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Is a Mid-Term Business Loan more flexible than an SBA Business Loan?

Mid-Term Business Loan

When searching for mid-term business loans, you may encounter unfamiliar financing options. However, one familiar term you’ll likely come across is “term loans.” These loans are a popular form of business financing, where a lender provides a lump sum of cash to an approved borrower’s business account. The borrower repays the loan, along with interest, over a specified period.

It’s important to note that term loans come in different forms: long-term and short-term. While the length of the loan term is a key difference, other factors, such as eligibility criteria, loan amounts, and interest rates, can also vary significantly between the two types.

While long-term loans may seem attractive, with their potential for high capital and low interest, they may not always be the best choice for your business. On the other hand, a short-term loan may prove to be more affordable, accessible, or a better fit for your needs, especially if your business is relatively new and lacks a proven track record of financial stability.

Ultimately, the type of loan you choose can have a significant impact on your financial outcomes. It’s crucial to consider both long-term and short-term loans and make an informed decision that aligns with your business’s unique needs and circumstances.

How Long-Term and Short-Term Loans Differ

The clearest differentiation between long-term and short-term loans is the length of their respective repayment periods. Short-term loans are pretty cut and dry: They’re any loans you’ll need to repay within 3 to 18 months—but usually less than a year. As you can imagine, long-term loans are intended to be paid off over a longer time.

The usual repayment period for long-term business loans is a little trickier to define. Generally, a long-term loan can be defined as any loan that takes 24-plus months to pay off, but that “plus” gets pretty liberal. It all depends on the lender you work with, your business’s financials, your intended use of funds, and possibly the loan program you’re participating in.

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Mid-term and short-term loans

Getting a Little More Granular with Mid-Term Business Loan Definitions

Let’s talk a little more about what we mean by term length. A “Mid-term business loan” can refer to a few different financing products in business lending. For today’s purposes, we’ll cover three main types of long-term loans:

Medium-Term Loans

Both banks and online lenders can offer medium-term loans. Either way, you generally look at a 2-year to a 5-year repayment period.

Long-Term Bank Loans

In truth, getting a business loan from the biggest banks is tough to secure a loan from your local bank, too. But if you’ve been in business for a few years, have a strong credit profile, and have solid revenue numbers, you’ll have more luck with institutional lenders. Long-term bank loan repayment typically lasts 5 to 10 years (even longer if you’re purchasing commercial real estate).

SBA Loans

The funds for SBA loans come from participating lenders, not directly from the Small Business Administration. The government agency provides a guarantee for the repayment of the loan, which can range from 75% to 85% of the loan value in case of default. Banks, credit unions, alternative lenders, and non-profit organizations can all participate in the SBA loan program.

These loans are highly sought after due to the government guarantee, making them among the best options for small businesses. The SBA offers various loan programs for different purposes, with the most popular being the SBA 7(a) loan, which can be used for a wide range of purposes such as working capital, real estate, equipment, refinancing debt, or business acquisition. The repayment period for SBA 7(a) loans varies based on the intended use of funds, with up to 7 years for working capital, 10 years for equipment, and 25 years for real estate.

In short, the repayment period for SBA loans depends on the loan program, the lender, and the borrower’s loan application, with short-term loans having repayment periods between 3 and 18 months and long-term loans requiring repayment over a period of 2 or more years.

Three More Differences Between Long-Term and Short-Term Loans

Other than their repayment periods, there are a few more crucial differences between long-term and short-term loans you need too know.

Eligibility Requirements

Traditionally, only borrowers with exceptional credit profiles have been able to secure long-term loans. This is because lenders face a higher risk of default when lending for a longer period of time, leading them to be more selective in their borrowing criteria. To ensure that they are lending to financially stable borrowers who can repay their debts on time, lenders typically require established businesses with a history of profitability and owners with high credit scores.

However, following the 2008 financial crisis, the emergence of online lenders has sought to make loans more accessible to borrowers who may not meet the stringent requirements set by traditional banks. These lenders specialize in offering short-term loans with less stringent eligibility criteria compared to traditional banks.

It is difficult to specify the exact eligibility criteria for any loan, including short-term or long-term loans. Ultimately, the lender will decide if you are eligible for their loan, and the terms and costs will vary based on their assessment.

That said, you might find success with the following stats, which you can think of as general guidelines:

Short-Term Loan

12+ months in business

500+ credit score

$100,000+ in annual revenue

Medium-Term loan

1+ years in business

650+ credit score

$200,000+ in annual revenue

Long-Term Bank Loan

2+ years in business

700+ credit score

$200,000+ annual revenue (some banks require profitability)

SBA Loan

2+ years in business

700+ credit score

$500,000+ annual revenue (some banks require profitability YOY)

…and that’s in addition to a slew of SBA loan requirements.

In general, obtaining a long-term loan may require the borrower to provide security in the form of assets such as real estate, equipment, cash, or a blanket lien, among others, which the lender can seize in case of default. Due to the high amount of capital involved, lenders take extensive measures to reduce their risk.

Conversely, short-term loans typically do not demand collateral. The best way to determine loan eligibility is by consulting a loan specialist or visiting a local bank, based on the type of loan desired. This information can help you determine if a short- or long-term loan is feasible for your business.

