Business Loan Terms: Typical Lengths, Amounts and Repayment Schedules
Business loan terms can refer to how long you have to repay a loan or the full set of conditions in your loan agreement. This article focuses on those broader conditions, which include the loan amount, interest rates and repayment schedule. These can vary depending on your lender and loan type.
What are business loan terms?
Business loan terms are the conditions that explain how much you can borrow, the costs and how you’ll repay the loan. They include the loan amount, repayment length, interest rate structure, repayment frequency and loan maturity date.
For example, a $50,000 business loan may include a five-year repayment term and fixed interest rate. Another loan could come with variable rates that change over time. Your terms can also include fees and a prepayment penalty for paying the loan off early.
Business loan terms can also vary widely depending on the lender and financing type, and your exact offer depends on your business’s qualifications.
Business loan repayment terms by loan product
Business loan repayment terms refer to the length of time you have to repay the loan. They vary based on how you plan to use the financing. Below are some examples of the kind of amounts and term lengths you can expect from different products.
| Loan Product | Potential amount | Potential term length |
|---|---|---|
| Short-term business loans | $5,000 to $500,000 | Up to 24 months |
| Bank term loans | $5,000 to $500,000, though larger loans may be available | 1 to 7 years |
| SBA 7(a) loans | Up to $5 million | Generally up to 10 years, but up to 25 years for real estate |
| SBA 504 loans | Up to $5.5 million | 10, 20 or 25 years |
| SBA microloans | Up to $50,000 | Up to 7 years |
| Business lines of credit | Up to $500,000, though larger lines may be available | Revolving, with lender-specific draw and repayment periods |
| Equipment financing | $10,000 to $10 million, depending on the lender and equipment | Typically 1 to 7 years |
| Invoice financing | Up to 90% of a business’s eligible unpaid invoice | Typically 30 to 90 days |
| Merchant cash advance | $5,000 to $600,000 | 3 to 24 months, depending on sales and the agreement |
Potential term: Up to 24 months
Potential amount: $5,000 to $500,000
Short-term business loans provide a lump sum you repay over several months or years, and payments can be daily, weekly or monthly. These loans can help bridge temporary cash gaps, like covering payroll during a slow season or buying inventory. However, the short repayment window makes them better suited to expenses that can generate revenue quickly.
Potential term: 1 to 7 years
Potential amount range: $5,000 to $500,000
Bank term loans provide a lump sum that you’ll typically repay through monthly installments. Some banks offer repayment terms of up to seven years, though it depends on the loan’s purpose.
Banks usually have stricter requirements compared to online lenders and may look for things like a higher credit score and more time in business. For example, Bank of America requires a personal credit score above 700 and at least two years in business.
SBA loan programs use federal backing to help participating lenders provide financing to eligible small businesses. Here are the different kinds of SBA loans:
- SBA 7(a): Borrowing amounts are available up to $5 million, with 10-year repayment terms for working capital and equipment or 25 years for real estate.
- SBA 504: These loans finance fixed assets, like commercial property and equipment, with maturity terms of 10, 20 or 25 years. The total financing amount varies by project.
- SBA microloans: These loans are available up to $50,000 with repayment terms up to seven years. They’re typically issued through nonprofit intermediary lenders.
Potential term: Revolving
Potential amount range: Up to $500,000 or more
A business line of credit doesn’t have traditional terms. Instead, you borrow as needed up to an approved limit, as opposed to receiving the entire amount upfront. As you repay the principal, the credit becomes available to borrow again during the draw period.
Potential term: 1 to 7 years
Potential amount range: $10,000 to $10 million
Equipment financing helps businesses spread the cost to purchase machinery, vehicles and other equipment over time. The repayment terms usually match the useful life of the equipment. Because the loan is typically secured by the equipment itself, it can make the approval process easier than an unsecured loan.
Potential term: 30 to 90 days
Potential amount range: Up to 90% of eligible unpaid invoices
Invoice financing lets you borrow against unpaid customer invoices, helping you cover expenses while you wait for payment. Repayment usually follows a short schedule tied to the invoice’s payment window.
