How many years is a medium term loan? Advantages and Disadvantages

A Medium Term Loan is Repayable in two to five years.

Author: Brad Nakase, Attorney

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Example of Medium Term Loan

Kevin is the owner of a restaurant in Los Angeles called Kosher Kevin’s, a deli specializing in tasty Reubens and homemade potato salad. Over the past several months, Kevin has increased his profitability and popularity to the point that he is prepared to open two new restaurants in different locations. He knows that this is the next step for his business, but there are financial challenges involved in expansion. Evaluating how much money he will need, Kevin determines that he will require a quarter of a million dollars to grow his business in the way he would like. But because of the financial difficulties involved in expanding, he figures that he will need a few years to pay back the loan. Therefore, Kevin decides to apply for a medium-term loan, which will give him a large amount of money, while allowing him to pay it back between two and five years. Happy with this solution, Kevin begins the application process for a medium-term loan.

What Is a Medium-Term Loan?

Throughout their careers, small business owners will run into opportunities to expand or improve their company. That said, they may not have the available capital to fund these exciting projects. Luckily, there are a number of business financing solutions that can help a business owner connect these gaps in cash flow.

A well-known solution for business owners is called a medium-term loan. This kind of funding can be used to finance near-term projects, which means that the business owner will repay the loan over the course of several years.

That said, this kind of loan is not right for every business owner. Because of this, it is important that an entrepreneur consider the advantages and disadvantages of medium-term loans in order to determine if it is right for them and their business.

Medium-term loans may be described as business loans that are provided by banks and alternative kinds of lenders. Usually, they offer fixed interest rates and flexible repayment terms that extend between one and five years.

Depending on the loan program, there is usually the choice to repay in monthly or bimonthly installments. Also, this kind of loan generally does not have penalties for prepayment.

Collateral is not usually required, but lenders might ask for a personal guarantee to secure the loan.

When Is a Medium-Term Loan Useful?

Medium-term business loans are helpful for small business owners who need capital in order to finance an acquisition or other expansion project. By comparison, short-term loans typically offer a quick boost of working capital, but must be paid back within a year. Two well-known examples of short-term funding are merchant cash advances and lines of credit.

When it comes to long-term loans, the borrower must pay back the money over a longer period of time. Usually, long term financing needs to be paid back within five to seven years.

By contrast, medium-term loans can take from between one to three weeks to get, but they provide longer period for repayment than short-term loans. Usually, lenders offer medium-term loans in amounts going up to $500,000. The interest rates will range from 9% to 40% APR.

Also, the lender might choose to charge an origination fee. Because the terms of repayment may be extended for up to five years, the business owner’s project has time to mature and create the cash flow needed to pay off the loan.

Medium-Term Loan Advantages

This kind of loan is beneficial to a business owner whose company has been running for a few years. It is also a good fit if the owner has a good personal credit score. This type of loan also has advantages over short-term financing, including the follow pros:

  • Fixed APRs: medium-term loans usually ask for a strong credit score and evidence of business profitability. If a business owner can show these, then he or she may get a more favorable interest rate that is stable over the lifespan of the loan.
  • Larger loan amounts: Medium-term financing generally grants a business access to up to $500,000 in cash in a few weeks. This allows a business owner to jump into new projects and grow their business immediately.
  • Lower monthly payments: Because medium-term loans offer flexible loan terms, it is possible to extend the repayment period up to five years and each month make smaller payments.

Medium-Term Loan Disadvantages

Like any type of business funding, medium-term loans have limitations. In some situations, medium-term loans might not be the right fit for a small business. The following are some of the cons associated with medium-term loans.

  • Tough approval process: Because it can take years to repay a medium-term loan, lenders pay more attention to a business owner’s credit. Generally, it takes a credit score of at least 600 to qualify, as well as annual revenues of at least $25,000. Also, a business owner must have been in business for at least a year prior to applying. Requirements will vary depending on the particular lender.
  • Long application process: The application process for a medium-term loan can take a long time. Often, lenders ask for a lot of paperwork to ensure that the borrower is responsible enough to pay the loan back on time.
  • Possibility of accrued interest: Depending on the borrower’s interest rate, extending the repayment period can result in accrued interest. This can make the loan much more expensive than a short-term business loan.


A medium-term business loan is a great option for small business owners in need of a large amount of capital and flexible repayment terms. However, this type of loan is best for established businesses that have good credit. Depending on the company and its situation, a short-term loan may be a better option.

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