If you’re a small business owner and need funding, you’re considering many options. It may seem like you have too many options.
Factors that determine your loan term include:
• The type of small business loan you need
• Which type of lender works best
• Interest rates and fees
• Repayment terms
• Aspects of your business (age, credit score, revenue, etc.)
Repayment term refers to the amount of time you have to pay back the lender. Terms generally range from within a few months to 25 years. Some lenders call out the loan maturity date instead.
It’s helpful to understand how loan terms differ between lenders and loan types to make sure you’re choosing the right financing. You also want to have clarity on rates, fees, and guidelines set by the lender.
We’re breaking down business loan terms and conditions for different types of small business financing, from short-term business loans to boost cash flow to long-term business loans aimed at helping your business grow and alternatives to traditional bank loans.
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What Is a Loan Repayment Term?
A loan repayment term can be a short term measured in months, an intermediate term measured in years, or a long term spanning more than two decades.
Typical business loan terms vary depending on business needs, type of financing, lender, and other conditions, as do average business loan amounts. The following sections will highlight common repayment terms and lending vocabulary to help give you an understanding of what to expect when searching for small business loan funding that’s right for you.
Typical Small Business Loan Terms by Loan Type
We’ve broken down several different small business financing options including the following information:
• Repayment term: How long you have to pay back the loan.
• Loan amount: Total amount you can borrow from a lender.
• Interest rate: Amount the lender charges for the loan, usually stated as a percentage.
• Time to funding: Amount of time it will take to receive the actual funds.
• Requirements/eligibility: Conditions that determine whether you qualify for financing.
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SBA 7(a) Loans
The U.S. Small Business Administration (SBA) offers a variety of loan programs, including SBA 7(a) loans as highlighted below:
• Repayment term: Maximum of 10 years for inventory, working capital, or equipment; 25 years max for real estate loans.
• Loan amount: $5 million is the maximum business loan amount for all 7(a) loans except Express and Export Express, which typically have maximums of $350,000 and $500,000, respectively.
• Interest rate: Can be fixed or variable and is determined by the lender using guidelines on rate maximums from the SBA.
• Time to funding: Varies depending on program, but turnaround time can be as short as 36 hours or take up to two weeks.
• Eligibility: Lenders will have the final say on whether you’re approved for an SBA 7(a) loan, but at a minimum, your business must meet the following eligibility requirements set by the SBA:
◦ Is a for-profit enterprise
◦ Currently does or proposes to do business in the U.S. or its territories
◦ You have a reasonable amount of equity in the business
◦ You have exhausted all other business and personal financing options
Term Loans
A term loan is a type of financing in which the borrower receives a single lump sum of funding that they repay (plus interest) to their lender over an agreed-upon repayment schedule. The business loan term is based on a borrower’s qualifications, loan amount, and other conditions set by the lender. Examples of common term loans are commercial real estate loans and other installment lending options.
• Repayment term: Short term (3 to 24 months), intermediate term (up to 5 years), or long term (up to 10 years).
• Loan amount: Varies depending on type of lender and program, but generally starts around $50,000 and can go over $1 million.
• Interest rate: Depends on type of lender, amount of loan, and other qualifying factors.
• Time to funding: Varies depending on the program but can be a few days or a few weeks.
• Eligibility: Typically determined by the lender based on loan amount, creditworthiness, and the amount of time you’ve been in business.
Bank Loans for Small Businesses
Business loan terms and rates from banks are generally seen as some of the most favorable, but also the most challenging to get. Banks typically require collateral and a strong financial history in order to qualify.
• Repayment term: Typical business loan terms are 3 to 10 years.
• Loan amount: Average business loan amount is around $500,000.
• Interest rate: Will ultimately depend on the lender, loan type, and assessed risk of lending to the borrower.
• Time to funding: Banks often have longer approval processes due to their stricter qualifying factors. They can be anywhere from one week to two months.
• Eligibility: Typically determined by the lender based on loan amount, creditworthiness, and the amount of time you’ve been in business.
Business Line of Credit
A business line of credit gives you access to funding up to an approved maximum amount, with interest typically charged on unpaid balances. These can be good short-term options for small business owners who want cash flow and flexibility to access funding on a revolving basis.
Business loan terms for a line of credit function differently than a traditional term loan because borrowers do not pay back in set installments, but according to how much they borrow against the line of credit.
• Repayment term: Typically 6 months to 5 years.
• Loan amount: Credit limit is determined by the lender but generally can be between $1,000 to $250,000.
• Interest rate: Depends on lender and creditworthiness.
• Time to funding: Online lenders typically approve within a few days, while traditional banks may take up to 2 weeks.
• Eligibility: Banks may require a credit score over 680 and a minimum two years in business. Some lenders may have less stringent standards.
Microloans
Microloans can be great for small business startups or businesses that have struggled to get financing elsewhere. The SBA has numerous intermediary lenders participating in its microloan program.
• Repayment term: Up to 6 years for SBA microloans. Private and peer-to-peer lenders will set their own business loan terms.
• Loan amount: Business loan amounts vary depending on lender, but are generally up to $50,000.
• Interest rate: Depends on type of lender, loan amount, and your business’ eligibility, but rates are generally higher than other loan types.
• Time to funding: Online lenders may approve within 24 hours, while lenders with stricter application requirements may take days or weeks.
• Eligibility: Traditional lenders will base funding on creditworthiness, collateral, and business history. Alternative lenders may have fewer or different qualifications, and take your business’ cause into consideration.