In comparison, a merchant cash advance gives you a lump sum of cash upfront in exchange for a percentage of your business’s future sales. Your lender collects a share of those sales through a set percentage of daily or weekly credit card receipts. MCA rates aren’t the same as APRs, so it’s important to understand the total repayment amount and fees.
How business loan repayment schedules work
Your repayment schedule outlines how often you make payments and how much you owe, while your loan term describes how long you have to repay. Both can affect affordability since even a smaller payment can strain your cash flow if it’s due more often.
Daily, weekly and monthly payments
Short-term loans and merchant cash advances often require daily or weekly payments, while bank term loans and SBA loans typically include monthly payments. Frequent collections can align with regular sales and reduce the lender’s repayment risk. Invoice financing may require repayment when the invoice is due or when the customer pays, so always review your agreement.
Amortization and interest-only payments
Amortization means paying down a loan through installments that cover both interest and principal. On a standard amortization loan, the balance shifts over time, with more of each payment going toward the principal.
Some commercial real estate and short-term construction loans allow interest-only payments initially. This lowers your payments temporarily and leaves the principal to be repaid later or at maturity.
Loan maturity dates and balloon payments
The maturity date is the deadline for repaying the remaining loan balance. A balloon payment is a large lump sum due at or near maturity because earlier payments haven’t fully paid off the loan. If you decide to go this route, you’ll need a plan to either refinance or pay off the loan before the balloon comes due.
How term length affects your payment and total cost
A shorter repayment term means higher monthly payments, but you’ll pay less interest overall. Whereas a longer term spreads your payments out, so you’ll pay less each month but more over the life of the loan.
For example, let’s say you take out a $50,000 loan with a 10% fixed annual interest rate. Here’s how your monthly payments and total interest would compare with three- and five-year repayment terms:
| Repayment term | Monthly payment | Total interest |
|---|---|---|
| Three years | $1,613.36 | $7,412.57 |
| Five years | $1,062.35 | $11,895.75 |
Choosing five-year payment terms lowers your monthly payments by $551, but adds nearly $4,500 in interest over the life of the loan. Use a business loan calculator to compare different repayment terms and find a plan that fits your budget.
What determines your business loan terms?
Lenders set business loan terms based on your ability to repay and how you plan to use the money. The exact requirements can vary, but these common factors all influence the amount, rate and term you’re offered:
- Time in business: The longer you’ve been in business, the more history lenders have to consider when it comes to your company’s performance. That’s why newer businesses may have fewer financing options.
- Personal and business credit: Most lenders will want to review both your personal and business credit to see how you’ve managed debt thus far. Stronger credit can help you qualify for the most favorable terms on your loan.
- Annual revenue and cash flow: Revenue shows your sales volume, while cash flow helps lenders determine whether you can cover the payments.
- Collateral: Putting down collateral can help you qualify for a larger loan or better terms, but you also risk losing those assets if you default.
- Industry risk: Seasonal demand and industry volatility can affect how lenders evaluate your repayment ability.
- Loan purpose: Financing inventory may require shorter terms than buying equipment.
Once you receive an offer, review the business loan agreement to confirm the repayment schedule, fees and any other restrictions before signing.
How to choose business loan terms that fit your cash flow
The right business loan terms allow you to cover your payments while still leaving enough cash available for operating expenses. Use these steps to evaluate whether a loan offer is a good fit for your business:
- Match the term to the purchase: Start by considering how long the money will benefit your business. For example, short-term financing may be a good option for inventory you expect to sell within a few months, while purchasing equipment could justify a longer loan term. Avoid a loan that leaves you paying for an asset long after you expect to replace it.
- Stress-test the payment: Start by estimating your current cash flow after payroll, rent, taxes and any other monthly expenses. But then ask yourself if you could still make the loan payment if your sales dropped 20% or a customer paid late. