When looking into all your financial options when opening your own business, one option you may look into is what is known as a term loan. This loan allows you to receive the necessary funds immediately. Many use these loans to purchase essential equipment, a property for their business, or a marketing campaign.
Before getting a term loan, you will want to consider all the pros and cons of applying for this specific loan for your business. Then, evaluate each of them as it relates to your company and decide whether the benefits outweigh the disadvantages.
The Pros
The first benefit of a term loan is that they have a predictable payment schedule. Because of the precise loan amount given out, there is a specific timeline for when you need to pay it back. So, you will have a clear idea of when your payments will be unless you have a floating interest rate.
A second pro to having a term loan is the possibility of repaying the loan early. When you first apply for the term loan, you will have a loan agreement that guarantees you can repay your loan early without any additional penalty. This way, your interest expenses are reduced, and applying for a different loan will be possible.
Finally, term loans are known for their lower interest rates. They may not be as long as a long-term loan, but in the end, with how much time it takes to pay back a long-term loan, you will end up paying more in interest. For a term loan, to keep the interest rates low, you will want to find the right balance of keeping your total interest paid and monthly payments as low as you can.
The more research you do, the better your outcome. Reputable term loan companies with a good track record, such as Lendio, make agreements, repayments and interest rates easy to manage.
The Cons
Meanwhile, there are also cons to a term loan. The first is the inflexible repayment schedule. While the predictability may be pleasant to some, the inflexibility may burden others. This is especially true if there is a strict early repayment policy. Whether or not you have the funds does not matter. However, you are expected to pay the balance on the date set. This can make it difficult for those struggling to pay the term loan back if their business is not doing as well for a time.
A term loan also has rigorous eligibility requirements. If you are opening up a small business, the most considerable risk to getting a loan is the possibility of your credit score being at risk. Your credit score is especially at risk because of how large term loans tend to be. This creates a significant downside along with their eligibility prerequisites. Granted, online lenders tend to be less strict than traditional banks, but either way, you will need exceptional credit history to qualify for a term loan.
The final con for a term loan is the potential for a slow funding period. The application process alone can take weeks to unfold. Once it does that, the business lender must finish other internal processes that may delay funding even more. There have been some cases where it only took a few business days, but most lenders have a drawn-out qualification procedure. Therefore, if you are pursuing a term loan, you need to be ready to wait for the funds to come your way.
Conclusion
It is important to note that these pros and cons all apply generally. For example, although there is a wide variety of term loans, they tend to be approved more often by online lenders and can fund them faster than traditional banks and credit unions. Similarly, online lenders tend to charge higher interest rates than banks and credit unions.
No loan is created equal. The amount you need, the time to pay it back, the type of lender you choose, and various other details seriously affect eligibility for a term loan’s criteria. In the end, you need to determine whether a term loan fits your business.
