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Whether you want to grow your business or need some help with short-term cash flow issues, small business loans can help your business grow and succeed. However, it’s essential to understand available types of financing and the small business loan terms associated with them before you apply.
Here’s an overview of standard business loan terms so you can decide which loan is best for you.
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Business Loan Terms Overview
There are many types of small business loans, each with its own terms and conditions. These are some of the most common types of small business financing, along with business loan terms you should be familiar with:
Term Loans
Term loans provide businesses with a set amount of money that borrowers must repay over a fixed period. This type of loan can be helpful for companies that need a large sum of money up front to cover expenses or otherwise invest in the business. Term loans usually have lower interest rates than credit cards or lines of credit, and they can provide businesses with some peace of mind knowing that they have a set amount of money to work with.
- Repayment terms: Short-term (three to 24 months); mid-term (up to five years); long-term (up to 10 years)
- Loan amounts: $5,000 to $1 million+
- Interest rates: 6% to 36%
- Time to fund: 24 hours to a few months
- Qualification requirements: Requirements vary by lender, but many financial institutions require a minimum credit score of 600, at least $8,000 in monthly revenue and that you’ve been in business for six months or more.
SBA Loans
Eligible businesses can qualify for U.S. Small Business Administration (SBA) loans. Loan funds can be used for a wide range of purposes, including working capital, debt refinancing and the purchase of equipment, supplies or inventory. Low interest rates and long repayment terms make SBA loans more competitive than other small business loans. Likewise, minimum qualification requirements may be more accessible than those imposed for other loan types.
- Repayment terms: Up to 25 years
- Loan amounts: Up to $5 million
- Interest rates: Base rate, plus 2.25% to 4.75% for 7(a) loans
- Time to fund: 30 to 90 days, depending on the loan program
- Qualification requirements: Businesses must operate for profit in the U.S., have reasonable owner equity to invest and have already used alternative financial resources before applying for an SBA loan. Borrowers should also have a credit score of at least 640, though applicants with scores of 680 or above are more likely to qualify.
Traditional Bank Loans
Traditional bank loans are typically available through banks, credit unions or other lending institutions. These loans generally are used to finance a business purchase, expansion or startup. Depending on the lender, these loans may have lower interest rates than other options. Still, it can be challenging to qualify—especially for newer businesses.
- Repayment terms: Three to 10 years
- Loan amounts: $250,000 to $1 million
- Interest rates: 3% to 22%
- Time to fund: Two weeks to several months
- Qualification requirements: Borrowers must typically have a minimum credit score of 640 or provide collateral, but these requirements vary by institution. Many banks also impose minimum revenue and time in business requirements.
Business Lines of Credit
A business line of credit is a type of business financing that allows businesses to borrow money as needed. This type of loan is ideal for companies with unpredictable or cyclical expenses, as it will enable them to borrow money when needed and then pay it back over time. Because business lines of credit are revolving, business owners can repay and access the funds repeatedly until the loan term ends.
- Repayment terms: Six months to five years
- Loan amounts: $1,000 to $250,000
- Interest rates: 10% to 99%
- Time to fund: A few days to two weeks
- Qualification requirements: Most lenders require borrowers to have a minimum personal credit score of 680, but some impose less rigorous requirements. To qualify, a business must also meet minimum revenue requirements (anywhere from $10,000 per month to $250,000 per year) and minimum time in business requirements (often six months to two years).
Microloans
Microloans are designed for small businesses and entrepreneurs who need small sums of money to start or grow their businesses. These loans are offered by the SBA and other community lenders, ranging from $1,000 to $50,000.
SBA loans also offer borrowers more flexible repayment terms and lower interest rates than traditional bank loans or business lines of credit. This makes them an ideal option for small business owners who may not have access to conventional bank loans. That said, borrowers cannot use microloans to purchase real estate or pay off existing debts.
- Repayment terms: Up to six years for SBA microloans
- Loan amounts: Up to $50,000
- Interest rates: 6% to 9% for SBA microloans
- Time to fund: 30 to 90 days
- Qualification requirements: Businesses must meet the SBA’s general eligibility requirements in addition to lending and credit requirements imposed by the intermediary lender.
