When taking out a business loan, one of the most common questions people ask is, “How long should my loan repayment period be?” There is no one size that fits all the answers to this question, so we’ll dig a little deeper in this article to help you decide the term length that is right for you. The repayment terms of your small business financing will depend on a few factors, such as what you plan to use the funds for, which lender you choose, and the type of loan you get. One way to find answers to questions like this is to use a business loan repayment calculator, but you’ll need to know the type of loan you’re interested in and the terms you hope to receive.

What is the average time to pay back a business loan?

The repayment period for new business loans can range anywhere from six months to 25 years. But again, the repayment terms will depend on many things. First, a lender determines the risk in loaning a borrower money. Each lender has its own criteria for assessing this risk. Long-term loans usually equal higher loan amounts and more extended repayment periods than other loans. So, a lender will review a borrower’s credit profile more thoroughly for longer-term loans. This is because the lender sees a higher risk with lengthier repayment terms. Therefore, borrowers with a stronger credit score and better financial credentials can usually command the best repayment terms (if you try a small business loan calculator, you’ll see this reflected in the results). The type of business you own determines how long you can pay off your loan. A lender will also evaluate your business and personal credit scores, business plan, debt ratio, tax returns, and annual revenue before deciding the term length they will allow. These things will also affect how much you have to repay on your loan. The less risk you carry for a lender, the lower your interest rate will be, and the less it will cost you to repay the loan.

Here’s a closer look at the types of business loans and their general repayment lengths.

Long-term business loans

A long-term loan offers a repayment period of at least 12 or more months. You make regular monthly loan payments or installments with a term loan after the lender issues you a lump sum or loan amount upfront. The loan will have a predetermined repayment schedule. Long-term loans include traditional bank loans, regular term loans, and SBA loans (most business loan repayment calculators are built for this type of loan).

Bank loans

Traditional lenders include local banks, commercial banks, and credit unions. While banks offer higher loan amounts at lower interest rates, they severely narrow their pool of eligible borrowers. Unfortunately, most business owners are rejected for bank loans. But, if you can get a bank loan, the typical repayment period is five to seven years, depending on the lender. You can often find a business loan repayment calculator on the website of the lenders you are looking into that will provide details about the terms they may provide.

Term loans

Term loans are available from regular banks and alternative lenders. Alternative lenders are flexible and cater to more borrowers. You’re more likely to have your business loan approved and get faster funding. Online business lender may be able to approve your loan within a couple of business days and deposit the funds into your bank account shortly after. The downside is that your business financing might come at a higher interest rate. A business loan repayment calculator can help you decide whether the terms make sense for your business needs. Depending on the lender and the financial profile of your business, you may have a shorter loan repayment period. But when you consider that it can mean the difference between meeting your business needs and your business going under, it’s worth considering. That said, the typical repayment period for a term loan with an alternative funding company is around one to five years.

Real estate loans

Commercial real estate (CRE) loans are a type of long-term secured business financing that you can use to acquire a new business, renovate an established business, or refinance existing business loans. CREs are high-dollar loans that range from $250,000 to $6 million ($5 million for SBA-7 loans). Business owners can apply for real estate loans through traditional lenders, the SBA, or an online lending marketplace or lender. The repayment length for an SBA real estate loan is up to 25 years, but a borrower has to make a downpayment of up to 30% if the loan is approved. And in reality, it’s tough to be approved for an SBA-7 loan, plus applications are frequently tied up in red tape. While the repayment period for a real estate loan is shorter with an alternative lender, you will likely be able to get the funds your business needs in a matter of days rather than months. Check for a business loan repayment calculator when vetting potential CRE loan lenders.

