What are the Typical Business Loan Terms that Small Business Owners Can Expect?

From interest rates to repayment periods and collateral requirements, business loan term length can vary significantly based on the lender, the business’s financial health, and the type of loan. Whether you’re seeking a short term working capital loan or a long-term investment, knowing what to expect can help you make informed decisions.

Key Points:

• Loan Amount and Interest Rates: Small business loan terms typically range from $10,000 to several million dollars, with interest rates depending on factors like federal funds rates, creditworthiness, loan type, and the lender.
• Repayment Terms: Loan repayment periods can vary widely, with short-term loans typically having higher monthly payments but lower total interest costs.
• Collateral and Personal Guarantees: Some business loans require collateral, such as property or equipment, and lenders may ask for a personal guarantee to ensure the loan is paid back.

Typical business loan term length

The terms assigned to each type of loan are approximate. The exact number of payments a borrower owes is unique to each loan.

• Short term loan - Short term business loans require that the debt be paid off in full or refinanced within 18 months. Short term business loans may include cash advance options, like bridge loans, merchant cash advances, SBA microloans, and term loans.
• Medium-term loan - Medium-term loan options offer repayment periods of 1-5 years and include term loans, lines of credit, equipment loans, and some SBA loans.
• Long-term loan - Repayment terms of more than six years are considered long-term loans, which are typically term loans issued by a bank, credit union, or online lender. Long-term financing options may include commercial real estate (CRE) financing, bank loans, equipment financing, and SBA 504 loans.

Common small business loans and their estimated terms

Merchant Cash Advance

A merchant cash advance (MCA) is a small business financing option where the business owner receives a lump sum of money in exchange for a portion of the business’s future credit card sales or annual revenue.

The typical repayment terms of a merchant cash advance involve daily or weekly deductions from a business’s credit card sales, usually ranging from 5% to 20% of revenues. Repayments continue until the full advance and associated fees are paid, making the repayment period vary depending on sales cash flow of the business.

Invoice Financing

Invoice financing and invoice factoring offer funding options to small business owners that have accounts receivable balances. They can be a great short term financing option for new business owners or borrowers with bad credit.

Invoice factoring works when the business sells its unpaid invoices to a factoring company, where a factoring agent collects the invoice balances and reimburses the borrowing business with up to 95% of its balance. Invoice financing is a similar financing program where the business receives a line of credit using their unpaid invoices as collateral.

Businesses receive an advance of 70% to 90% of their outstanding invoice value upfront, with the remainder paid after the invoice is settled by the customer. Repayment terms are typically tied to the payment cycle of the invoices, which could range from 30 to 90 days.

SBA Loans

SBA loans are a type of business financing where the loan amount is partially guaranteed by the U.S. Small Business Administration. The government backing makes these loans lower risk for lenders, so the borrower benefits by receiving lower interest rates, small down payment requirements, and longer terms. SBA loan funds can be used for startups, operating expenses, franchise financing, large purchases, expansion, and debt refinancing.

Repayment terms will vary widely. For example, repayment terms for an SBA 7(a) loan vary based on the loan's purpose. For working capital or equipment purchases, the term is typically up to 10 years, while loans for real estate purchases or construction can have terms up to 25 years.

SBA loans are available to small and medium-sized business owners through traditional lenders, like banks and credit unions, or online lenders.

Business Line of Credit

A business line of credit is a flexible financing option for small business owners. When a borrower applies for and is approved for a line of credit, they are approved for a maximum credit limit. Like a business credit card, the borrower can then draw on that credit line anytime they need fast funding.

The repayment schedules for lines of credit include monthly payments of interest and principal. Business lines of credit are a great financing tool for entrepreneurs interested in growing an established business credit score because eligibility requirements are less strict than traditional bank loans.

Business Term Loans

A term loan is a type of financing issued by traditional and alternative lenders. Term loans may be secured, where collateral or a personal guarantee is required, or they may be unsecured, where the borrower’s credit history is enough to secure funds. Interest rates for term loans vary depending on the amount of the loan, the lender, the down payment, and the creditworthiness of the borrower. The interest rates may be fixed or variable, which fluctuates with market rates. Repayment terms including the number of payments required, interest rates, origination fees, and prepayment penalty are all provided to a borrower upfront, once their loan application is approved.

Equipment Financing

Repayment terms for equipment loans typically range from 3 to 7 years, depending on the lifespan of the equipment being financed. Interest rates can vary, but they are often fixed, with monthly payments required until the loan is fully repaid.

The equipment, or asset, purchased acts as collateral on the loan so the interest rates on the loan are lower than other types of business loans. The term of an equipment loan is determined by the life of the asset.

How to negotiate the best small business loan term length

Business loan terms are based on several factors including the borrower’s creditworthiness, type of loan, lender, length of the loan, down payment, and any personal or government guarantee provided. However, loan terms are rarely set in stone. It is possible to negotiate the following terms:

• Processing and origination fees – Some lenders and types of business funding options include processing fees, or loan origination charges at the start or throughout the term of a loan.
• Personal guarantees – Business loans commonly require the business owner to add a personal guarantee to the terms, which states that if the business can’t pay back the loan, the owner will.
• Prepayment penalties – Prepayment penalties charge the borrower a fee if they repay the loan ahead of schedule.
• Interest rates – Interest rates, or annual percentage rate, can be negotiated and may be lowered with a different lender, higher credit score, or larger down payment.

Final thoughts

The loan repayment period covers the number of payments and the total cost the borrower has committed to. Short term loans typically mature within 18 months, while long-term loans can have repayment schedules lasting 25 years. The term of a loan depends on the lender, loan program, type of financing, fees, and interest rate. To negotiate the best rate, consider watching your credit score, adding collateral, and working with a great lender.

FAQs on Small Business Loan Terms

What is the typical term on a business loan?

The typical term on a business loan ranges from 1 to 5 years, though some loans, particularly those for real estate, can extend up to 25 years. Shorter terms are common for working capital loans, while longer terms apply to equipment or real estate financing.

What are the typical interest rates for business loans?

Typical interest rates for business loans can vary widely, depending on factors like the type of loan, the borrower’s creditworthiness, and market conditions. Rates tend to be lower for traditional bank loans and SBA-backed loans, while alternative lenders may charge higher rates to account for increased risk.