan.

When is a Medium-Term Loan Useful?

Medium-term business loans are useful if 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. Typically, long term financing will need to be repaid within five to seven years.

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

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

Medium-Term Loan:

Medium-term business loans are beneficial if your business has been up-and-running for a few years and you 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 business funding. In some cases, medium-term loans may not be the right choice for your small business:

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 business lender that 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 significant accrued interest. This can make the loan significantly more expensive than a short-term business loan with comparable terms.

Conclusion: Consider the Pros and Cons of a Medium-Term Loan Prior to Applying

This type of small business loan can be a great solution to finance your next growth project. If you need a large amount of capital and flexible repayment terms, it may be worth pursuing.

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.

Editor’s Note: This post was updated for accuracy and comprehensiveness in June 2021.