For years, the business world has adjusted to more or less stable interest rates. However, the talks of a surge in interest rates started to surface in 2023. In the next few months of 2024, businesses that rely on a term loan will feel the changes impacting their businesses. While it is tough to determine the pros and cons of rising interest rates, let’s first understand the scenario better.
What is a business term loan?
A business term loan is mostly opted by small businesses for a specific period (short period) to grow their business, and meet instant needs, amongst others. This type of loan is given with either fixed or floating interest rates and is curtailed to meet the needs of the business.
A term loan is typically of three different types:
- Short-term business loan
- Intermediate-term business loan
- Long-term business loan
A term loan is sanctioned against specific terms and conditions that are mostly decided after assessing:
- The asked amount
- Capacity of the borrower to repay
- Cash flow or in-hand availability of funds
Why do businesses opt for a term loan?
A term loan allows a business to grow and meet financial needs smoothly. Multiple reasons push businesses to opt for a term loan such as:
- Quick procedure
A term loan does not have months of waiting period and tedious documentation. Short term loans online options have made it accessible, as well.
- The regular inflow of cash
Term loans help the business to smoothly meet their monthly needs and manage their finances based on the amount.
- Interest rate
One of the biggest factors that drew businesses towards a term loan was the lower interest rates. However, the talks of rising rates might impact the number of businesses coming in for a term loan.
Changing scenarios of rising interest rates for business term loans and businesses
A business term loan is (in most cases) applied by small-scale or start-up businesses. If interest rates are going to continue with an upward trend, this can leave crucial impacts including:
- Increased borrowing cost
As the interest rates increase so does the overall loan amount. Businesses will have to repay a much bigger amount throughout their loan tenure.
- Loan tenure
A business term loan is taken for a specific period which is generally a short period. However, with a rise in interest rates, the choice to opt for a short tenure becomes unaffordable due to increased monthly payments.
- Lack of investors
A business term loan is taken to expand the business in ways that can pave the way for investors to come into play. However, the rise of interest rates indicates an unstable market that will force investors to hold their money and observe before investing.
- Increase in secured term loan
While business term loans are available in both secured and unsecured options, a high interest rate increasing the repayment cost might force lenders and borrowers to opt for a secured loan. This can put businesses in jeopardy in case of a default in repayment.
What impacts interest rates?
Interest rates are affected by multiple factors that are mostly not within the control of an individual. Take a look at the two key players in determining interest rates:
- Inflation
Since the purchasing power of lenders decreases with the repayments they get, lenders are going to increase interest rates to ensure profits.
- Government
Monetary policies decided by the government impact the interest rate.
The bottom line
A business term loan was introduced to help businesses expand and set a strong foot in the market. One of the key features of this type of loan was its lower interest rates and with trends showing a chart of rising interest rates, businesses are set to be impacted. It is on their financial management to make the best of the situation. Assistance from a business banker can help them build a strong business through short term loans.
