What it is: Term loans are the standard commercial loan, often used to pay for a major investment in the business or an acquisition. The loans often have fixed interest rates, with monthly or quarterly repayment schedules and a set maturity date.
Bankers tend to classify term loans into two categories: intermediate- and long-term loans.
Intermediate-term loans usually run less than three years, and are generally repaid in monthly installments (sometimes with balloon payments) from a business's cash flow.
Long-term loans can run for as long as 10 or 20 years and include additional requirements such as collateral and limits on the amount of additional financial commitments the business may take on.
Upside: Term loans are often the best option for established small businesses. If your financial statements are sound and you're willing to make a substantial down payment, you can receive financing with minimal monthly payments and total loan costs. The loans are best used for construction, major capital improvements, large capital investments, such as machinery, working capital and purchases of existing businesses.
Related: Why Business Loans Are Up for Grabs
Downside: Term loans require collateral and a relatively rigorous approval process but can help reduce risk by minimizing costs. Before deciding to finance equipment, borrowers should be sure they can they make full use of ownership-related benefits, such as depreciation, and should compare the cost with that leasing.
Also note that when it comes to loans more than $100,000, you need a complete set of financial statements and must undergo a complete financial analysis by the lending institution.
Related: 3 Signs You May Need to Ditch Your Bank
How to get it: Large U.S. banks are active in business lending. But it is also worth checking out local community banks with a focus on business lending because they have more leeway when it comes approving loans. Their officers can also be a wellspring of useful advice about how to secure financing.
The degree of financial strength required to receive loan approval can vary tremendously between banks, depending on the level of risk the bank is willing to take on. Search for a prospective bank on the FDIC's website and then click on "latest financial information."
Find "performance and condition ratios" and zero in on the "total risk-based capital ratio," which regulators require to be above 10 percent if a bank is to be considered well-capitalized. The higher ratio, the more secure the bank is financially.
Additional guidelines to consider when selecting a business bank:
- Ask friends where they bank and if they are satisfied.
- Forge a relationship with a bank long before you will need a loan, it will help you find out how they will treat you. Believe it or not, banks want to talk to you even if they cannot lend you money.
- Scan local business news stories for evidence of who is making the kinds of loans you are seeking. Not all banks can be the best at everything. Some are better at business loans, while some are better with consumer deals.
- Visit two to four banks to find your fit. Be upfront, and tell them you are considering a loan and that you are talking with other banks. Then listen to their pitch.
- Think about working through the SBA or other economic-development groups to secure better terms. They are not only for businesses that cannot get funding any other way.
Banks consider the following "five C's" when making decisions about term loans:
- Character: How have you managed other loans (business and personal)? What is your business experience.
- Credit capacity: The bank will conduct a full credit analysis, including a detailed review of financial statements and personal finances to assess your ability to repay.
- Collateral: This is the primary source of repayment. Expect the bank to want this source to be larger than the amount you're borrowing.
- Capital: The bank does not want to be left holding the bag. So what assets do you own that can be quickly turned into cash if necessary? The bank wants to know what you own outside of the business -- bonds, stocks or apartment buildings -- that might be an alternate repayment source.
- Comfort/confidence with the business plan: How accurate are the revenue and expense projections? Expect the bank to make a detailed judgment.
FAQs
A business term loan is a lump sum of capital provided upfront, repaid at regular intervals over a set period. They can be great for investing in an expansion opportunity, purchasing equipment and machinery or funding renovations.
What is the typical term for a business loan? ›
Business Loan Terms Summary
| Loan type | Repayment terms | Time to fund |
|---|
| SBA loans | Up to 25 years | 30 to 90 days |
| Traditional bank loans | Three to 10 years | Two weeks to several months |
| Business lines of credit | Six months to five years | A few days to two weeks |
| Microloans | Up to six years for SBA microloans | 30 to 90 days |
5 more rowsOct 28, 2022
Long-term business loans can typically be repaid over three to 10 years, and in some cases as long as 25 years.
Do commercial banks offer short term loans? ›
Commercial loans are most often used for short-term funding needs.
