Business Term Loan?
A business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate—this type of traditional financing is what most people think of when it comes to small business loans.
Generally, business owners use the proceeds of term loans to finance specific, one-off investments for their small businesses such as real estate purchases, business expansions, debt refinancing, and more.
Business Term Loan Details
|MAX. LOAN AMOUNT||LOAN TERM||INTEREST RATES||SPEED|
|Up to $1,000,000||One to five years||7% – 30%||As fast as one day|
- Set payment structure
- Suitable for a wide range of business purposes
- Term loans from online lenders can fund quickly
with fewer requirements than traditional lenders
- Can be a great way to finance a larger investment
while building business credit
- Potential prepayment penalties
- Shorter-term loans can be expensive
- Often require collateral or a personal guarantee
How Do Business Term Loans Work?
With a term loan, a small business lender gives you access to a lump sum of capital—which you then pay back, with interest and fees, over a set period of time.
Although your payment schedule will vary based on the type of business term loan and the lender you’re working with.
This being said, business term loans can be issued by banks, credit unions, and online lenders. In general, banks and credit unions will offer the most ideal rates and terms, but will also require top qualifications and will be slower to fund. Online lenders, on the other hand, will offer greater flexibility and faster funding times, but will likely be more expensive and have shorter terms.
Overall, in addition to a predictable payment schedule, one of the benefits of business term loans is that they can be used for a variety of business financing purposes.
You’ll find that these loans are often used for:
- Purchasing equipment or inventory
- Working capital
- Refinancing other business debts
- Hiring staff
- Meeting payroll or tax obligations
- Financing business expansions
- Purchasing real estate
- Funding general long-term investments
Business Term Loan Example
To get a better sense of how business term loans work, let’s walk through an example.
Let’s say you’re offered a term loan of $250,000 with monthly payments and a two-year term. The interest rate on this loan is 8% and you’re paying the lender an origination fee of 2%.
With this information, you can plug-in the numbers into a term loan calculator to estimate your monthly payments—as well as determine how much this loan will cost your business.
Overall, you’ll be making monthly payments of $11,306.82 to the lender with a total repayment of $271,363.75. The cost of this loan, therefore, is $26,363.75. In addition, you can also use these calculations to determine your APR, as opposed to the simple interest rate. If your interest rate is 8%, but you also have an origination fee of 2%, your APR will end up being higher than that quoted 8%.
In this case, the APR on the loan is 10.01%.
Qualifications for a Business Term Loan
*Based on past Customers
Types of Business Term Loans
As we mentioned, the phrase “business term loan” can actually encompass a variety of financial products that all share this term structure.
It’s important to distinguish between the different types of business term loans.
- Short-term loans: Short-term loans have repayment periods of one year or less (sometimes up to 18 months). These loans are usually issued by online lenders, have the most flexible qualifications, and are the fastest to fund. Short-term loans, however, are also typically the most expensive type of business term loan. Learn more about short-term business loans.
- Medium-term loans: Medium-term loans have repayment periods of one to five years. These loans are available from online lenders, as well as banks and credit unions. Although these products may have higher requirements and be slower to fund than short-term loans, they’re usually much more affordable. Learn more about medium-term loans.
- Long-term loans: Although in some instances medium-term and long-term loans are used interchangeably, in general, long-term loans are those with terms longer than five years. Some of the most notable long-term loans are SBA loans—with terms of up to 25 years. Long-term loans require top borrower qualifications and are slow to fund, but also offer the lowest interest rates. These term loans almost always are issued by traditional lenders like banks and credit unions. Learn more about long-term business loans.