Business Loan Terms 2024 – Newsweek Vault (2024)

Common Business Loan Terms

When it comes to borrowing money, there’s no one-size-fits-all solution for small businesses. There are several types of small business loans, and you may find repayment terms spanning anywhere from a few months to 10 years or longer. Here are some of the most common types of financing for small businesses.

Term Loans

Traditional term loans, also known as commercial loans, offer a lump sum upfront that you pay back over a fixed period. You can find short-term, medium-term and long-term loans from various lenders, such as banks, credit unions and online lenders.

While there’s no set-in-stone definition for these terms, a short-term loan may span a few months to two years, while a medium-term loan might have a term of three or five years and a long-term loan could be repaid over 10 years.

You can find term loans for as little as $1,000 up to amounts of $1 million or more. Interest rates vary, but may start somewhere around eight percent, with the lowest rates going to borrowers with strong credit and a stable financial outlook.

Along with meeting credit requirements, you’ll need to meet other criteria to qualify for a term loan. Some lenders want to see that your business makes a minimum of $100,000 per year and has been in business for at least six months or a year.

Some lenders, especially online ones, can process your application quickly and disburse your funds within a business day or two. But banks usually take longer, so you may have to wait a few weeks to receive your term loan.

SBA Loans

SBA loans are small business loans that are guaranteed by the U.S. Small Business Administration. They tend to come with competitive interest rates, and some loan types have lengthy repayment terms as long as 25 years.

Both SBA 7(a) and SBA 504 loans, for instance, offer maximum repayment terms of 25 years and loan amounts up to $5 million. Business owners working on certain energy projects can access 504 loans as high as $5.5 million.

You can apply for an SBA loan with one of the SBA’s partner lenders, such as a bank or credit union. You’ll need to meet credit and income requirements, and the process typically takes a month or longer.

Microloans

If you need a smaller loan amount, a microloan could make sense for your business. Miicroloans are term loans of $50,000 or less and have repayment terms that span several months up to a few years.

Microloan providers are often nonprofit organizations or government agencies seeking to support new startups, borrowers with bad credit or entrepreneurs from underrepresented communities. As a result, the criteria to qualify for a microloan may be more flexible than a typical term loan, but there may be more restrictions around how you can spend the money.

The SBA also offers microloans up to $50,000 with interest rates around eight percent to 13 percent. The business loan terms on an SBA microloan span up to six years.

Business Lines of Credit

While term loans provide your total funding amount upfront, business lines of credit let you borrow money on an as-needed basis. They’re a form of revolving credit that you can borrow from and pay back as you go.

As with a term loan, you’ll need to meet a lender’s requirements for credit and revenue to qualify for a business line of credit. The line of credit may only be available for a certain number of months or years, though it may be possible to renew it.

Compared to business credit cards, lines of credit can have higher limits and lower rates depending on your creditworthiness and other factors. Your maximum credit limit may start around $1,000 and go up to $250,000 or higher. You’ll only have to pay interest on the amount you borrow, and that amount will become available again after you pay it back.

A business line of credit could make sense if you have unpredictable expenses or seasonal gaps in cash flow, but watch out for potentially high interest rates compared to term loans.

Equipment Financing

If you need equipment for your business, such as a bulldozer, restaurant oven or even an office printer, equipment financing could help you pay for it. An equipment loan is secured by the equipment you purchase.

Since it’s a secured loan, an equipment loan may have lower interest rates and less stringent credit requirements than an unsecured business loan. Keep in mind, though, that the lender could seize your collateral if you don’t pay back your loan.

Your repayment terms may be fixed or tied to the lifespan of the equipment, and you may need to put down a down payment upfront. Some lenders can turn around your financing request quickly, while others may take a few weeks to process your loan.

Invoice Factoring

Invoice factoring is an alternative to borrowing a business loan that can get you fast access to cash. It involves selling your outstanding invoices to a third-party company, which in turn typically collects payments from your customers.

You might receive around 70 percent to 90 percent of your invoice value as an advance rate. The factoring company will pay you the remaining balance once it gets payments from customers, minus its factoring fees.

Invoice factoring may not be your most affordable option for borrowing money. But it could help you out in a pinch if you need quick, relatively easy access to cash or don’t have strong enough credit to qualify for an alternative type of business loan.

Merchant Cash Advance

A merchant cash advance is another financing option, especially for businesses that aren’t yet established enough to qualify for another type of business loan. With a merchant cash advance, you borrow money against your future sales.

You’ll typically pay back your advance with a percentage of your credit card sales, which may be automatically debited for repayment. A merchant cash advance lender may look at your credit card and bank statements when determining whether you qualify for an advance.

Rather than charging an interest rate, lenders usually use a factor rate of 1.1 to 1.5. This means you’ll pay back 110% to 150% of the amount you borrowed. Your terms may span three to 18 months, and the amount you can borrow typically ranges from around $5,000 to $500,000. Merchant cash advances are often one of the most expensive forms of business financing, especially compared to loans from a traditional bank.

Business Loan Terms: Overview