Loan Amount

As you know, long-term loans offer borrowers larger loan amounts than short-term loans do.

Once again, the amount of capital a lender will offer an approved borrower depends upon the information provided on the borrower’s business loan application. Loan amounts depend upon the lender itself and the type of loan offered; that’s especially the case with online lenders, who all assign different caps on their loan products.

  • Short-Term Loans: $2,500 to $250,000. The average short-term loan amount is $20,000.
  • Medium-Term Loans: $25,000 to $500,000, with an average loan amount of $110,000.
  • Long-Term Bank Loans: $100,000 to $500,000.
  • SBA 7(a) loan: Up to $5 million, but the average SBA loan amount was $417,316 in 2016.

You’re probably starting to see a theme here: As loan terms lengthen, the potential loan amounts increase and the eligibility requirements toughen up, too. This all loops back to that foundational concept: As the lender’s risk of extending a loan increases, they’ll take greater care to protect their interests in case the borrower defaults.

Long-term loans usually offer higher capital amounts than short-term loans.

Loan Cost

Of course, loans never come for free—you’ll have to pay back the lump sum (also known as the principal), the interest rate your lender assigns you, and any additional loan fees your lender charges.

Like all things small business loan-related, the cost of any given loan isn’t formulaic because every loan type and underwriting process is different. But we’ll generally show you what to expect about the costs of long-term and short-term loans.

Short-Term Loan Cost

Short-term loans are typically easier for businesses to qualify for than long-term loans. Compared to banks, these alternative lenders are more inclusive of which borrowers they approve for their loans.

But without a tough set of requirements to weed out risky borrowers, short-term lenders need another way to protect their interests in case a borrower defaults. For this reason, short-term loans typically come with higher interest rates than long-term loans. The additional cost ensures that short-term lenders make money off their loans, even if a borrower defaults.

You’re also paying for the speed of your loan: Funds from short-term loans can be delivered to a borrower’s bank account in as little as one day.

Lenders also assign higher interest rates to borrowers whom they deem extra-risky, like businesses with lower annual revenue and business owners with lower personal credit scores.

So, the cost of your short-term loan largely depends on how the lender evaluates your business loan application information. Generally, you can expect annual percentage rates (APRs) on short-term loans to vary from 8.5% to 80%. APR includes the cost of interest plus additional fees attached to your loan, so it’s a more accurate representation of your loan’s annual cost.

Unveiling the Hidden Truths:

Even though short-term loans usually have a higher interest, they are not necessarily costlier than long-term loans. Quite the opposite is often true. The longer you hold onto a loan, the more money you will pay in total interest over the life of the loan. So it’s often the case that a 10-year long-term loan will be costlier over the life of the loan than a 6-month short-term loan, even though the long-term loan has a lower quoted interest rate.

Calculating your cost of debt, including fees, is the only way to know whether a loan is “worth it” and will help your business grow.

Mid-Term Business Loan Cost

Generally, you can expect a mid-term loan to carry an APR of 7 and 30%. Unlike short-term loans, most medium-term loans are amortized. Although you’ll repay the same amount every month (or every week, depending on your repayment schedule), that payment comprises two facets: the principal and the interest.

As you pay down your loan, your payment gets allocated to differing interest and principal amounts. Often, lenders stack the earliest bills with interest so they can make their money back ASAP, and the interest amount gradually decreases over time. That means you’ll save on interest if you can pay off an amortized loan early.

Long-Term Bank Loan Cost

Depending on the terms of your long-term bank loan, your interest rates may be fixed or variable. That APR will be among the lowest, starting at around 5%. Banks value customer relationships, too, so they might reward loyal customers with lower interest rates.

SBA Loan Cost

SBA 7a loan interest rates are based on market interest rates, but for most loan programs, the SBA sets a maximum rate that intermediary lenders may charge borrowers. Exact rates depend upon the loan program, the loan’s size, and the loan terms. Currently, the SBA 7(a) program rates start at around 7%. Depending on the size and terms of your loan, you might also need to pay an SBA guarantee fee.

Short-term loans usually carry higher interest rates than long-term loans. That said, you’ll typically pay less in total interest on a short-term loan because you’re holding the loan for a shorter period.

Is a Long-Term or Short-Term Loan Right for You?

Long-term loans offer larger amounts, lower interest rates, and longer repayment periods. However, they are harder to qualify for.

Short-term loans have higher interest rates but faster funding options. The best loan for your business depends on its needs and your ability to repay.

Consider debt cost and time to funding when choosing between long-term and short-term loans. Work with your lender to find the best option for your business growth.

Why BitX Funding of Mid-Term Business Loans

BitX offers mid-term loans for businesses. It acts as a bridge, linking clients with suitable lenders. The loans offered are tailored to meet specific business needs. The company’s mission is to provide flexible financing options.

They offer a wide range of loan products to help businesses grow. With its extensive network of lenders, BitX ensures quick and easy access to funds. Choose BitX for your mid-term loan needs and experience hassle-free financing. Call now to speak with a loan specialist at 203-763-1430.


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