The most common loans for small and medium business have been short-term loans. This is not surprising since many small and medium business owners assume that they will not get approval for long-term loans. There is some truth to this since many lenders are unwilling to work with SME businesses that present a higher risk.
Short-term funding vs term loans
Short-term funding typically refers to any type of funding that is expected to be repaid in 24 months. This applies to funding facilities such as merchant cash advance, revolving credit lines, invoice, and receivables factoring. Term loans, on the other hand, are longer-term funding facilities. These loans typically run for 3-5 years. The repayment of these loans is scheduled either on a fixed-interest or reduced interest basis.
But lenders are increasingly willing to look and approve term loan applications from these riskier businesses, as reported by a study done by Biz2Credit Small Business Lending Index™ report for 2018. A good number of business owners mistakenly believe that term loans represent a heavier financing burden on their businesses. But there is a lot of good that comes to a business that works with term loans.
Taking a long-term loan requires careful planning. This is a large financial undertaking, which must go towards meaningful business needs to grow the business. Committing to take requires a business to relook what the look is going into, and the weather that is the priority need for a business at that moment.
Tighter financial discipline
A term loan’s scheduled installment payment forces a business into tighter financial discipline. Unlike a revolving line of credit, for example, where a business can access funds anytime, there is no recourse if a business loan is not efficiently and properly used.
A business with high-cost undertakings is better served by term loans. Unlike short-term loans that are usually capped at $1 million, term loans come with higher funding, sometimes several million dollars. This type of loan enables a business to put up heavy industry equipment, buy land and heavy machinery and other heavy costs that would otherwise not be afforded by short-term funding.
Higher credit scores
A business that pays off one or two term loans is rated highly. Lenders are more willing to work with a business that has shown predictability and the ability to pay in the past. For a small business with an eye on long-term growth, this is very useful as it means friendlier lenders and constant access to cash.