Why SMBs Prefer to Use Term Loans

The world of business finance is filled with myriad options, each with its distinct features and implications. For small- and medium-sized businesses (SMBs), navigating this vast sea of choices can be a daunting task. However, one financing instrument that often stands out for SMBs is the term loan.

Term loans entail borrowing a specific amount of money, and then repaying it over a predetermined period (the ‘term’), often with a fixed interest rate. This straightforward structure provides a degree of predictability and stability that can be especially appealing to SMBs. But, what are the specific reasons why SMBs prefer to use term loans?


One of the main attractions of term loans is the predictability they offer. Once the loan is approved, businesses know exactly how much they need to repay each month, and for how long. This makes budgeting easier and reduces uncertainty, a significant benefit for SMBs operating in often unpredictable market conditions.

Lower Interest Rates

Compared to credit cards or lines of credit, term loans typically come with lower interest rates. This is mainly due to their secured nature, meaning lenders have some form of collateral to fall back on if the borrower defaults. This lower cost of borrowing is a big draw for SMBs looking to finance their operations or growth initiatives.


Term loans can be used for a variety of purposes, from purchasing equipment and real estate to funding expansion plans or even managing day-to-day cash flow. This flexibility is attractive to SMBs, who often have diverse financing needs.

Building Credit

Repaying a term loan on time can help SMBs improve their credit ratings, making it easier for them to secure financing in the future. This is particularly important for newer businesses that are still building their credit history.

Easier Approval

Compared to larger loans or more complex financing options, term loans often have less stringent approval requirements. This can make them a more accessible form of financing for SMBs, especially those with less-than-perfect credit histories.

In conclusion, the combination of predictability, low-interest rates, flexibility, credit-building potential, and easier approval makes term loans a preferred financing option for many SMBs. However, it’s essential for each business to thoroughly examine its specific needs and circumstances before choosing any financing option.

Select Capital offers term loans for a wide range of business needs. Contact our team today to learn more.