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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 | - 600+ credit score
- $8,000+ monthly revenue
- Six or more months in business
|
| 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 | - 640+ credit score, plus general SBA eligibility requirements
|
| Traditional bank loans | Three to 10 years | $250,000 to $1 million | 3% to 22% | Two weeks to several months | - 640+ credit score
- Minimum revenue
- Time in business
|
| Business lines of credit | Six months to five years | $1,000 to $250,000 | 10% to 99% | A few days to two weeks | - 680+ credit score
- $10,000+ monthly revenue
- Six or more months in business
|
| Microloans | Up to six years for SBA microloans | Up to $50,000 | 6% to 9% for SBA microloans | 30 to 90 days | - Lender-imposed credit requirements, plus general SBA eligibility requirements
|
| 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+ | - Financial documents
- Client creditworthiness
|
| Inventory financing | Up to one year | 20% to 65% of inventory cost | 0% to 80% | 24 hours to a couple of months | - Six or more months in business
- Inventory minimums
- Inventory management requirements
|
| Equipment financing | Life of equipment | Up to 100% of equipment cost | 2% to 20% | 24 hours to a few weeks | - Credit score
- Time in business
- Revenue
|
| Merchant cash advance | Three to 18 months | Up to $500,000 | 1.1 to 1.5 factor rate | 24 hours+ | - Monthly sales
- Bank statements
|
Find the Best Small Business Loans of 2022
FAQs
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.
How long is a typical business loan? ›
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. Use of funds.
What are the 4 loan types? ›
Listed below are four common types of mortgage loans for homebuyers today: conventional, government-backed mortgages, fixed and adjustable, and interest-only loans.
Are SBA loans hard to get? ›
SBA loans typically have lower rates and longer terms than you could qualify for with a conventional loan. Although it's easier for a small business to qualify for an SBA loan than a conventional loan, the application requires you to provide extensive documentation of your finances.
What is the current SBA loan rate? ›
SBA 7(A) interest rates
*The current prime rate, as of September 2022, is 6.25%. 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 much are payments on a 50000 loan? ›
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.
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.
How much money can I borrow to start a business? ›
Startup loans typically range from $9,000 to $20,000. You can be funded for as little as $500 or for as much as $750,000 (though you'll need a large personal income for a loan that size). Startup loan decisions are made differently from other forms of business financing.
What type of loan is easiest to get? ›
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.
What are the 3 types of term loan? ›
There are three main classification found in Term Loans: short-term term loan, intermediate term loan, and long-term term loan.
Here are eight of the most common types of loans and their key features.
- Personal Loans. ...
- Auto Loans. ...
- Student Loans. ...
- Mortgage Loans. ...
- Home Equity Loans. ...
- Credit-Builder Loans. ...
- Debt Consolidation Loans. ...
- Payday Loans.
Ineligible businesses include those engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment or lending, or where the owner is on parole.
What credit score does the SBA use? ›
Instead of a personal credit score, the SBA uses the FICO Small Business Scoring Service (SBSS) when evaluating 7(a) loan applicants. The system calculates the business owner's credit bureau data, financials and other factors to produce a number between 0 and 300.
What can stop you from getting a SBA loan? ›
You have a low overall personal or business credit score, or a poor credit history. You do not have sufficient collateral or assets to secure your loan. You do not have enough free capital or cash flow to meet loan repayments. You have too much already outstanding debt.
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.
Can you get forgiveness for SBA loan? ›
Small business owners who utilized the Paycheck Protection Program (PPP) can apply for loan forgiveness on eligible expenditures. PPP forgiveness requires applying through the Small Business Administration (SBA) online portal or individual lender.
How do I qualify for a small business loan? ›
When applying for a business loan, you should generally have:
- P&L statements and balance sheets for the past two years.
- up-to-date financial statements.
- business plans or project plans to show the direction your business is taking.
- tax returns to verify your income statements.
- bank accounts, also for verification.
A $20,000 loan at 5% for 60 months (5 years) will cost you a total of $22,645.48, whereas the same loan at 3% will cost you $21,562.43. That's a savings of $1,083.05. That same wise shopper will look not only at the interest rate but also the length of the loan.
How much can I borrow with a 700 credit score? ›
You can borrow $50,000 - $100,000+ with a 700 credit score. The exact amount of money you will get depends on other factors besides your credit score, such as your income, your employment status, the type of loan you get, and even the lender.