Invoice Factoring or Financing
With invoice factoring, you sell your invoices to a factoring company that is then responsible for collecting payment from your customers. With invoice financing, you use unpaid invoices as collateral to receive cash from a lender. Both can be nice short-term financing options for small, B2B businesses that regularly use invoices or have irregular billing cycles.
• Repayment term: Typically 30 to 90 days to reflect the terms set for customers paying the invoice.
• Loan amount: Typically a percentage — up to 100%, depending on the lender — of the amount of each invoice.
• Interest rate: On top of a processing fee of typically 3%, the factoring fee is generally 1% to 2% of the total amount of each invoice and charged each week until the customer pays their invoice.
• Time to funding: As little as 24 hours*
• Eligibility: Must be a business that invoices customers, which are usually B2B organizations. Lenders may also consider your creditworthiness and your customers’ ability to pay the invoices.
Equipment Financing
A type of small business loan for the specific purchase of necessary business equipment, these are typically intermediate-term loans that are paid off within a few years. With business equipment financing, you can secure loans for necessary equipment and machinery without tapping into valuable cash reserves.
• Repayment term: Generally, business loan terms are the same as the life of the equipment; could be a few months or many years.
• Loan amount: Can be up to 100% of equipment cost
• Interest rate: Typically ranges between 5% and 30%
• Time to funding: Online lenders may approve within 24 hours, while banks may take up to a few weeks.
• Eligibility: Lenders will typically look at creditworthiness, business history, and monthly or yearly revenue. Banks may want to see at least two years of business history to qualify. Because the equipment acts as collateral, these types of loans may be easier to qualify for than other financing.
Inventory Financing
This is an asset-based term loan or line of credit that a business receives in order to purchase more inventory and maintain cash flow. The inventory itself acts as collateral for the loan or line of credit.
• Repayment term: Typically up to one year, depending on the inventory, or possibly longer for revolving inventory lines of credit.
• Loan amount: A percentage of your inventory, generally 20% to 65%
• Interest rate: Depending on the lender type, could be anywhere from 0% to 80%
• Time to funding: Between one business day and several weeks depending on the lender
• Eligibility: Be in business for at least six months to one year, meet inventory minimum set by the lender, and be willing to have inventory audited if the lender requires it
Merchant Cash Advance
A merchant cash advance allows small businesses (“merchants”) to get a cash advance in return for a portion of their future credit/debit card sales or receivables, plus a factor rate or fee.
• Repayment term: Typically, three to 18 months but depends on the lending company.
• Loan amount: Business advance amounts usually up to $500,000.
• Interest rate: Factor rate typically between 1.1 to 1.5, multiplied by the cash advance amount (E.g.: $5,000 cash advance × 1.3 factor rate = $6,500 owed to the merchant lending company).
• Time to funding: Can be as little as 24 hours.
• Eligibility: Lenders typically look at financing documents like monthly sales and bank statements to determine if the business will be able to make the amount advanced back.
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Loan Maturity Date
The loan maturity date is generally the due date for making the final required payment on your small business loan. The loan maturity date typically aligns with the term length.
A $50,000 SBA microloan with a six-year term, for example, would typically feature 72 scheduled monthly payments. The date when the 72nd and final required loan payment is due is the loan maturity date.
Here are some of the maximum maturity term lengths on SBA loan products:
• SBA 7(a) loans can have a maturity term of up to 25 years for financing real estate
• SBA 504 loans can have a 10-year maturity term for equipment financing
• SBA microloans can have a maturity term of no more than six years
What Is a Prepayment Penalty?
A prepayment penalty is a fee that some lenders may charge if you pay off a loan prior to the loan maturity date. The terms and conditions of your small business loan may disclose the financing costs, including any fees and penalties. Paying off a small business loan early can minimize your interest costs and may be right for you if there’s no prepayment penalty.
Which Business Loan Terms Are Right for You?
When deciding which business loan terms are right for your business, it may help to assess what your immediate needs are and how much debt you can safely take on. To get started, it may help to answer the following questions:
• What is the total cost of the funding you need, including interest rates and fees?
• What are your revenue projections for the business loan terms you’re considering?
• What items are the most essential to purchase for your business? Are there items that can wait?
• What are your regular business expenses and how do you plan to cover them?
• How much working capital do you currently have to work with?
• Do you have collateral you can offer to lenders?
• Has cash flow been healthy or restricted? Would financing help or hurt it?
The Takeaway
Business loan terms can be short, intermediate, or long in duration. A short term may suffice if you need fast funding for working capital. You might prefer a longer term if you need commercial real estate financing.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
What are common terms for a business loan?
A business loan can have a short term, intermediate term, or long term repayment schedule depending on its purpose. Microloans, for example, generally have terms of up to six years. SBA 7(a) loan terms can go up to 25 years for financing real estate and up to 10 years for working capital purposes.
What is a typical SBA loan term?
Here are some typical term lengths for SBA loan products:
• Up to 25 years for SBA 7(a) loans used for real estate financing
• Up to 10 years for SBA 7(a) loans used for working capital purposes
• 25 years for SBA 504 loans used for real estate financing
• 10 years for SBA 504 loans used for equipment financing
• No more than six years for SBA microloans
How long can a business loan term be?
SBA 7(a) and 504 loan terms can go up to 25 years for financing real estate. These are generally the longest terms you can get for an SBA loan product.
What are the three types of term loans?
A business loan can have a short term, intermediate term, or long term repayment schedule depending on its purpose. An SBA 7(a) loan for real estate financing typically comes with a long term of up to 25 years. Microloans typically have short terms of up to 36 months, but SBA microloan lenders can offer intermediate terms of up to six years.
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Small Business Loans
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