Understanding Business Loan Terms

There are numerous business loan terms to choose from when you are seeking financing. You can choose between a short-term loan or a long-term loan, the length of the repayment can be either a few months or last over 20 years. Depending on the situation your business is in and what your business needs are, you need to determine which type will best suit your business. Read on to learn more about the most common business loan types and terms.

Common Business Bank Loans

Some common business bank loans that you might be interested in seeking are:

• SBA loans
• Term loans
• Short-term loans
• Equipment loans
• Business lines of credit
• Invoice financing
• Microloans

Each of these loans have different terms which we will dive into next.

SBA Loans

SBA loans are government-backed loans and they are the most affordable and accessible business loans out there. They also offer the longest terms on the market with the following repayment term lengths:

• SBA 7(a) loans: 5-25 years
• SBA 504 loans: 1-25 years
• SBA microloans: Less than 6 years

Term Loans

Term loans can be short, medium, or long-term. These have fixed interest rates and either monthly or quarterly repayment schedules and a set date. If you are a small business, this could be the best option for you especially if you are using the funds for construction, capital improvements, and more. However, it is important to note that term loans have a rigorous approval process and require collateral, so it is important to be okay with this at first before deciding to move forward with the term loan. The term loans have a repayment period of one to five years.

Short-Term Loans

Short-term loans are meant to be repaid in 3-18 months. These offer quick funding, small loan amounts, and a lower cost of capital.

Equipment Financing

Equipment loans have a repayment period of 1 to 5 years. With equipment financing, the equipment financing is secured by the equipment. This is less risky for lenders, so they offer repayment terms up to only 5 years. You can get equipment financing through conventional and alternative lenders.

Business Lines of Credit

The repayment terms for a business line of credit varies by lender. With a conventional bank you can get longer terms of up to 5 years. With alternative online lenders, you might get terms of 6 months up to 2 years.

Invoice Financing

Invoice financing is a short-term funding option designed to provide you an advance of funds to help you while you wait for your customers pay for their accounts receivable. Repayments are typically completed in less than 3 months.

Microloans

Microloans are valued at $50,000 or less and you can pay it back in 6 years or less. Many microloans can be paid off in less than a year and the average term is 40 months. Microloans can be used for working capital, inventory, equipment, or other business projects.

How Do You Qualify?

In order to improve your chances of qualifying for a term loan, banks consider the following:

• Character: your business experience and how you have managed other loans in the past including both personal and business.
• Credit capacity: banks will analyze your credit thoroughly so they can assess your creditworthiness and ability to repay.
• Collateral: collateral is often used as a source of repayment. The collateral that is used will need to be larger than the amount you are borrowing.
• Capital: banks want to know what you own outside of the business – including bonds, stocks, or anything that may be an alternate repayment source.
• Comfort: your business plan needs to have accurate revenue and expense projections which will be reviewed in detail by the banks.

If you plan to go through a conventional bank for a business loan, you will need to meet the following:

• 650 or higher credit score
• Predictable annual revenue of $100,000 or more
• Need to be business more than one year
• Collateral

The Bottom Line

Repayment terms for business loans can range from a several months to a few years. By now you should be familiar with the types of loans available and their repayment terms and determine which might be a good fit for you. It is recommended that you determine the loan amount you will need and the repayment period you are comfortable with.