How much would a monthly payment be on a $30 000 loan? ›
With a loan amount of $30,000, an interest rate of 8%, and a loan repayment period of 60-months, your monthly payment is around $700. Before you purchase your new vehicle, remember to budget for car maintenance, gas, and car insurance.
Three to four years is the standard estimation for how long it takes a business to be profitable. Most of your earning in the first year of the business will be used for paying expenses and reinvestment.
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.
How do I not pay back an SBA loan? ›
You'll need to submit an offer in compromise to the SBA and provide evidence that you are unable to repay your loan. The offer you submit must be something you can reasonably repay and usually as a lump sum. Both your lender and the SBA must agree to the offer in compromise.
Can I use my EIN to get a loan? ›
Can I Get a Loan with Just My Business EIN? Yes, there are certain circ*mstances where a lender will not use your personal credit score, but only your EIN as a factor in lending to you. Note that they won't just use your EIN in isolation, as there are many factors that go into qualifying for a small business loan.
Do you need revenue to get a business loan? ›
Many lenders will only consider businesses that bring in at least a minimum monthly or annual revenue. How much cash flow you'll need depends on the lender — for example, online lender OnDeck requires $100,000 in annual revenue to qualify for its line of credit, while Bank of America's minimum is $250,000.
Do banks look at gross or net income for business loans? ›
Because you own a small business, you must provide the bank with copies of your tax returns as proof of personal and business income. They will look most closely at the adjusted gross income figure from your filed tax returns.
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.
How do I qualify for a business loan? ›
When applying for a business loan, you should generally have:
- P&L statements and balance sheets for the past two years.
- up-to-date financial statements.
- business plans or project plans to show the direction your business is taking.
- tax returns to verify your income statements.
- bank accounts, also for verification.
In short, the answer is yes—standard SBA loans do require a personal guarantee, although individual lenders have some discretion to determine exactly who from the business has to sign a personal guarantee and what type of guarantee they have to sign.
Do you need deposit for business loan? ›
Do you need money down (a deposit) for a business loan? No. A secured loan will require some form of collateral (property or other assets) but no money from you. An unsecured loan does not require any collateral, so there's no money down (deposit) to get a business loan.
Disadvantages of SBA Loans
- 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.
Three to four years is the standard estimation for how long it takes a business to be profitable. Most of your earning in the first year of the business will be used for paying expenses and reinvestment.
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.
Do banks give loans to startups? ›
So yes, banks do make loans to startups – provided they demonstrate the ability to repay them. Generally, that means: Strong collateral. Lenders expect borrowers to put up something – usually their home or other significant asset.
Which bank is best for a business loan? ›
Best Banks for Business Loans
- 1.SBI (Small Business Loans)
- HDFC Bank (Company's Growth Loans)
- ICICI Bank (Commercial loan)
- Citibank (Commercial Loans)
- IDFC (Commercial Loans)
- Kotak Bank (Commercial Loan)
- Bajaj Finserv Loan (MSME)
- IndusInd Bank.
Your bank or credit union: If you've opened a business bank account, inquire with your financial institution about business loans and credit. Even if your new business doesn't qualify for the full loan amount you're looking for at your bank, a small loan or line of credit could help.
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.
Can SBA loan be denied after approval? ›
Even after you've been through the application process, it's possible that your SBA loan will be disqualified or denied. If that happens, you'll have questions—and we're here with the answers.
How long do you have to pay back an SBA loan? ›
Usual Repayment Periods for Long-Term Loans for Small Business. The easy answer is one to five years on most long-term small business loans and up to 25 years on SBA loans.
How much money can I borrow to start a business? ›
Startup loans typically range from $9,000 to $20,000. You can be funded for as little as $500 or for as much as $750,000 (though you'll need a large personal income for a loan that size). Startup loan decisions are made differently from other forms of business financing.
While some loans offer quick funding the same day you apply or within 24 hours, others take weeks or even months. If you opt for a traditional business loan from a bank, for example, you'll likely have to wait several weeks to get approved and receive the money.
Can I get a business loan with no money down? ›
Affordable business financing.
These loans waive the down payment in exchange for collateral, higher interest rates, and other fees. No-money-down business loans usually aren't cheaper in the long term, but they're the perfect financing option if you don't have money on hand for a hefty down payment.
