What Are Common Small Business Loan Terms?

If you’re a small business owner and need funding, you’re considering many options. It may seem like you have too many choices.

One choice is how long you’ll have to repay the loan (your loan term). Factors that determine your loan term include:

•   The type of small business loan you need

•   Which kind 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 (the day by which your loan must be paid off) instead.

It’s helpful to understand how small business loan terms differ among 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 for boosting cash flow to long-term business loans aimed at helping your business grow, as well as alternatives to traditional bank loans.

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 you’re searching for the small business loan funding that’s right for you.

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Typical Small Business Loan Terms by Loan Type

We’ve broken down several different small business financing options and included 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 SBA Small Loan, Express, and Export Express, which typically have maximums of $500,000.

•   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 several 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 according to 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 (three to 24 months), intermediate term (up to five 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 three 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.

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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 six months to five 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 two 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 seven 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 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 90% upfront, depending on the lender — of the amount of each invoice.

•  Interest rate: On top of potential processing fees, the factoring fee is generally 1.00% to 5.00% of the total amount of each invoice and generally charged each month until the customer pays their invoice.

•  Time to funding: Typically, between 24 hours and a few days.

•  Eligibility: Must be a business that invoices customers, which usually means a B2B organization. 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: Often business loan terms are linked to the expected lifespan 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 5.00% and 30.00% or more

•  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 around 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 8.00% to 99.00%

•  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 and your sales.

•  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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Interest Rates and Fees Explained

When it comes to repaying your loan, line of credit, or other type of funding, the term has a significant impact on what your payments will be and how many of them you’ll need to make. But the length of time you have to pay back your financing isn’t the only factor to consider as you evaluate its expense. Here are some other important considerations.

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Fixed vs. Variable Interest Rates

Most financing will charge you some kind of interest: It’s the cost of taking out the loan or line of credit. The lower your interest rate, the more affordable your loan is likely to be. However, it’s also worth assessing the difference between fixed and variable interest rates to make sure you’re comfortable with your choice.

A fixed interest rate will not change for the life of your loan. If it starts at 10.50% it will remain 10.50% through your last payment. This means you’ll know exactly what you’ll need to repay every month, allowing you to budget effectively far in advance.

Some loans — and many lines of credit — come with a variable rate. Loans with these rates may start out lower than comparable fixed-rate loans, but at a set point, they will change according to an industry benchmark. If prevailing interest rates drop, this could mean that you’d pay less, but if they rise, your bills will increase, too. While a variable rate can be advantageous, it also adds an element of uncertainty to your budget and makes it more difficult to forecast your costs.

Origination Fees and Other Charges

Whenever you’re considering applying for financing, fees are a concern, as they can add significant expense to borrowing. Basically, an origination fee pays the lender for the work of handling your application — reviewing your paperwork, verifying your eligibility, checking your credit score, and so on.

Generally speaking, any form of business financing may involve an origination fee, which can be a flat-fee charge of a percentage of the amount you’re borrowing. Banks typically charge between 0.50% and 1.00%, while online lenders may charge from 1.00% to 9.00%. Potentially, you may also face other closing costs, as well. SBA 7(a) loans don’t charge origination fees, but do require an upfront guarantee fee.

Depending on the financing you choose, you may also need to take into account appraisal fees (if you are offering up collateral for your lender to review)h. Once you’ve secured your funding, there may be annual fees, draw fees (for lines of credit), late payment fees, collection fees (if you default), and more. Be sure to go over the fine print about fees as you discuss potential financing options with your financial advisor.

APR vs. Interest Rate

One way to get a quick sense of how expensive fees on your business financing will be is to compare the interest rate to the annual percentage rate (APR), which is the yearly charge for borrowing money plus fees charged by your lender. Also expressed as a percentage, the APR provides a more comprehensive gauge of the cost of your particular loan on a yearly basis.

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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 seven 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 should 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.

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How Repayment Frequency Impacts Your Cash Flow

Depending on your lender and your financing, you may have some options as to how often you make payments. While many loans require monthly payments, some financing can be repaid on a weekly or biweekly basis, on the one hand, or a quarterly schedule on the other.

Repayment frequency may be instrumental in impeding or improving business cash flow. The payment frequency that will work best for you will likely depend not only on the type of financing you choose, but also on the nature of your business and its income.

Frequent payments are typically smaller. This means that they may be easier to pull together and leave more cash available for other purposes. However their frequency can make managing them more demanding and could be a problem if your company tends to receive income at longer intervals. Quarterly repayments, which are likely to be much larger, require more discipline to plan for and gather, which can make it feel like they’re restricting cash flow, assuming that you’re budgeting well in advance.

Which Business Loan Terms Are Right for You?

When deciding which business loan term is 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, try answering 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?

Recommended: SBA 504 vs. 7a

How to Compare Loan Offers Effectively

It’s always a good idea to shop around for loans. As you size up your different offers, here are some elements you should consider:

•  Type of financing and how well it meets your needs

•  Maximum amount available

•  Length of loan term

•  Repayment schedule and whether it aligns with your business

•  Interest rate (or factoring fee)

•  APY (and/or fees associated with the financing)

•  Timeframe for funding

Understanding how your options stack up in these areas should help simplify your choice so that you can find the best financing for your business.

The Takeaway

The terms of business loans 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 is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

Large or small, grow your business with financing that’s a fit for you. Search business financing quotes today.

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 or seven 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 seven 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 usually have short terms of up to 36 months, but SBA microloan lenders can offer intermediate terms of up to seven years.

What is the difference between a loan term and a loan amortization schedule?

While your loan term and your amortization schedule are related, they’re not the same. A loan term is the entire period of time you have to fully pay back a loan — principal and interest. An amortization schedule is the plan for how each of the payments you make will be applied toward principal and interest. When you start paying back the loan, most of your money will go toward interest, and as you reach the end of your loan term, more of your payment will be applied toward principal.

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