What is a business term loan?
If you have a car loan, student loan or a mortgage, then you’re likely already familiar with the concept of a term loan. You borrow a lump of cash upfront for a specific purpose and repay the loan over a set period of time with fixed, equal payments.
Businesses can use term loans for a variety of purposes, including:
Purchasing equipment or inventory.
Renovating an existing location or expanding to a new location.
Purchasing real estate.
Hiring new employees.
Refinancing existing debt.
How term loans work
Term loans can range in size from $2,000 to $5 million, with APRs typically ranging from 6% to 99%.
Like mortgages and car loans, these loans usually follow an amortization schedule. This means most of your payment goes toward paying interest at the beginning of the loan, and more toward principal near the end. Term loans can often be repaid early to save on interest, although lenders may charge a prepayment penalty.
Business term loans are offered by traditional banks, credit unions and online lenders.
Banks offer low rates on term loans but carry stricter requirements — such as a strong personal credit score and high annual revenue — and take longer to fund. Bank term loans typically have long repayment terms of up to 10 years.
Online lenders offer speed and convenience but often carry higher costs. They also tend to have looser qualifications than banks. In addition, you can get short-term loans with repayment terms between three months and three years from online business lenders.
Both banks and online lenders provide Small Business Administration loans, which are guaranteed by the federal agency. This type of term loan provides up to $5 million and carries repayment terms of up to 25 years, depending on what you plan on using the money for. SBA loans also have some of the lowest APRs, making them a good option for long-term financing.
Business term loan example
To get a better sense of how small-business term loans work, consider this example:
If you had a $100,000 term loan with a five-year repayment period at 20% APR, you’d make fixed monthly payments of $2,649 and pay total interest and fees of $58,963.
Types of business term loans
These loans typically have repayment terms of 12 months or less. Short-term loans are usually offered by online lenders and are fast to fund. Although these loans can be easier to qualify for than some other business term loans, they often have higher interest rates with larger payments required on a daily or weekly basis.
Medium-term loans generally have repayment terms ranging from one to five years. These loans are available from online lenders as well as banks and credit unions.
Compared with short-term loans, you may have to meet stricter requirements to qualify for a medium-term loan — however, these products can have more affordable interest rates. Typically, medium term loans are repaid on a weekly or monthly basis, making individual payments more manageable.
Although medium-term loans and long-term loans are sometimes grouped together, long-term loans typically refer to loans with a repayment period of more than five years.
Long-term loans are usually slow to fund and more difficult to qualify for — but offer low interest rates and ideal terms for financing large projects, such as real estate purchases or business renovations.
These loans are generally repaid on a monthly basis, with lower individual payments spread out across a longer period of time. The total cost of debt, however, may be more overall compared with short-term or medium-term loans.
With terms of up to 25 years, SBA 7(a) loans are a common example of long-term business loans.
Business term loans: Pros and cons
You can borrow large amounts of money to finance expansion or growth.
Long repayment terms can make big investments more affordable.
Repaying term loans on time may help you build business credit.
Loans at online lenders can be approved and funded quickly, usually within a few days to a week.
Qualification requirements for online lenders may be looser than those for traditional banks.
Less flexibility than business lines of credit, as payments begin immediately after funding.
Shorter term loans may carry high costs and frequent repayments, although this depends on the lender.
SBA loans are low cost but carry strict requirements and can take a while to fund.
Collateral may be required — this would be an asset, such as equipment or real estate, that the lender can sell if you can’t make payments.
How to apply for a business term loan
If you think a term loan is right for your financing needs, you can follow these steps to apply:
Evaluate your qualifications. Check your credit score, annual revenue and time in business. These are three of the key requirements lenders will look at to determine whether you qualify for a loan.
Compare lenders. Decide which type of lender is best for your needs. Online lenders may have more flexible qualifications and faster funding times, but higher interest rates. Banks and credit unions, on the other hand, can offer more affordable rates, but their products can be harder to qualify for.
Prepare your documentation. Once you’ve decided which lender is right for you, prepare the documentation for your application. Common required documents include business financial statements, business and personal tax returns, business and personal bank statements and business legal documents.
Complete and submit the application. Follow the lender’s instructions to complete the application and provide all necessary documents. Take advantage of any assistance the lender offers to guide you through the application process.
Compare small-business loans
If you’d like to compare loan options, NerdWallet has a list of small-business loans that are best for business owners. All of our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.