Invoice Factoring
Invoice factoring enables business owners to borrow money against the value of their outstanding invoices. This type of loan is ideal for businesses with a large number of invoices due soon, as it allows them to borrow money quickly and easily. Invoice factoring may be a good option for businesses without established credit because factoring companies typically make lending decisions based on the creditworthiness of the business’ clients.
- Repayment terms: 30 to 90 days
- Loan amounts: Up to 100% of each invoice amount
- Interest rates: 3% processing fee, plus a factoring fee of 1% to 2% of the invoice amount
- Time to fund: As little as 24 hours
- Qualification requirements: Invoice factoring companies look at a business’ financial documents, including account receivable, bank statements and outstanding invoices. These lenders also evaluate the business’ clients’ creditworthiness to assess the risk level.
Inventory Financing
Inventory financing is a type of loan secured by the value of the purchased inventory. Businesses that expect to receive a large influx of orders are best-suited to this type of financing, as it allows them to quickly and easily finance the purchase of additional inventory. That said, repayment terms are shorter than with other business loans, and interest rates can be high.
- Repayment terms: Up to one year
- Loan amounts: 20% to 65% of the inventory cost
- Interest rates: 0% to 80%
- Time to fund: 24 hours to a couple of months
- Qualification requirements: To qualify for inventory financing, businesses must sell products or materials and meet minimum time and business requirements (usually six months to one year). Many lenders also set inventory minimums and require the business to have a well-organized inventory management system.
Equipment Financing
Equipment financing lets business owners borrow money to pay for equipment. The equipment secures the loan, so interest rates are lower than for many types of financing. Likewise, funding speeds can be fast, and repayment terms are typically tied to the useful life of the equipment. When financing equipment, however, it’s necessary to make a down payment—usually between 5% and 20% of the purchase price.
- Repayment terms: Usable life of the equipment (often two to seven years)
- Loan amounts: Up to 100% of the equipment cost
- Interest rates: 2% to 20%
- Time to fund: 24 hours to a few weeks
- Qualification requirements: Business owners should have a credit score of at least 600 to qualify for equipment financing. Some lenders also impose operating history requirements.
Merchant Cash Advance
A merchant cash advance is a type of loan that allows businesses to borrow money against the future sales of their business. Loans are often repaid through automatic debits from the business’ credit card sales, making them ideal for companies with a strong credit history and high sales volume.
- Repayment terms: Three to 18 months
- Loan amounts: Up to $500,000
- Interest rates: Factor rate of 1.1 to 1.5
- Time to fund: As little as 24 hours
- Qualification requirements: Generally, businesses should have at least $10,000 in monthly business deposits, but this number varies by lender. Lenders often review at least three months of credit card processing statements, copies of tax returns from the last one or two years and recent business bank account statements.
Business Loan Terms Summary
| Loan type | Repayment terms | Loan amounts | Interest rates | Time to fund | Qualification requirements |
|---|---|---|---|---|---|
| Term loans | Three months to 10 years | $5,000 to $1 million+ | 6% to 36% | 24 hours to a few months |
|
| SBA loans | Up to 25 years | Up to $5 million | Base rate, plus 2.25% to 4.75% for SBA 7(a) loans | 30 to 90 days |
|
| Traditional bank loans | Three to 10 years | $250,000 to $1 million | 3% to 22% | Two weeks to several months |
|
| Business lines of credit | Six months to five years | $1,000 to $250,000 | 10% to 99% | A few days to two weeks |
|
| Microloans | Up to six years for SBA microloans | Up to $50,000 | 6% to 9% for SBA microloans | 30 to 90 days |
|
| Invoice factoring | 30 to 90 days | Up to 100% of each invoice amount | 3% processing fee, plus a factoring fee of 1% to 2% of the invoice amount | 24 hours+ |
|
| Inventory financing | Up to one year | 20% to 65% of inventory cost | 0% to 80% | 24 hours to a couple of months |
|
| Equipment financing | Life of equipment | Up to 100% of equipment cost | 2% to 20% | 24 hours to a few weeks |
|
| Merchant cash advance | Three to 18 months | Up to $500,000 | 1.1 to 1.5 factor rate | 24 hours+ |
|
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FAQs
What is the typical term for a small business loan? ›
Repayment term: Typical business loan terms are 3 to 10 years. Loan amounts: Average business loan amount is around $500,000. Interest rates: Could be as low as 3% or as high as 22%, but will ultimately depend on the lender, loan type, and assessed risk of lending to the borrower.
