What Is a Term Loan?

Does your business need to purchase equipment, renovate office space or make a similar type of investment? A term loan is likely your best option, giving you the cash to grow your business.

Term loans for businesses are offered by traditional banks, credit unions and online lenders. Here’s what you need to know about term loans, including their pros and cons and how to apply for financing.

How a term loan works

If you have a car loan, student loan or a mortgage, then you likely already know how a term loan works. 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.

Requirements, rates and speed of funding vary between banks and online lenders. Term loans range in size from $2,000 to $5 million, with annual percentage rates ranging from 6% to 99%.

Banks offer low rates on term loans, but typically 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 typically 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 the money is for. SBA loans also have some of the lowest APRs, making them a good option for long-term financing.

Like mortgages and car loans, term loans typically 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 usually be repaid early to save on interest, although lenders may charge a prepayment penalty.

Term loan example: On 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. Use NerdWallet’s business loan calculator to figure out the costs and repayments on a term loan.

For information on other financing options, read our guide on business loan types.


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Term loans: Pros and cons

Pros:

  • 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

Cons:

  • Less flexibility than 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

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Find and compare small-business term loans

NerdWallet has created a comparison tool of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.

Steve Nicastro is a staff writer at NerdWallet, a personal finance website. Email: Steven.N@nerdwallet.com. Twitter: @StevenNicastro.

Updated April 21, 2017.