SBA loans

Small business administration loans are often considered the Rolls Royce of business loans. The SBA doesn’t loan the money for these loans directly. Instead, the loans are distributed by a regular bank participating in the SBA loan program, and the SBA guarantees part of the loans. This reduces the risk for lenders, so they reduce the rate for you. With SBA loans, you will face a higher degree of scrutiny than you would as a regular borrower at traditional lenders because you must also satisfy the SBA’s lending criteria. But, if you can manage to get approval for an SBA loan, you may have up to 25 years to repay the loan, depending on which loan program you’re entered. SBA loans are also among the lowest interest rates available for business loans, sometimes as low as 5%. Typically, an SBA loan will grant a 25-year repayment length for real estate, a 10-year payback for machinery or equipment, and seven years for a working capital loan. The SBA also offers a microloan, which is a smaller funding amount with a shorter time to repay the loan. Microloans are generally used for supplies, equipment, working capital, or expanding or starting up a business. The repayment terms for an SBA microloan are usually no more than six years.

Short term business financing

Short-term business financing, such as working capital loans, equipment loans, merchant cash advances, invoice financing, invoice factoring, and lines of credit, have a shorter repayment time. When a borrower has a hard time securing a long-term business loan, they often fund their businesses with smaller, short-term financing. The good thing about short-term loan options and other short term financing is that you don’t always have to have a large down payment or collateral like you would with a long-term loan. In these cases, a lender will want to establish your creditworthiness and get a personal guarantee to sign off on the loan. Here’s a look at a few types of short-term business financing.

Business line of credit

While a business line of credit is often used over the long term, it is considered short-term financing. A line of credit works similarly to a credit card and allows you to borrow up to a pre-approved credit limit. You only pay interest on the amount of credit you use, and you can pay it off each month or make a minimum payment. But any balance that’s left will incur interest. As you repay the credit you’ve used, the credit limit resets, and you can borrow again up to the limit set forth by the lender. Many business owners use their line of credit as working capital to help manage their business cash flow more efficiently, while some reserve it for emergency use.

Working capital loans

A working capital loan is financing that covers everyday operating expenses, such as payroll, inventory, or equipment purchases. It is sometimes also used as an opportunity to grow or expand your business. Typically a working capital loan is best when you need quick funding. Because working capital loans are meant to cover short-term needs, the repayment period is usually shorter, usually from three to 12 months. This can mean higher interest rates, so use a business loan repayment calculator to see if it’s still the right decision for you.

The bottom line: What is the best business loan repayment schedule?

As with any decision concerning your business, it all comes down to what is best for you and what your business needs. While longer-term financing tends to come with more favorable terms, it’s not always attainable for every business. If that’s your situation, a short-term funding option could help meet your business goals faster. For instance, consider the business journey of Reinaldo (Ray) Anzola. Ray spent his business career finding worn-out restaurants and breathing new life into them. When an opportunity came up to renovate another restaurant, Biz2Credit provided the fast funding he needed. Ultimately, you need financing that works for you when you need it. That might mean going with a loan that has a shorter repayment period now and refinancing it later when you’re able to get a long-term loan.

FAQs

What are the benefits of long-term business loans?

Long-term loans usually have more relaxed repayment periods with lower interest rates. This means your loan will likely cost you less, and it will be easier for you to pay back the loan. In the meantime, you build valuable business credit that makes it more likely for you to get future financing when you want to grow your business, or you need to invest more in your business.

Is there a benefit to paying off a business loan more quickly?

A free business loan repayment calculator may often help you decide whether there’s a benefit for paying off your loan early. Just check the terms to see if there is a prepayment penalty.

Why are interest rates higher with unsecured loans?

Unsecured loans don’t have collateral to back up the loan, which presents a higher risk for the lender. A lender balances this risk by charging a higher interest rate and setting a shorter repayment time to pay back the loan. Consider using a business loan repayment calculator to see if the higher interest rates still work for your needs.

Is there anything else I should know about interest rates and loan repayments?

Loan terms can include fixed interest rates or variable interest rates. Fixed rates stay the same throughout the life of the loan, while variable rates fluctuate. Use a business loan repayment calculator to see what the effects of both might be on your bottom line.

What is the advantage of short-term business financing?

Short-term business financing from alternative online providers can be more accessible than traditional business financing from a bank. And they often provide faster funding. To evaluate the options, consider using a business loan repayment calculator.

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