Business loans can help businesses grow, provide short-term operating costs, or be used for investment in equipment and staff. However, if you are looking for a business loan, it’s important to understand the conditions under which you are borrowing.
Loan terms refer to the terms and conditions involved when borrowing money. This can include the interest rate and fees associated with the loan, penalty fees that borrowers might be charged, and any other special conditions that may apply.
Your loan terms will also define the loan’s repayment period, which is how long you have to repay it in full. Business loan terms can range from a few months to more than 25 years.
Key Takeaways
- Every business loan has a loan term, which is how long you have to repay the loan in full.
- Loan terms can vary significantly, from a few months to more than 25 years.
- Different types of business loans have different loan terms.
- The loan term you are able to negotiate will depend on the size and strength of your business and your business plan.
Business Loan Terms by Type of Loan
The average business loan term varies considerably by the type of loan you take out, and what you plan to use it for. You will negotiate a loan term when you are applying for your loan, but each type of loan has an average loan term and interest rate.
Each loan can vary significantly, but the examples below are typical terms and conditions for that loan type.
Bank Loans
- Average loan term: Three to 10 years
- Maximum loan amount: $250,000 to $1 million
- Typical interest rate: 3% to 22%
- Time to apply: Two weeks to several months
- Minimum eligibility requirements: Typically, a minimum credit score of 640 or collateral, and sometimes minimum revenue numbers and a minimum amount of time the business has operated.
Small Business Administration (SBA) Loans
- Average loan term: Up to 25 years
- Maximum loan amount: Up to $5 million
- Typical interest rate: Base rate, plus 2.25% to 4.75% for 7(a) loans (variable-rate loans); base rate plus 6.00% to 8.00% for fixed-rate loans
- Time to apply: 30 to 90 days, depending on the loan program
- Minimum eligibility requirements: To be approved, the business must be for-profit, operate in the United States, have a certain amount of the owner's equity available to invest, and have made use of other means of financing. Also: a credit score of at least 640, and preferably 680 or above.
Term Loans
- Average loan term: Short-term (three to 24 months); midterm (up to five years); long-term (up to 10 years)
- Maximum loan amount: $5,000 to $1 million+
- Typical interest rate: 6% to 36%
- Time to apply: 24 hours to a few months
- Minimum eligibility requirements: Varies based on the lending entity, but a minimum credit score of 600 is typical, a minimum monthly revenue of $8,000, and a minimum time in business of six months.
Business Lines of Credit (LOCs)
- Average loan term: Six months to five years
- Maximum loan amount: $1,000 to $250,000
- Typical interest rate: 10% to 99%
- Time to apply: A few days to two weeks
- Minimum eligibility requirements: A personal credit score of at least 680 is needed but some lenders may be more lenient. There are minimum revenue thresholds that range between $10,000 per month to $250,000 per year and a minimum time in business stipulation of between six months and two years.
Microloans
- Average loan term: Up to six years for SBA microloans
- Maximum loan amount: Up to $50,000
- Typical interest rate: 6% to 9% for SBA microloans
- Time to apply: 30 to 90 days
- Minimum eligibility requirements: The SBA’s general eligibility requirements must be met on top of all of the requirements imposed by the intermediary lender.
Merchant Cash Advance
- Average loan term: Three to 18 months
- Maximum loan amount: Up to $500,000
- Typical interest rate: Factor rate of 1.2 to 1.5
- Time to apply: As little as 24 hours
- Minimum eligibility requirements: Minimum monthly business deposits of $10,000 but this can fluctuate depending on the lender. Lenders also assess a minimum of three months of income and revenue statements.
Inventory Financing
- Average loan term: Up to one year
- Maximum loan amount: 20% to 65% of the inventory cost
- Typical interest rate: 0% to 80%
- Time to apply: 24 hours to a few months
- Minimum eligibility requirements: Products and materials must be sold, a time of operation of at least six months to one year, and it is possible that some lenders will require inventory minimums and the business to have a reliable and robust inventory management system.
Equipment Financing
- Average loan term: Usable life of the equipment (often two to seven years)
- Maximum loan amount: Up to 100% of the equipment cost
- Typical interest rate: 4% to 5%, up to 30%
- Time to apply: 24 hours to a few weeks
- Minimum eligibility requirements: A credit score of at least 600. Operating history requirements may also need to be met.
Invoice Factoring
- Average loan term: 30 to 90 days
- Maximum loan amount: Up to 100% of each invoice amount
- Typical interest rate: 3% processing fee, plus a factoring fee of 1% to 2% of the invoice amount
- Time to apply: As little as 24 hours
- Minimum eligibility requirements: Variable. Financial statements are assessed, including line items such as accounts receivable. Bank statements and outstanding invoices will also need to be reviewed. The creditworthiness of the business’ clients will also be evaluated to determine the overall risk level.
How to Choose the Right Business Loan Term
Choosing the correct type of loan for your business—and the correct loan term—will depend on what you need the loan for. In general, you should aim to take the shortest loan that is feasible for your business. This will allow you to get out of debt more quickly, and reduce the amount you pay in interest. That said, you should also be realistic about how quickly you can repay the loan. Missing payments can lead to financial penalties, or (in extreme cases) your lender seizing your collateral.
So, it is important to have a realistic business plan in place before applying for any kind of financing. If you can reasonably prove that a loan will improve the profitability of your business, you are more likely to be approved for a loan—and more likely to be able to pay it back.
What Is a Loan Maturity Date?
A maturity date is the date when a debt should be repaid in full. For a business loan, this is the date when the loan should end if you make repayments on time.
Is There a Penalty for Paying Off My Loan Early?
It depends on the business loan you take out. You should check your terms and conditions carefully to make sure you won’t be penalized if you plan to pay back your loan early.
Why Do Businesses Use Short-Term Loans?
Businesses can use short-term loans to bridge a gap in their cash flow, among other uses.
What Is the Longest Term You Can Get on a Business Loan?
It’s possible to negotiate a repayment period of 25 years or more. Use caution when taking out such a long-term loan, because you’ll be paying interest for a long time, which can add up to a significant amount.
What Is the Maximum Amount for a Small Business Loan?
You can borrow up to $5 million through an SBA loan, but the maximum amount you can borrow will depend on the size of your business and your lender’s confidence in it.
The Bottom Line
The average length of a business loan depends on the type of loan and what the borrowing business plans to use it for. Loan terms can range from a few months to more than 25 years. It’s important to carefully define what you need a loan for before deciding on your loan term.