What is the maximum term for a business loan? ›The maximum maturities for SBA loans are as follows: 25 years for real estate. 10 years for equipment. 10 years of working working capital or inventory loan.
How long is a typical business loan? ›Long-term business loans typically have repayment terms ranging from three to 10 years, whereas short-term business loans usually have repayment terms of one year or less.
What questions are asked for a business loan? ›- What is your business plan? ...
- How much money do you need? ...
- What is your business financial and credit score? ...
- Where is the audited financial statement of your business? ...
- Where are your financial details and credit score?
“Loan terms” refers to the terms and conditions involved when borrowing money. This can include the loan's repayment period, the interest rate and fees associated with the loan, penalty fees borrowers might be charged, and any other special conditions that may apply.
How does SBA determine loan amount? ›SBA Uses Cash Flow Analysis to Determine Your Repayment Ability. In addition to the total eligible loan calculation, SBA loan officers use a cash flow analysis to determine the EIDL amount you qualify for, specifically if you will be able to repay the EIDL amount you are requesting.
What percent is the average business loan? ›In general, you could expect to see the following average range of annual percentage rates, or APRs, based on loan type: Traditional bank loans: 3% to 7% Alternative, online loans: 11% to 44% (or higher)
How long does it take for a small business loan to go through? ›The SBA promises a turnaround time of 36 hours for their express loans. But, that doesn't include the time it takes for the lender to approve the loan, which could tack on another few weeks. So, instead of 60-90 days, you're looking at 30-60 days for the SBA loan processing time when all is said and done.
What is the current SBA loan rate? ›SBA 7(A) interest rates
*The current prime rate, as of November 2022, is 7%. SBA Express loans are part of the 7(a) program but can have higher interest rates. Their rates range from prime plus 4.5% to prime plus 6.5%, depending on how much you borrow.
- What is the purpose of this loan request?
- What dollar amount do you need for your loan request?
- What length of term do you need to repay the loan in monthly installments?
- What entity will the name of the loan be under? ( ...
- What type of collateral will you be able to pledge for the loan request?
What do small business lenders look for? ›
They'll consider household income, business revenue, cash flow, outstanding debt, unused credit lines, and the amount of money the owner has personally invested into the business. All these variables will help lenders calculate the ability for an owner to repay the loan.
What proof do you need for a business loan? ›Typical documents include personal and business tax returns, government-issued ID, EIN, financial statements, business documents, bank statements, and your SSN.
What are the 4 basic principles of finance? ›The four principles of finance are income, savings, spending, and investing. Following these core principles of personal finance can help you maintain your finances at a healthy level. In many cases, these principles can help people build wealth over time.
What is the most common source of small business financing? ›Bank loans. Bank loans are the most commonly used source of funding for small and medium-sized businesses.
What are the 4 common sources of financing? ›The common financing sources used in developing economies can be classified into four categories: Family and Friends, Equity Providers, Debt Providers and Institutional Investors.
What is the most common loan term? ›The most common mortgage term in the U.S. is 30 years. A 30-year mortgage gives the borrower 30 years to pay back their loan.
What are 3 factors that can affect the terms of a loan? ›- Interest Rate.
- Length of the Loan.
- Total Amount Financed.
In theory, calculating your loan payment is simple. You take the total amount you borrowed (known as your principal), and divide it over the number of months over which you agreed to pay back the loan (known as the term).