What is the average business term loan rate? ›
Average business loan interest rates
| Business loan | Interest rate |
|---|
| Bank business loan | Average 7.71% to 8.98% APR* |
| Online business loan | 9.00% to 75.00% APR |
| Business lines of credit | Average 7.43% to 9.18% APR* |
| SBA loans | Fixed rate: 13.50% to 16.50% APRVariable rate: 11.50% to 15.00% APR |
2 more rowsMar 29, 2024
The monthly payment on a $50,000 loan ranges from $683 to $5,023, depending on the APR and how long the loan lasts. For example, if you take out a $50,000 loan for one year with an APR of 36%, your monthly payment will be $5,023.
What is a good APR for a business loan? ›
Current average business loan interest rates
| Business loan type | Average interest rates |
|---|
| SBA 7(a) loans | Variable: 11.5% to 15% Fixed: 13.50% to 16.50% Rates vary depending on loan amounts and terms |
| Traditional bank loans | 6.25% to 9% |
| Business lines of credit | 3% to 39.90% |
| Online loans | 3% to 60.9% |
2 more rowsStill, a higher credit score of 700 or above generally means you'll be eligible for funding with more attractive terms. And while it's possible to get a business loan with a credit score as low as 500, a lower credit score could make it more challenging to qualify for a business loan.
What is the difference between a term loan and a business loan? ›
One of the major differences between Flexi Business Loans and term loans is the rate of interest. In the case of a Flexi Business Loan, interest is on the amount utilised and not on the entire loan limit. However, interest for term loans is on the entire principal amount irrespective of the amount utilised.
How much money can you borrow for business loan? ›
In general, lenders will only provide loans up to 10% to 30% of your annual revenue to ensure you have the means for repayment. Securing a small business loan can open a lot of doors for your organization.
Commercial banks prefer lending short-term loans due to lower risk, better liquidity management, reduced interest rate risk, and higher profitability.
Why do banks prefer short term loans? ›
These loans are considered less risky compared to long term loans because of a shorter maturity date. The borrower's ability to repay a loan is less likely to change significantly over a short frame of time. Thus, the time it takes for a lender underwriting to process the loan is shorter.
Is business loan interest tax deductible? ›
Typically, the repayment of a business loan's principal is not tax-deductible, but you can likely write off the interest that you pay on the loan. The proceeds from a business loan will not be counted as income toward your taxes.
What is the current interest rate for a small business loan of $25000? ›
Interest rates: SBA 7(a) fixed-rate loans
| 7(a) loan amount | Maximum fixed rate |
|---|
| $25,000 or less | 16.50% |
| $25,000 to $50,000 | 15.50% |
| $50,001 to $250,000 | 14.50% |
| Over $250,000 | 13.50% |
Feb 27, 2024
Business loans come with a range of terms, anywhere from three months to 25 years. The type of loan you open will determine what terms you have access to. For example, short-term loans will have shorter term lengths, like three to six months, and SBA loans boast terms of up to 25 years.
How long should a business loan take? ›
While you can get a fast business loan in as little as 24 hours, traditional business loans take longer. You can expect most business loans to take at least a week or longer to process and fund. If you're going for an SBA loan, you can expect the SBA loan process to take 30 to 90 days.
How long do you have to pay back a business loan? ›
Short-term loans are generally repaid in six to 24 months; long-term loans typically have repayment periods of three years or more. Bank loans secured by collateral generally offer lower interest rates than unsecured loans; however, the lender can take your collateral if you fail to pay back the loan.
How soon do you start paying back a business loan? ›
Along with your repayment period, your lender will also determine your repayment structure. Usually, you can expect to repay a long-term business loan monthly or bimonthly. So your payments could start in as little as a few weeks after taking the loan.
What is a good credit score to get a business loan? ›
Still, a higher credit score of 700 or above generally means you'll be eligible for funding with more attractive terms. And while it's possible to get a business loan with a credit score as low as 500, a lower credit score could make it more challenging to qualify for a business loan.
