Are Term Loans Good?

Term loans are one of the simplest ways to fund growth: you receive a lump sum now and repay it on a fixed schedule until it reaches zero. Whether a term loan is good for your business depends on fit, not hype. Below is a credit-analyst view tailored to Canadian SMEs—when a term loan works beautifully, when it doesn’t, and how to structure it so payments match your real cash flow.

If you need a quick definition first, visit Term Loan or scan our Business Loans overview.

When a term loan is a smart choice

One-time, clearly defined purchases or projects
Think equipment, renovations, a target acquisition, or consolidating short-term debt into a single predictable payment. The fixed amortization gives budgeting certainty.

You want ownership and a clear payoff date
A term loan amortizes to zero. If you’re buying long-life assets and plan to keep them, ownership plus equity build makes sense. For asset-specific options, compare Equipment Loans and Equipment Leases.

You prefer discipline over flexibility
Fixed payments enforce a repayment plan. For owners who like a defined timeline, term loans reduce the temptation to “float” balances indefinitely.

When a term loan is not your best tool

Seasonal or lumpy cash flow
Fixed payments don’t flex when receivables lag. In these cases, a Business Line of Credit or Working Capital Loan is often better. If most of your cash is trapped in invoices, consider Invoice/Freight Factoring.

Ongoing or repeat equipment purchases
If you’ll buy gear multiple times through the year, a one-and-done loan creates friction. Explore an equipment line of credit within Equipment Financing for draw-as-needed convenience.

You value the lowest monthly payment over ownership
A lease with a residual typically lowers the monthly outlay and preserves upgrade flexibility. See Equipment Leases.

Fit test you can apply in five minutes

Use these questions to decide if a term loan is “good” for your situation right now.

Goal clarity
Is this a one-time capital project or asset purchase? If yes, a term loan fits. If it’s ongoing working capital, try a Line of Credit.

Useful life vs term
Will the asset outlast the loan? Good. If the asset will be obsolete before payoff, consider a lease with a buyout.

Cash flow stability
Can you service a fixed monthly payment through slow periods? If not, add a revolving buffer or restructure.

Ownership vs flexibility
If you want equity and depreciation benefits, loans win. If upgrade cadence matters, leases help.

Security and speed
Securing the loan with equipment or a GSA can improve pricing; when speed and simplicity matter more, explore Unsecured Loans. Learn more about Secured Loans.

Cost modelling without the guesswork

Before choosing, build two or three scenarios in minutes with our Calculator:

• Change the term length (e.g., 48 vs 60 months) to see the trade-off between monthly affordability and total interest.
  
  
• Compare loan vs lease for the same asset; a lease residual often lowers the payment meaningfully.
  
  
• Test down payment sizes. A modest increase can reduce monthly stress and interest over time.
  
  

If you already own high-value equipment and need cash now, Refinancing & Sale-Leaseback can unlock equity while you keep the asset in service.

Quick comparison of term loan vs. common alternatives

Explore details under Business Loans and Asset-Based Lending.

Risks and drawbacks to plan around

Rigidity during slow months
The schedule doesn’t flex with revenue. Pair your loan with a modest Line of Credit to cover receivable delays.

Prepayment rules
Some contracts penalize early payout or cap extra principal. If you expect to prepay, ask for partial-prepay privileges or compare a lease with a nominal buyout.

Collateral and blanket GSAs
A secured loan may register a PPSA over assets, which can limit future borrowing. If you need to preserve flexibility, target an asset-specific Equipment Loan or review Unsecured Loans.

Term vs useful life mismatch
Avoid paying for yesterday’s machine tomorrow. Match amortization to the asset’s economic life; if tech changes fast, a lease is often safer.

Case study

A Hamilton fabrication shop wanted a CNC upgrade to win larger contracts. We modelled three options in the Calculator:

• 60-month term loan for ownership and equity build
  
  
• 60-month equipment lease with a 10% buyout to lower the monthly
  
  
• Refinance an owned press brake via Business Refinancing, then take a smaller new loan
  
  

They chose the fixed-rate term loan to keep the asset long-term and negotiated partial prepayment privileges after year one. Within two quarters, throughput rose and they prepaid 10% of principal from retained earnings—saving interest while keeping working capital available for materials.

Startups and newer businesses

Term loans can be good for startups if the payment fits your early cash flow and the asset directly generates revenue. Strengthen the file with down payment, collateral, or a co-signer, and ask whether your purchase is eligible for the Canada Small Business Financing Program. If traditional channels are tight, explore In-House Financing.

Documentation checklist to speed approvals

• Government ID and company details
  
  
• Recent bank statements and any available financials
  
  
• Quotes or invoices for the purchase; if you’re acquiring a truck or trailer, Mehmi sells equipment directly—browse our Inventory
  
  
• Existing debt summary and purpose of funds
  
  
• Insurance details and collateral list for secured files
  
  

You can also see how we tailor structures by sector under Industries and learn more About Us.

Bottom line

A term loan is good when you have a clear one-time need, stable enough cash flow, and a plan to own the asset through its useful life. It’s less ideal for revolving needs, volatile seasons, or assets that become obsolete quickly. The best approach is to model two or three scenarios—loan vs lease, shorter vs longer term—then choose the structure that gives you both affordability and control.

Run your numbers with the Calculator and compare Term Loans, Equipment Financing, and a Line of Credit. Feel free to contact our credit analysts via Contact Us for 24–48-hour decisions and terms aligned to your cash flow.

Are you looking for a truck? Look at our used inventory.

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Frequently asked questions

Are term loans cheaper than lines of credit?
If you need a fixed amount for years, an amortizing term loan can be cheaper overall. For short-term, revolving needs, carrying a Line of Credit may cost less because you pay interest only on what you use.

Is a lease better than a term loan for equipment?
Leases often produce lower monthly payments thanks to a residual and can ease upgrades. Loans favour equity build and straightforward ownership. Compare both under Equipment Financing.

Do secured term loans get better pricing?
Usually. Pledging equipment or registering a GSA can improve approval odds and cost. Learn more about Secured vs Unsecured Loans.

Can I refinance merchant cash advances into a term loan?
Often yes. Consolidation via Business Refinancing can replace multiple remittances with one predictable payment.

What if I already own equipment but need liquidity?
Consider Refinancing & Sale-Leaseback to unlock equity and keep using the asset.

How do I estimate my payment quickly?
Use the Calculator to test loan vs lease, different terms, and down payments—then contact us for a tailored quote.