Are SBA loans hard to get? ›SBA loans are easier to qualify for than regular bank loans. They also have lower interest rates, longer terms and more flexible repayment options.
What does the SBA look for in a successful borrower? ›Past earnings and projected cash flow. Ability to repay the loan with business earnings. Sufficient invested equity to operate on a sound financial basis. Potential for long-term success.
How much credit do you need for a SBA loan? ›
640 to 700: Business loan providers generally consider a credit score that falls somewhere between 640 and 700 to be good but not excellent. Generally, the minimum credit score for SBA and term loans is around 680.
What is the prime rate today 2022? ›The current Bank of America, N.A. prime rate is 7.00% (rate effective as of November 3, 2022). The prime rate is set by Bank of America based on various factors, including the bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans.
How much do you need saved for a business loan? ›Business owners should expect to pay a 10% to 30% down payment when applying for an SBA 7(a) loan. Businesses with weak cash flow or low-value collateral typically have higher down payment requirements.
What happens after SBA loan is approved? ›After an SBA loan is approved, it usually takes around five days for the lender to disburse loan funds—but it can take up to 14 days. That said, the actual amount of time it takes for you to receive loan proceeds depends on the lender and the business' bank.
How long does it take SBA to deposit funds once approved? ›The current estimate of when the SBA will inform you of the terms you have been approved for is 3-4 weeks. They will send you the approved loan documents for you to review, sign, and return. The SBA will then deposit the funds direct deposit within 3-5 business days.
How long after my loan is approved do I receive the money? ›You can often apply online within minutes and might even get an instant decision, depending on the lender. If you're approved, you'll typically get the funds within five business days. Some lenders send money even faster — for example, Lightstream might fund your loan as soon as the same business day.
Can you negotiate an SBA loan? ›The SBA offer in compromises program allows you to negotiate with your lender and set up a settlement agreement. Don't be misled, this is not loan forgiveness. You'll still be responsible for at least part of what you owe after liquidating assets.
What percentage of SBA loans are forgiven? ›At a Senate committee hearing in August, Kelley said the SBA has already processed forgiveness decisions for about 97% of loans issued in the first year of the program, 2020.
Will SBA loans ever be forgiven? ›While the SBA will not forgive 100% of the debt owed, the goal is to settle on a number that makes sense for both the agency's bottom line and a business's financial ability to pay. If the SBA approves the offer in compromise, a payment will be issued and the loan will be classified as “Compromised/Closed.”
What are the 5 C's of lending? ›Lenders will look at your creditworthiness, or how you've managed debt and whether you can take on more. One way to do this is by checking what's called the five C's of credit: character, capacity, capital, collateral and conditions.
What are the five C's lenders consider when approving a loan? ›
What are the 5 Cs of credit? Lenders score your loan application by these 5 Cs—Capacity, Capital, Collateral, Conditions and Character. Learn what they are so you can improve your eligibility when you present yourself to lenders. Capacity.
What are the 6 items that trigger a loan application? ›- Name.
- Income.
- Social Security Number.
- Property Address.
- Estimated Value of Property.
- Mortgage Loan Amount sought.
Poor credit scores or lack of credit history are among the most common reasons businesses get rejected for business financing. Credit scores help banks and other lenders determine your creditworthiness – or how likely you (or your business) are to pay them back.
Why is it difficult for small businesses to get loans? ›Poor credit history and low cash flow can prevent small businesses from securing loans. Before applying for a business loan, make sure your financial documents are in order and that you understand what lenders need from you.
What are the easiest loans to get approved for? ›The easiest loans to get approved for would probably be payday loans, car title loans, pawnshop loans, and personal installment loans. These are all short-term cash solutions for bad credit borrowers in need. Many of these options are designed to help borrowers who need fast cash in times of need.
How do you convince the bank for a loan for a business? ›- Write a good business plan first. ...
- Clean up your credit rating before you apply. ...
- Pick a business domain that is squeaky clean. ...
- Show a significant personal investment. ...
- Demonstrate an ability to repay from revenues, not collateral.
