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Pros and Cons: Should I Get a Business Term Loan?

a female business owner proudly shows off her business and her new business term loan.

Looking for the best lending solution for your business? In today's competitive business landscape, finding the right financing option is essential for long-term success. If you're considering business term loans, it's your lucky day! Join us as we explore the pros and cons of business term loans, helping you make informed decisions about your financial future.

Basics of Business Term Loans

A business term loan is a fixed amount of money borrowed from a bank or lender, repaid over a set period with interest. To get one, a business typically applies with the lender, providing financial documents (and collateral if required), and undergoes a credit check and evaluation of their ability to repay the loan.

To learn more about the basics of business term loans and how they work, read our recent article.

Pros of Business Term Loans

Using a term loan for business has many advantages, making it a popular choice for countless companies:

1. Structured Repayment:

Term loans have clear and structured repayment schedules, giving businesses the predictability the need to budget and plan their finances effectively. For example, having clear payment due dates helps businesses avoid cash flow problems and maintain financial stability.

2. Long-Term Financing:

Unlike shorter-term financing options (such as lines of credit), business term loans offer access to larger sums of money over an extended period. This makes them ideal for funding large projects, expansions, or long-term asset investments like equipment or real estate.

3. Lower Interest Rates:

Term loans for businesses often come with lower interest rates compared to other forms of financing, such as credit cards or short-term loans. This can result in major savings over the life of the loan, which allows businesses to direct more resources towards growth and development.

4. Flexible Use of Funds:

Term loans typically offer flexibility in how businesses can use the funds. Whether it's purchasing inventory, hiring staff, or funding marketing efforts, businesses can freely allocate capital where it's most needed without any restrictions.

5. Build Credit:

Responsible repayment of a term loan can help businesses establish or build their credit scores. A positive credit history not only increases the likelihood of future loan approvals but also opens doors to better financing terms and opportunities for growth and expansion.

Cons of Business Term Loans

Just like any financial tool with benefits, business term loans also come with some disadvantages to consider:

1. Collateral Requirement:

Many lenders require collateral to secure a term loan, which can be a major barrier for businesses. This is especially the case for startups or businesses with limited assets. Using collateral—like real estate or equipment—puts the business at risk of losing those assets if they can't repay the loan.

2. Lengthy Application Process:

Applying for business term loans can take a lot of time and paperwork, slowing down access to funds when businesses need them urgently. This delay could affect growth plans or other opportunities.

3. Fixed Payments:

Structured repayments offer stability but can feel limiting during tight cash flow periods. Fixed payments might strain the business's finances, possibly leading to liquidity problems or the need for extra financing to cover expenses.

4. Interest Costs:

Despite lower interest rates, the total interest paid over the life of a term loan can be substantial, especially for long-term loans. Businesses need to carefully consider how much borrowing will cost and decide if the benefits outweigh the financial burden of interest payments.

5. Risk of Default:

Failure to repay a business term loan according to the agreed-upon terms can have serious consequences. Defaulting on a loan payment can damage credit scores, hinder future borrowing, and even lead to the loss of collateral. This ultimately puts the business's assets at risk.

Is it a Good Idea to Get a Business Term Loan?

If your business needs a large amount of money for a specific purpose, a business term loan can be a great option. It's ideal for long-term investments like buying equipment, expanding operations, or refinancing debts.

Many industries use business term loans, including boating, landscaping, healthcare, and more. These loans offer them the opportunity to:

  • Take advantage of low interest rates
  • Enjoy longer repayment terms
  • Build business credit

Ready to give your business a boost? Apply for a business term loan at Academy Bank and discover why so many businesses like yours trust us with their financial needs.

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All loans and lines of credit are subject to credit approval and require automatic payment deduction from an Academy Bank business checking account. Origination and annual fees may apply. Terms, conditions, and loan product eligibility applies.