It's important to analyze all aspects of a franchise loan product before making a final borrowing decision. However, you may find yourself wondering: What's more important to focus on - term length or interest rate?

Term

Your loan's term length relates to amortization, or the paying off of loan debt based on a specific repayment schedule. In most cases, the shorter your term length, the higher your monthly payments.

There are certain types of loan products that buck this trend, though. For example, balloon loans allow borrowers to pay a smaller amount each month before a large final payment is due at the end of the loan period.

Rate

Lenders charge interest on the money you borrow, and your rate determines how much extra you will need to pay back in addition to your loan principal.The lower your interest rate, the less money you owe over your loan's term length.

Interest rates impact monthly payments far less than term lengths.

Which is more important?

There's a tendency among borrowers to focus on interest rates, as no one wants to pay more money than necessary to obtain franchising capital. However, it's essential to understand how a shorter term length may conflict with your business plans.

"You obviously want to have a repayment amount for your individual franchise unit that is commensurate with your ability to repay," says Travis Perrine, a franchise finance specialist at ApplePie Capital.

For example, say you're the new owner of a quick-service restaurant franchise. You have the option of borrowing a $400,000 loan with a three-year term and a 2% interest rate, or a $400,000 loan with a 10-year term and a 7% interest rate. The 2% loan has monthly payments of approximately $6,800 higher, which can be counterintuitive at first glance.

"In this case, the term is far more important, because you're likely not going to be able to pay back that loan in three years," Travis says. "You might go bankrupt trying to pay back such high monthly payments while also trying to keep your business afloat. Opting for the higher interest rate may be the smarter business decision."

Cash flow is vital to franchise business owners, especially those just getting a new unit off the ground. Anything that inhibits cash flow is likely to interfere with overall business viability.

"Rate affects repayment a lot less than people think it does," Travis says. "If you run amortization tables on the difference between a half-point interest rate on payments on a seven-year term loan, you'd be amazed at how little the difference is."

Additionally, longer term lengths can help franchise owners expand their portfolios more quickly. Less money spent on monthly payments means increased liquidity to be used opening new units.

As with all business decisions, it's important to think strategically. While securing low interest rates is always preferable, remember that term length has a much more immediate and drastic impact on your finances.