Apply for a Medium-Term Loan for Your Business

Capital requirements pop up every now and then, invariably creating problems for businesses from time to time. New businesses require financial support to establish themselves while existing ones require capital for buying new machinery and equipment, renovation, paying off loans, managing cash flows, and for several other reasons. All such capital requirements can be fulfilled by opting for a Business Loan. It is one of the most easily accessible means available for raising capital to meet such business requirements. 

Business Loans include term loans. In an ever-changing business environment, financing options for term loans may seem confusing and getting the right one can be a very difficult task. In this article, we’ll cover some things you should know about term loans: 

What is a Term Loan?

A term loan is a financial instrument that provides a lump sum amount based on predefined borrowing terms. The borrower and lender agree on a fixed schedule for repayment with interest rates either fixed or floating. The maturity date of these loans is predetermined, and businesses frequently use them for the purchase of fixed assets. These loans offer greater flexibility and have comparatively lower interest rates. This article explains what is term loan.

Types of Term Loans 

Depending on the tenure of the term loan, it can be classified as 

  • Short-term Loans: Short-term loans are usually given for less than a year. These come in handy for businesses that do not have a line of credit. The main purpose of these loans is to manage cash flow problems or to maintain positive cash flows. For example, these loans can be used to pay wages to workers. 
  • Medium-term Loans: Medium-term loans range between 1 to 3 years. The monthly installments for these loans are arranged using the cash flows generated by the business. These loans are also referred to as intermediate-term loans and deal with large sums of money. This type of loan can include capital expenditure on machinery or equipment. 
  • Long-term Loans: A loan for more than three years is a long-term loan. Long-term loans generally require collateral along with fixed monthly or quarterly payments. This type of loan can be availed for purchasing high-value fixed assets such as lands or buildings. 

When the tenure is long, the equated monthly installments (EMIs) are lower. But the borrower ends up paying a higher interest rate for longer-term loans. Businesses that require smaller amounts of capital find a short-term loan beneficial. In the case of short-term loans, the borrower enjoys a lower rate of interest. However, the EMI amount is higher as a tradeoff. 

When should you apply for a medium-term Business Loan?

A medium-term Business Loan is usually the right choice and it is available for 1 to 3 years. You can apply for a medium-term loan if you need to borrow funds for more than a year. Collateral security is needed for these types of loans. You may consider a medium-term loan to enhance the IT infrastructure of your firm. You can also avail of this loan if your organization needs new fixtures or furniture.

Ensure that you can generate returns from the investment within this period. The EMIs and repayment schedule should be considered while applying for a medium-term loan. Carefully examine the cost of financing. The rate of interest is another important factor to be considered before borrowing funds. Like short-term loans, medium-term loans can also be met with balloon payments. A balloon payment is a one-time, lump-sum payment, usually at the end of the term.

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