Term Loans

Small business term loans can help your business finance various objectives and involve less risk than a merchant cash advance (MCA). Whether you are considering a term loan or struggling to meet the payment terms of an MCA, it is wise to consult with an experienced debt relief specialist.

At ReconcileMyMCA.com our debt relief specialists and merchant cash advance attorneys represent businesses nationwide that are at risk of defaulting on their financial obligations. Trust our team to explore all your options and help to keep your business a going concern. Contact us today by completing the convenient intake form. 

What is a business term loan?

A term loan is similar to a merchant cash advance in that a term loan provides a lump sum of capital upfront, but there are significant differences. The name “term loan” refers to the length of the repayment term, and the loan is paid back at fixed intervals (e.g. weekly, bi-weekly, monthly) over the life of the loan. 

This means that term loans offer a predictable payment schedule, unlike merchant cash advances that are paid back through daily deductions of credit card and debit card receipts, which tend to fluctuate. In addition, term loans are intended for established businesses, typically with at least 2 years of operating history, whereas the minimum time in business for an MCA can range from 2 months to 1 year. 

Types of Term Loans

There are three types of small business term loans —  short-term, intermediate-term, and long-term, each of which serves different purposes:

Loan Type Repayment Term Used For
Short-term 12 months or less Financing needs that can be paid back within a year or less
Intermediate-term 1 to 5 years Purchasing inventory or equipment/refinancing existing business debt
Long-term 6 to 20 years Large capital projects (e.g. new construction)

The type of term loan that is most suitable for your business depends on how the funds will be used and how quickly you anticipate a return on your investment. In particular, term loans are commonly used for:

  • Hiring and training new employees
  • Buying inventory or equipment
  • Developing new products
  • Refinancing business debt

How a Term Loan Works

Term loans are relatively straightforward compared to other types of small business financing. The two main considerations are the repayment terms and interest rate:

  • Repayment terms — The loan is repaid according to a payment schedule established by the lender at a rate specified in the loan agreement. A term loan can be prepaid through increased monthly payments or by paying the outstanding balance entirely, as long as the loan agreement does not include a prepayment penalty. 
  • Interest rate — Term loans typically have a fixed interest rate determined by factors such as loan amount, repayment term, and the business owner’s credit history and credit rating. 

The Pros and Cons of Term Loans

There are a number of advantages to term loans, including:

  • Lower interest rates — Because term loans have longer repayment terms than short-term borrowing options (e.g. line of credit, business credit card), they are typically available at lower interest rates.
  • Flexibility — Term loans offer a range of repayment terms that allow a business to select the term that best suits its timeline and budget.
  • Predictable payment structure — Small business term loans offer a set payment schedule for a fixed amount of time and the monthly payment does not fluctuate. 

On the other hand, there are downsides to a business term loan, such as: 

  • Fees — Lenders typically charge a variety of fees (e.g. origination fees, processing fees, late payment penalties, monthly or annual fees) that increase the cost of funding, especially when fees are rolled into the loan payment. 
  • Stricter credit criteria — If the business has a short credit history or lower credit score, the interest rate will invariably be higher. 

MCAs v. Small Business Term Loans

As the foregoing summary indicates, there are several differences between an MCA and a loan, not the least of which are the repayment amounts and repayment terms. Because repayment amounts in a merchant cash advance are based on revenue, the repayment schedule may vary due to fluctuations in revenue. 

If your business experiences a receivables shortfall, the MCA agreement should include a reconciliation clause that requires the funder to restructure the repayment terms. This is where the merchant cash advance attorneys at ReconcileMyMCA.com can help. Once we agree to take your case, we will analyze your financial situation and renegotiate the payment terms with the MCA provider. If the funder refuses to restructure the payment plan, we may recommend filing a lawsuit. 

Contact Our Experienced Merchant Cash Advance Attorneys

If you are considering small business financing, it is important to know the difference between a term loan and a merchant cash advance. Given that many businesses may not meet the eligibility requirements for a term loan, taking an MCA can be a viable option. But if your business is currently at risk of defaulting on a merchant cash advance, contact us as soon as possible. Our debt relief specialists are available 24/7.