- IRS form K-1.
- Business emails.
- Business meeting minutes.
- Business resolutions.
- Other business records.
Every lender, whether it's a bank or alternative lender, will require proof of identity. Bank Statements – Lenders commonly request anywhere from the last three months to the last three years of bank statements. Bank statements present a picture of the cash inflows and outflows of your business.
What is the current SBA loan rate? ›SBA 7(A) interest rates
*The current prime rate, as of November 2022, is 7%. SBA Express loans are part of the 7(a) program but can have higher interest rates. Their rates range from prime plus 4.5% to prime plus 6.5%, depending on how much you borrow.
How long do banks give business loans for? Bank loans often require repayment in 1-3 years for short-term loans and 3-10 years for long-term loans, though products and terms vary by lender. The loan repayment schedule will depend on several factors, including: Type of loan.
How are small business loans paid back? ›
Most business loans are installment loans. Instead of getting a revolving credit line, you receive the full amount of the loan upfront and pay it back in equal installments. This way, there's a set repayment term, typically with fixed monthly payments.
What kind of financing do small businesses prefer? ›If your company is a startup serving a local market and does not need large-scale funding, debt financing is probably your best, and perhaps only, option. More prominent startups often combine debt and equity financing to reduce the downside of both types.
Can you negotiate an SBA loan? ›The SBA offer in compromises program allows you to negotiate with your lender and set up a settlement agreement. Don't be misled, this is not loan forgiveness. You'll still be responsible for at least part of what you owe after liquidating assets.
What is the prime rate today 2022? ›The current Bank of America, N.A. prime rate is 7.00% (rate effective as of November 3, 2022). The prime rate is set by Bank of America based on various factors, including the bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans.
Are SBA loans hard to get? ›SBA loans are easier to qualify for than regular bank loans. They also have lower interest rates, longer terms and more flexible repayment options.
What happens if you get a business loan and the business fails? ›Your personal assets could be seized
Your lender can come after your personal assets if your business is unable to repay its debts. If your loan is secured and you're a sole proprietor, a collection agency will likely be able to seize your personal assets along with your business assets to pay back your loan.
Monthly payments on a $100,000 mortgage by interest rate
At a 4% fixed interest rate, a 30-year $100,000 mortgage may cost you around $477.42 per month, while a 15-year mortgage has a monthly payment of around $739.69.
The monthly payment on a $30,000 loan ranges from $410 to $3,014, depending on the APR and how long the loan lasts. For example, if you take out a $30,000 loan for one year with an APR of 36%, your monthly payment will be $3,014.
Are small business loans going to be forgiven? ›While the SBA will not forgive 100% of the debt owed, the goal is to settle on a number that makes sense for both the agency's bottom line and a business's financial ability to pay. If the SBA approves the offer in compromise, a payment will be issued and the loan will be classified as “Compromised/Closed.”
What are the disadvantages of an SBA loan? ›- Strict underwriting requirements. SBA loans come with some of the strictest underwriting requirements small business owners can face. ...
- Extensive paperwork. ...
- Long application timelines. ...
- Personal guarantee or down payment may be required. ...
- Flaws with COVID-19 funding.
Who is responsible for paying back an SBA loan? ›
Small businesses receive loans from SBA partner lenders and the borrower is obligated to pay this lender back. SBA guarantees up to 85% based on different loan amounts, which the lender can ask for payout in the case of a defaulted loan.
What do small business lenders look for? ›They'll consider household income, business revenue, cash flow, outstanding debt, unused credit lines, and the amount of money the owner has personally invested into the business. All these variables will help lenders calculate the ability for an owner to repay the loan.
What is the most common way to fund a small business? ›- Traditional loans. If you are a new business, you might not have a credit history. ...
- Online lenders. ...
- Personal loans. ...
- Microlenders. ...
- Self-funding. ...
- Investors. ...
- Crowdfunding. ...
- Friends and family.
The common financing sources used in developing economies can be classified into four categories: Family and Friends, Equity Providers, Debt Providers and Institutional Investors.