Great for —

• These loans provide a large lump sum of cash upfront that allows the business to invest in projects or areas of the business without the large impact on cash flows. 

• Companies can easily budget for the loan because of a set repayment schedule that has predictability of cost and payments for the company. 

• Businesses that are looking for quick access to funding and have strong business fundamentals have the ability to access funding from many term loan providers.

• Many term loans don’t have a prepayment penalty which can allow the business to pay off the debt early to save on fees.

• Many term loans are priced based on the Prime Rate which has seen a sharp decline over the last year and a half. On March 16, 2020, we saw the largest change in 5 years from 4.25% to 3.25% due to the global economic concerns. Pricing the loan based on Prime Rate is advantageous because of the low rates right now. 

Things to Watch Out For —

• Term loans require payment first before anything else. In a bad situation like a shut down of the business or in a great outcome like an acquisition, the lender would be paid the money back before anyone else. Additionally, some lenders may want to check your personal credit or even ask for a personal guarantee to mitigate risk. 

• Lenders will often ask for covenants (requirements) that ensure companies continue to have business performance that the lender is counting on such as cash flow, strong cash balance, or other metrics. It will be important to make sure that the covenants work for the business throughout the life of the loan and won't keep the business from achieving its goals.

• Some lenders are now fixing interest rates to avoid floating rates becoming too low with the Prime Rate dropping.