9 Benefits of A Business Term Loan
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Business financing ranks high on the to-do list of most business owners. While it may not be needed now, almost all companies will need funding assistance at some point. Preparing for that time is crucial since owners want to ensure they can take advantage of opportunities when they arise or make ends meet if the cash flow gets tight.
Many different financing options are available, but one of the most common is a term loan. Term loans can be short or long-term and can be used for multiple purposes. This article will discuss the benefits of term loans and how they can be obtained.
What Are the Benefits of a Term Loan?
A term loan can be used to even out cash flow, improve working capital, purchase equipment, and scale a business. There are various advantages of debt financing, as well as drawbacks.
What are the benefits of a long-term loan? Long-term loans are available to businesses that qualify for them. Typically, the company or its owner must have good credit. There must be an established history in the business of solid revenues over a period of time. A few advantages of long-term loans include:
1. Building Business Credit
Obtaining a long-term loan helps you build your company’s credit. As your business grows, you’ll want to establish a solid credit history that you can rely on in the future.
At the right time, you’ll be able to scale your business using debt financing without resorting to private investors who may require you to turn over partial control of the company.
2. Taking Advantage of Lower Interest Rates
The interest charged on a long-term loan is typically lower than that of short-term financing since it is paid off over time. Interest rates on long-term loans are also usually fixed. You won’t have to wonder what your monthly payment for the loan will be — you’ll be able to plan for its repayment each month.
3. Borrowing More
A long-term loan typically allows you to borrow much more than a short-term loan. You’ll be able to use the loan for significant items, such as purchasing expensive equipment or buying a new building. Additionally, you can keep part of the proceeds for when you may need it or to buffer your working capital.
4. Enjoying Wide Access
Long-term business loans are available from most banks. You may also work with other lenders, such as credit unions or an online lender like Fundid Capital. Each lender will have its requirements for obtaining the loan. If you develop a good relationship with a lender, it can benefit future financing opportunities.
5. Getting the Added Incentive of a Personal Guarantee
Many business loans require a personal guarantee from the borrower. If your company becomes unable to make its monthly required payments, the lender may pursue your personal assets. Your home, vehicle, bank account, and other assets may be up for grabs if you default on a business loan with a personal guarantee.
While this might seem like a downside, it can provide additional motivation that will drive you to make sure your business is a success.
6. Benefiting from a Longer Commitment Period
A long-term loan comes with a long-term commitment. Your company may be making payments for 20 years or longer before the loan is fully satisfied. Agreeing to a loan of this length allows you to predict your debt obligations for a decade or more, which is far simpler than managing the uncertainty that comes from selling partial ownership.
A short-term loan may be more realistic for newer businesses or those who don’t want to commit to long repayment periods. Advantages of short-term financing include:
1. Easy Obtainability
A long-term loan often comes with significant hurdles. You may need to fill out lots of paperwork, provide several years of financial statements, and furnish copies of your company’s tax returns before obtaining long-term financing. Short-term loans are often much easier to get, involving much less hassle.
2. Improving Your Company’s Credit Score
You can improve your company’s credit score by obtaining either long or short-term financing. As long as you make your payments on time, you’ll be able to develop a borrowing history. Your borrowing history can make it easier to obtain credit in the future.
3. Helpful for Emergencies
Providing funding for emergencies is another one of the most significant advantages of short-term financing. A short-term loan can help you out of a cash flow crunch, let you purchase equipment, or meet any other purpose.
These loans can be beneficial when sales drop or you’re having difficulty meeting business expenses, such as payroll. Since they don’t usually have a lot of usage restrictions, the funds can be used in the manner required.
Long vs. Short-Term Loans
When you consider the advantages of debt financing, you’ll want to determine what you intend to use the financing for.
If you purchase something big to help grow the business, a long-term loan may be more effective. Short-term loans are better for newer companies that haven’t yet maximized their growth. They require less commitment, and the total borrowed is usually much less than what can be obtained through long-term lending.
How Can a Term Loan Help Me Grow My Business?
What are the benefits of a long-term loan? As with any funding decision, there are long-term financing advantages and disadvantages. The same is also true of short-term financing.
2 Primary Advantages of Debt Financing
Term loans can provide significant benefits to companies seeking to scale their growth. You can use a term loan to purchase a new space for operations, buy equipment, or stabilize cash flow. As term loans can typically be used for almost any business purpose, there are many ways they may benefit your company's growth.
1. Maintaining Control
Often, companies turn to private investors for help growing their business. However, there are often stipulations that the applicants must accept before receiving funding when they do so.
The investor may require that they be involved in management decisions, which can reduce the level of control that the owner has over their business. Debt financing can allow business owners to retain the authority in decision-making.
2. Protecting the Business
While it may be tempting to assist the business with money from your own pocket, doing so can put the company at risk. If your tax returns are audited and you have mixed personal and business finances, it can be difficult for the auditors to tell what’s what. Depending on the entity structure you have chosen for your company, you could potentially lose any legal personal protection benefits.
Debt financing can help you to protect your business interests.
When Should I Choose a Long-Term Loan?
What are the benefits of a long-term loan? Long-term financing advantages and disadvantages exist. It’s best to choose a long-term loan in certain circumstances:
- You feel confident about your company’s future success
- Money is needed for expensive equipment or to buy a location for operations
- You’re not worried about the impact of repayment on monthly cash flow
- The interest rates and terms of the loan are favorable
If you’re starting to grow your business, it is generally best to stick with shorter-term financing until you feel more comfortable.
Secure the Best Financing for You
It’s essential to understand the different advantages of debt financing when you're considering funding for your business. This analysis can help you determine whether long or short-term financing is more appropriate.
Need funding to grow your business? Learn more about Fundid Capital to find out how you can get capital to grow faster.