For businesses looking for finance to solve a particular problem, medium-term loans can be an effective solution. This article takes a look at why medium-term finance is a viable option for businesses, and also importantly why it might not be.
Firstly, let’s take a look at what exactly medium-term loans are.
Medium-term loans sit somewhere between the rapid turnaround of short-term loans, and the more detailed documentation and process of long-term loans. Urgency is usually less of a factor with medium-term loans, so it’s not uncommon for the process of reviewing an application, assessing security and funding the loan to take up to two weeks – though it can be done much faster when needed.
As with all secured loans, once an application is received and security confirmed, valuations and caveat checks are completed on the security offered. Once security requirements are satisfied and terms agreed between the parties, funding is usually provided within 24 hours of the loan being accepted.
Interest rates will vary between providers, however, the key benefit of medium-term business loans is a lower interest rate which enables more manageable payments to be made. This can be particularly useful when a business uses the funds to invest in capital which will deliver a return for the business, in turn helping to pay the loan off itself over time.
In many cases, businesses in need of finance may not want to commit to a loan over the course of three to five years, in which case a medium-term loan at one to two years, will often fit their needs perfectly.
As we mentioned earlier, while short-term loans can be funded in as little as 24 hours from submitting the initial application, medium-term loans generally take a little longer. So, for businesses hunting down urgent finance to fill a cash flow gap or seize an opportunity, business bridging finance is definitely the better option.
Small businesses should also be wary of fees and penalties. Many lenders will charge a range of upfront fees before they’ve even considered your application, so pay close attention to non-refundable fees when looking at providers. For full disclosure, Strive does not charge upfront fees, however, we do charge a documentation fee of $3,450 which is included in the overall loan fee should a loan be accepted.
In addition, some lenders will penalise early completion of a loan which can make a huge difference if your business intends to get ahead in payments. Conversely, at Strive Financial, our loans are all treated as interest only, meaning your business will pay only the interest payments until you’re ready to pay off the loan amount in full. This suits many businesses as it gives them the flexibility to pay off quickly or slowly.
So, what does a medium-term loan look like in the hypothetical real world? Tom the cabinet maker is based on a recent client of ours.
Tom the Cabinet Maker wants to purchase new fabrication equipment for his factory. To upgrade his production equipment he’ll need to borrow $50,000. Tom applies for a medium-term loan and received funding within two weeks with no upfront fees and at 2% interest per month. His loan will run for 6 months. Tom will pay payments of $1,000.00 per month on his interest-only facility, over 6 months the total cost of the loan will come to $9,3450.
For Tom, the solution was worth the investment, as his new equipment would open up a new revenue stream and ultimately pay off the loan itself in time. That being said, not all loan solutions are clear cut so if you’re exploring a business loan, get in touch with us and let’s chat about the options available to you. We’re just a phonecall away.
There is a lot of stigma attached to short term lending. And with good reason in some cases. But, the reality is that almost every business at some stage will need access to finance – and that’s not something to be ashamed of. Short term finance can help businesses react to changing situations or take advantage of new opportunities.
Cash is king. Nowhere more so than in small business – it enables the purchasing of stock, paying of staff and contractors or even paying debts. It also enables small businesses to invest in new opportunities or innovate – but cash for these businesses can be a little bit chicken and egg. Which comes first?