Medium-Term Loans: Advantages, Disadvantages, and Best Lenders
What Are Medium-Term Loans?
Medium-term loans are loans with a repayment period between two and five years. Usually, these loans offer up to $500,000 in financing, a monthly or bimonthly payment schedule, and mid-market interest rates. It typically takes two to three weeks to get funding with a medium-term loan.
Whether you are dreaming about owning a small business or have already launched your company, it’s likely that you need financing of some sort to reach your business goals. As a savvy small business owner, you might even have started doing your research on the different types of business loans out there.
Term loans are a great option for small businesses looking for a traditional loan with a set repayment time frame and predictable payments. The type of term loan that you can receive will vary based upon credit rating, cash flow, and many other factors.
Within the term loans category, medium-term business loans can be a good choice for some small business owners. These are loans with a payback period of about two to five years. Let’s look at medium-term loan advantages and disadvantages, details, and best lenders.
How Medium-Term Business Loans Work
Medium-term loans work similarly to short-term business loans and long-term loans, with the main difference obviously being their repayment time frame. In addition to the time frame, medium-term loans also differ in their interest rates and qualification standards.
Here’s how medium-term loans work:
Medium-Term Loan Definition
Definitions vary from lender to lender, but most commonly, medium-term loans are defined as loans with a repayment period between two and five years. In comparison, short-term loans are repaid within two years, and long-term loans are repaid within 10 to 20 years.
Usually, borrowers have to make payments on a medium-term loan every month or twice a month. Medium-term loans are available both from banks and alternative online lenders.
Medium-Term Loan Qualification
To qualify for a medium-term loan, you generally have to have average credit, and your business should be producing revenue. Each lender sets their own qualification standards. Banks look for credit scores over 700 and businesses that are at least two years old with strong growth potential. If you’re looking to get a medium-term loan from a bank, you might have to put down some collateral.
Online lenders are a bit more relaxed and can work with borrowers who have credit scores in the 600+ range. They prefer businesses that are at least a year old and producing revenue.
Medium-Term Loan Cost
The interest rates on medium term loans largely depend on who the lender is:
- Medium-term bank loans typically have interest rates less than 10%
- Medium-term online loans from alternative lenders typically have interest rates ranging from 7% to 30%.
Interest typically compounds based on your repayment schedule. If you pay back your medium-term loan on a monthly basis, then interest will compound monthly.
Medium-Term Loan Uses
Medium-term loans are best suited for growing, revenue-positive businesses with a need for capital to further expand. For example, you can use these loans to buy inventory and supplies, open a new location, or hire more talent.
If you have a newer business or are trying to build up your credit, then a short-term loan is more beneficial. For much larger purchases like buying a new building, long-term loans, such as SBA loans, are your best bet.
Medium-Term Loans: Advantages and Disadvantages
Medium-term loans can be the perfect answer to the funding needs of some businesses. But, they are not ideal for everyone. Depending on your creditworthiness, the age of your business, and your revenue situation—plus your reason for seeking for financing—you might be better off with different types of business loans.
Here’s a closer look at medium-term loan advantages and disadvantages:
Medium-Term Loan Advantages
- Set Monthly or Bimonthly Payments – Regular payments, spaced one month or two weeks apart, can be a great thing for businesses that are trying to budget for fixed costs.
- Fixed Interest Rates – Medium-term loans usually have fixed interest rates. Having a set interest rate on a loan helps a business owner to know exactly what that loan is costing them over time.
- Improved Credit Score – Receiving and successfully paying off a medium-term loan will improve an owner’s credit score and help you build business credit. As they move forward with their business, they will be more likely to get additional loans.
- Many Uses Covered – Medium-term loans can be used for a variety of business purposes.
Medium-Term Loan Disadvantages
- Longer Application Process – Medium-term loans require slightly more paperwork and have a longer turnaround than short-term loans. However, they are still quick to get compared to long-term loans.
- Harder to Qualify – If you don’t have good credit or cash flow, you might not be able to qualify for a medium-term loan. These loans can also require collateral.
- Fees and Penalties – Term loans can come with origination fees and prepayment penalties, so be sure to speak with your lender. You should be aware of all your obligations.
As a small business, you may find that term loans like the medium-term loan are a great option when it comes time for expansion. Remember that your credit score will favor heavily in your loan terms. Talk all of your options over with a loan specialist or lender to be sure that you are getting the best deal for you.
Medium-Term Loan Example
Maria of Maria’s Deli wants to purchase new kitchen equipment, including a new meat slicer, meat grinder, and a new refrigeration unit. All of the upgrades to her kitchen will cost her approximately $15,000. Maria applies for and receives a medium-term loan with a 9% interest rate and a 3% origination fee. Maria will need to pay the loan off in four years, so her monthly payment will be $373.28. The cost of the loan or interest is $3,367.23, unless Maria pays off the loan early.
The Best Medium-Term Lenders
Once you decide to apply for a medium-term loan, there are a variety of lenders you can work with. These include banks and online non-bank lenders. If you have really strong credit, you might be able to land a better deal from a bank. But if you’re credit isn’t quite high enough, or if you value speed over cost, then an alternative lender is a better choice.
Here’s a look at some of the best medium-term lenders on the market:
Lending Club
Lending Club offers loans of up to $300,000 that have one to five year terms. Interest rates range from 5.9% to 25.9%. Lending Club works with a wide range of small businesses, and the application process is completely online. The only paperwork you have to provide is some recent business bank statements and your most recent business tax return.
The application process with Lending Club usually takes two to three weeks. Business owners with a credit score over 620, annual revenue over $50,000, and who’ve been operating for at least one year are eligible for Lending Club medium-term loans.
Fundation
Similar to Lending Club, Fundation offers online medium-term loans. Their loans go up to $350,000 and have one- to four-year terms. Interest rates range from 7.9% to 28.9%, so they’re slightly costlier than Lending Club. For loans under $200,000, you’re eligible to apply if you’ve been in business for one year, have a credit score over 660, and generate at least $100,000 in annual revenue.
The qualification requirements are significantly harder for loans over $200,000. On average, Fundation funds loans in three business days, making this a quick option for business owners in need of capital fast.
Wells Fargo
If you prefer a bank loan option, then Wells Fargo business loans are a good option. They offer medium-term business loans between $10,000 to $100,000. These are unsecured business loans, meaning that they don’t require collateral. Terms range from one to five years, and interest rates start at 8.25%. These loans don’t have any prepayment penalties.
If you have a Wells Fargo checking account that’s been open for at least one year, then you can even apply online, which isn’t always a possibility for bank loans. Just keep in mind that you need to have an excellent credit score and high business revenue to qualify for a Wells Fargo business loan.
The Bottom Line
Because of the flexibility and the ease of regular set payments, medium-term loans are popular among small businesses. They occupy a sweet spot between short-term loans, which are too expensive for some borrowers, and long term loans, which might require too much of a commitment.
Just be sure to find out about any penalties or fees that might be associated with your loan. Make sure you understand the interest rate you’ll be charged and your repayment schedule. Asking questions is the best way to ensure that you’re happy with your medium-term business loan.
Priyanka Prakash, JD
Priyanka Prakash is a senior contributing writer at Fundera.
Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.