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When it comes to business loans, it’s important to take all aspects of the loan into consideration, especially the business loan terms. In business lending, “terms” define the amount of time a borrower has to pay back the financial assistance they have received. Typical business loan terms depend on the type of loan and can reflect long or short repayment structures, from just a few weeks to more than 25 years. It’s important to know small business loan terms if you’re looking for outside funding. The likelihood of that is great as 43% of small business owners applied for a loan in 2020.
So, if you’re curious about business loan terms you’ve come to the right place. Let’s begin!
An Overview of Typical Business Loan Terms
The terms of a loan refer to the exact amount of time the borrower has to repay their loan and accumulated interest to their lender. Business loan terms and conditions are specific to each business concerning what the loan is specifically for, the business credit score, sales history, etc. If your business does not yet have any credit or has bad credit, You can still get approval but there may be some hefty terms and agreements. This may result in shorter repayment periods, higher interest rates, a limited borrowing capacity, and collateral or personal guarantee on the loan.
Is there a difference between typical small business loan terms?
Typical small business loans can vary quite drastically with some amounts over a million dollars and others as little as the low thousands. Terms range from just a few short months to as long as 25 years. Term lengths for business loans vary with the type of loan secured, the exact amount borrowed, the financial history of the borrower, and the chosen lender.
Typical Business Loan Terms by Type
Small business loan terms are dependent on the type of loan you secure for your business and can be specific to a merchant’s particular agreement with their lender. Below we’ll cover the typical business loan terms by tpe.
Traditional bank loans
Traditional bank loans vary from three years to up to ten years. These bank loans are difficult to qualify for. Therefore, while these business loan term lengths may sound ideal, they’re not available for the majority of small business owners.
Traditional bank loans average near $500,000, but banks do lend as little as $50,000 to smaller businesses. Interest rates vary according to the loan size, term length, and personal merchant details such as their credit score. A lender may require businesses to put up collateral to secure financing. Approved borrowers typically have access to funds within two months.
Small business loans (SBA)
Small Business loans can have some of the longest terms available to borrowers. SBA term lengths depending on the specific SBA loan program of the lender. The most common three include:
- 7(a) Loan Program: 5 – 25 years
- CDC/504 Loan Program: 10 – 25 years
- Microloan Program: Less than 6 years
SBA loans can be difficult to obtain, if a business owner does qualify, it can take up to three months before the borrower receives their funding. These loans can be as small as $10,000, however, the average SBA loan amount is around $350,000. Interest rates will depend on both loan amount and term lengths.
SBA loans offer competitive interest rates with maximum caps in place. government-backed SBA loans are some of the most sought-after loans on the market since they’re both affordable and accessible. Supported by the Small Business Administration along with banks, credit unions, and alternative lenders, SBA loans offer borrowers a lot of options to find financial assistance specific to their business’s needs. Recently there has been a massive push to provide small business funding due to the COVID-19 pandemic. This has afforded business owners new small business loan terms and funding opportunities.
Short-term business loans offer borrowers smaller loans with shorter terms. Short-term loans are most commonly characterized by repayment terms of one year or less. However, most lenders offer short-term loans with repayment structures of 3-18 months.
Medium-term business loans are typically obtained through alternative lenders but operate much like traditional bank loans. Terms typically range from one to five years, which is a relatively longer repayment structure than most other online business loan solutions. Long-term loans typically last 7-10 years and are more likely to be available through banks and credit unions rather than alternative lenders, which some business owners prefer.
Business lines of credit
Business lines of credit come in both short-term or medium-term varieties. Therefore, these loan terms vary vastly from as short as six months to a length of five years. Shorter terms are typically offered by alternative lenders, while traditional banks offer lines of credit with longer repayment structures.
Business lines of credit can fluctuate between $10,000 to $500,000. If qualified, approval should be fairly quick and work as a sort of credit card for your business. With this option, it’s best to pay off the balance in full each month as you may be subject to higher interest charges.
Merchant cash advance
A merchant cash advance is a loan product that is repaid by a percentage of a business’s credit card sales. This financing option’s repayment structures are unique to each borrower-lender agreement. The agreement continues until the total amount lent is repaid in full plus any interest defined in the agreed-upon terms. As business sales fluctuate, so does the loan repayment. The terms are fully dependent on a business’s sales revenue. Typically, borrowers will pay off their merchant cash advance anywhere from 4-18 months.
Merchant cash advances (MCA) have a quick turn around and merchants can receive their funds within just a few business days. Depending on the sales history, a business can secure between $5,000 to $500,000 through an MCA lender. MCA can be extremely expensive, with APRs going up to 350%.
Invoice financing, also known as invoice factoring, options offer strictly short-term business loans. These financing solutions allow businesses access to funds through their outstanding invoices. The loan terms depend on how long it takes the invoiced customer to pay their invoice. Typically invoice financing companies accept invoices that are 3-6 weeks overdue.
Common business loan terms for equipment financing are typically longer. These loans are dependent on the equipment that is purchased with this financing. It’s built-in collateral which means the lender takes on less risk. Therefore, financers most commonly offer repayment terms varying from 2-5 years.
What is the Average Loan Amount?
The average small business loan amount in the U.S. is $633,000 according to the Federal Reserve. It is important to note that loan amounts are specific to the business’s needs, therefore loan amounts are extremely varied. How much a business can borrow depends on credit scores, sales revenue, the type of loan, and the lender. Some loans have borrowing caps in place that will limit how much even the most qualified business owners can borrow. In the end, you need to understand the position your business is in and the appropriate loan terms you’re willing to accept to grow your business.