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What Are Common Small Business Loan Terms?

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Updated November 6, 2020
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What Are Common Small Business Loan Terms?
If you’re a small business and you need funding, there are many options. Yet, you may be wondering what is considered a small business loan, do I qualify, and what can I expect? A variety of factors determine the answers to those questions, including:
  • The type of small business loan you need
  • Which type of lender you choose
  • Interest rates and fees
  • Repayment terms
  • Aspects of your business (e.g. age, credit, revenue) 
While each of these is important, many borrowers want to know about repayment terms, or business loan terms. This refers to the amount of time you have to pay back the lender and can be as short as a few months, to many years. As a borrower, it’s helpful to understand how loan terms differ between lenders and loan types to make sure you’re choosing the right financing for your business. You also want to have clarity around other conditions, such as rates, fees, and guidelines set by the lender. To help you make a wise choice, we’re breaking down business loan terms and conditions for nine different types of small business financing, from short-term business loans to help improve cash flow, to long-term business loans aimed at helping your business grow.

What Is a Loan Repayment Term?

To get a thorough understanding of business loan terms, let’s first clarify the difference between a repayment term and loan terminology. In this guide we will focus primarily on repayment terms, but it can also be helpful to understand some of the terminology around loans, such as “interest rates”, “time to funding”, and “eligibility.”A loan repayment term is the amount of time that a borrower has to pay back the loan. Typical business loan terms vary depending on the business needs, type of financing, lender, and other conditions, as do average business loan amounts.The following sections will address both business loan terms and some common lending terminology to help give you a thorough understanding of what to expect when comparing your small business loan options.

Typical Small Business Loan Terms

To help you make the right decision for your business, we’ve broken down nine different small business loan options with the following information:
  • Repayment terms: How long you have to pay back the loan 
  • Loan amounts: Total amount you can borrow from a lender
  • Interest rates: 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 if you qualify for financing

SBA 7(a) Loans

The U.S. Small Business Administration (SBA) offers a number of loan programs to assist small business owners. Their most popular SBA programs are the 7(a) Loan Programs that offer a variety of options for short- and long-term financing. SBA loan length varies greatly depending on the program, but here is an overview of 7(a) loans.
  • Repayment term: Maximum of 10 years for inventory, working capital, or equipment; 25 years max for real estate loans
  • Loan amounts: $5 million is the maximum business loan amount for all 7(a) loans except Express and Export Express, which have maximums of $350,000 and $500,000, respectively
  • Interest rates: Can be fixed or variable and are determined by the lender using guidelines on rate maximums from the SBA. For variable, if the loan’s maturity is:
    • Under seven years and the amount is:
      • $25,000 or less: Base rate plus 4.25%
      • $25,000 to $50,000: Base rate plus 3.25%
      • $50,000 or higher: Base rate plus 2.25%
    • Over seven years and the amount is:
      • $25,000 or less: Base rate plus 4.75%
      • $25,000 to $50,000: Base rate plus 3.75%
      • $50,000 or higher: Base rate plus 2.75%
  • Time to funding: Varies depending on program, but turnaround time can be as short as 36 hours or take up to two 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 operations
    • 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

What is a term loan? A term loan is a type of financing in which the borrower gets a single lump sum of funding that they repay (plus interest) to their lender over 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 (3 to 24 months), mid-term (up to 5 years), or long-term (up to 10 years)  
  • Loan amounts: Varies depending on type of lender and program, but generally start around $50,000 and can go over $1 million, with average around $500,000
  • Interest rates: Depends on type of lender, amount of loan, and other qualifying factors. 
  • Time to funding: Varies depending on 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 that businesses have a strong financial history in order to qualify. 
  • 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. 
  • 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.

Business Line of Credit

A business line of credit gives you access to funding up to an approved, maximum amount, with interest only charge on unpaid balances. These can be good short-term options for businesses 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 6 months to 5 years
  • Loan amounts: Credit limit is determined by the lender but generally can be between $1,000 to $250,000
  • Interest rates: Depends on lender and creditworthiness, but can be from 10% to 99% 
  • Time to funding: Online lenders typically approve within a few days, while traditional banks may take up to 2 weeks.
  • Eligibility: Banks may require a credit score over 680 and a minimum two years in business. Online lenders are good for new businesses or those with less-than-stellar credit as their qualifications are typically less stringent than many banks.

Microloans

Microloans can be great for small business startups or businesses that have struggled to get financing elsewhere. They are very small, short-term loans offered from mission-focused lenders. There are also microloan programs available through the SBA that cater specifically to women, veterans, minorities, and low-income individuals. 
  • Repayment term:  Up to 6 years for SBA microloans. Private and peer-to-peer lenders will set their own business loan terms. 
  • Loan amounts: Business loan amounts vary depending on lender, but are generally up to $50,000
  • Interest rates: Depend on type of lender, loan amount, and your business’ eligibility, but rates are generally higher than other loan types. For SBA microloans, interest rates are generally between 8% and 13%.
  • 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 off of 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 who 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 nice short-term financing options for small, B2B businesses that regularly use invoices and/or have irregular billing cycles. 
  • Repayment term: Typically 30 to 90 days to reflect the terms set for customers paying the invoice
  • Loan amounts: Typically, a percentage—up to 100%, depending on the lender—of the amount of each invoice
  • Interest rates: On top of a processing fee of typically 3%, the  factoring fee is generally  1% to 2% of the total amount of each invoice and charged each week until the customer pays their invoice 
  • Time to funding: As little as 24 hours
  • Eligibility: Must be a business who invoices customers, which are usually B2B organizations. Lenders may also consider your creditworthiness and your customers’ ability to pay the invoices.

Equipment Financing

Equipment financing is a type of small business loan for the specific purchase of necessary business equipment. They are typically medium-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: Generally, typical business loan terms are the same as the life of the equipment; could be a few months or many years.
  • Loan amounts: Can be up to 100% of equipment cost
  • Interest rates: Typically, 2 to 20%
  • 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/yearly revenue. Banks may want to see at least 2 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

Inventory financing 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 up to 1 year, depending on the inventory, or possibly longer for revolving inventory lines of credit.
  • Loan amounts: A percentage of your inventory, generally 20% to 65%
  • Interest rates: Depending on the lender type, could be anywhere from 0% to 80%
  • Time to funding: Depends on the lender but could take just a day for online lenders up to a couple of months for traditional banks
  • Eligibility: Be in business for at least 6 months to 1 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, 3 to 18 months, but depends on individual merchant lending company 
  • Loan amounts: Business loan amounts usually up to $500,000
  • Interest rates: Factor rate typically between 1.1 to 1.5, multiplied by the cash advance amount (Ex: $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 they’ll be able to make the amount advanced back.

Which Business Loan Terms Are Right for You?

When deciding which business loan terms are 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, it may help to answer 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?
If you have been established for many years, have good credit, and need funding for a large expansion, you may opt for a bank loan which can offer higher lending amounts and more favorable business loan terms and rates. If you’re a newer business, have low credit, or need funding quickly, online lenders may offer more realistic financing options for your needs. We know finding the right business loan terms is only a step in the process of securing the capital a growing company needs. That’s why we want to make small business financing easier and simpler by allowing you to compare online lenders with just a few clicks. Whether you need a long-term solution or quick cash, we’re here to help you get the right financing for your business.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20057

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Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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