Small Business Loan Terms: Average, Typical Length

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Small Business Loan Terms

Almost every business will need to secure some sort of funding at some point. The biggest challenge when trying to secure funding is familiarizing yourself with the various options available on the market. Even established businesses would sometimes need a quick injection of cash to spend on renovation plans, equipment upgrades, or to cover unexpected expenses. If you’re planning to avail of a financing option for your company, the most important thing to take note of when taking out a business loan is the loan terms that you are signing up for. Expand

What are business loan terms?

Whether you’re funding a business expansion or improving your existing operations through purchasing new equipment, it’s important to determine where your loan is going. Knowing what you need a loan for gives you a clear idea about the right small business loan terms to apply for based on the current needs of your business. When choosing the right business loan, note that the loan terms you will qualify for depending on the nature of your business, your business’ overall creditworthiness, and your business’ financial situation.

If you have ever applied for a small business loan, chances are you have already studied a variety of financing options that have different amounts, interest rates, and repayment terms. While sifting through a myriad of loan options can seem incredibly daunting, getting at least a basic understanding of the different commercial business loan terms can be helpful in finding the best option for your financial needs.

In this article, we will be discussing financing options based on loan amounts and typical business loan terms.

What are term loans?

As you spend time studying various term loans, you are bound to come across financial jargon that you might not have heard of before. But first, did you know that term loans is an all-encompassing term used to describe several loans offered by lenders? To distinguish one from the other, term loans can either have a fixed or variable interest rate and will always have a fixed repayment schedule that can range from a couple of months to 25 years.

How do business loan terms work?

The average business loan term is usually based on whether you are applying for short-term, medium-term, or long-term business loans.

What are short-term business loans?

As the name implies, short-term business loans have relatively short repayment periods. For that reason, short-term loans tend to have higher interest rates as it’s mostly associated with a need for quick, albeit generally modest, amounts. There’s no standard short-term loan definition as short-term business loans tend to have several different types as well. But, in general, short-term loans are often meant to be repaid anywhere between three to 18 months. Lines of credit, merchant cash advances, and invoice financing are all types of short-term business loans.

What are medium-term business loans?

Simply put, a loan that can be repaid within five years is considered as a medium-term business loan. Medium-term business loans have fixed interest rates and somehow flexible payment terms that depend, of course, on terms that you can qualify for. This type of business loan can be a great alternative to short-term business loans because loan amounts are larger and the repayment period is longer.

What are long-term business loans?

Long-term business loans can be used for just about any business purpose such as purchasing real estate, funding construction projects, buying additional equipment, or taking over an existing business. As opposed to short-term business loans and medium-term business loans, long-term business loans usually have larger funding amounts with lower interest rates and longer payment periods.

A long-term business loan can have repayment terms between three and 10 years. But, in some cases, long-term business loans used to pay for real estate may have repayment terms of up to 25 years. While long-term business loans sound like a nice way to acquire funding, the biggest downside is that this type of loan may be more difficult to qualify for.

What are typical business loan terms?

It may be difficult to summarize typical business loan terms as they depend on the lender and type of loan you’re applying for. To get an overview of the average business loan term, we would need to look at some of the most popular loans available to businesses.

What are SBA loans?

When considering loans offered by the Small Business Administration (SBA), it’s important to keep in mind that the SBA does not lend money directly to businesses. Rather, the SBA partners with various financial institutions, community development organizations, and micro-lending institutions and sets guidelines for loans that small businesses can apply for. The SBA offers a variety of loan programs that cater to specific business purposes.

SBA 7(a) Loan – According to the official SBA website, borrowers applying for the SBA 7(a) loan program can borrow a maximum amount of $5 million. Loan maturities depend on the borrower’s ability to repay the full loan amount and the purpose of the loan. The SBA says maturity terms can be 25 years for real estate, 10 years for equipment, and 10 years for working capital or an inventory loan.
SBA Microloan Program – The SBA’s Microloan program offers loans of up to $50,000 that can be used for purchasing inventory, furniture, machinery, equipment, and for covering operating expenses. For this type of loan, the maximum repayment term allowed is up to six years. See also: Small Business Micro Loans
SBA 504 Loan Program – The 504 program provides small businesses with long-term, fixed-rate financing for fixed assets such as land, commercial space, and equipment. T The SBA 504 loan program can be used to purchase real estate, fund renovation projects, or procure additional equipment. The SBA’s 504 loan program has loan maturities of 10 and 20 years.

What are traditional bank loans?

When it comes to loans, whether it be personal or business, banks are the first thing that comes to mind. Banks are a popular source of funding as they offer loans with some of the best interest rates and the longest repayment terms. The repayment period for traditional bank loans, depending on the type of bank loan you’re trying to acquire, would range from three to 25 years.

What are business lines of credit?

Business lines of credit offer a convenient and flexible way to cover day-to-day business expenses like monthly bills, inventory, utilities, and other time-bound expenses. Generally speaking, business lines of credit can either be short-term or medium-term loans that business owners can pay back immediately or over a set period of time.

What is small business invoice financing?

Small Business Invoice financing is a type of short-term business loan where a business is granted funds based on its outstanding invoices. It can be classified as asset-based financing that helps improve a business’ cash flow – which is one of the primary factors that determine a business’ health. However, because invoice financing depends on how fast your customer pays your invoice, it is difficult to determine a set payback period.

What is equipment financing?

Another form of asset-based financing, equipment financing is a loan specifically designed for businesses that want to acquire new equipment. The equipment you purchased then becomes collateral in the event that you become unable to pay back your loan. Depending on the type of equipment you want to purchase, paying back your equipment financing loan can take anywhere between one to six years.

What is a merchant cash advance?

A merchant cash advance is a financing option that involves lenders granting cash advances to businesses in exchange for an agreed-upon percentage of future credit card sales. Before being given a cash advance, an agreement must be made between a business and the lender regarding the advance amount, payment terms, and factor rate as loan payments are typically made by taking a percentage of your business’ debit or credit card transactions. Due to its unique repayment scheme, terms for merchant cash advances can be difficult to determine as it highly depends on your business’ sales.

How do I choose which loan term option is best for me?

Like most financial decisions, it’s important to shop around to get the best small business loan terms and rates out there. If you’re still unsure about which loan term option is best for you, you could start by asking yourself the following questions:

What do I need the money for?
Do I need a one-time payment or a revolving line of credit?
Does it make financial sense to apply for a long-term loan for a short-term need?
Will I be able to secure sensible interest rates?

Answering these questions should enable you to find a loan that would best meet your needs. If you want a quick and easy way to find commercial business loan terms that you could qualify for, why not try PrimeRates?

PrimeRates provides a quick and easy to use online tool that enables borrowers to access personalized loan offers. Through PrimeRates’ partner lenders, borrowers that have gone through the pre-qualification process can select the best offer based on loan amounts, interest rates, and repayment terms. Sounds simple enough? Take a look at the step-by-step process:

Pre-qualification application takes less than 2 minutes to complete and would not have an impact on your credit score
After getting pre-qualified, choose the offer the best fits your needs by comparing monthly payments, APRs, and loan amounts
Finalize your loan offer with your chosen lender – your lender may ask for additional documents such as ID, income, and other relevant financial documents
Once approved, all you have to do is wait for your funds!

PrimeRates can be used to compare a variety of business loans from SBA loans to merchant cash advances.

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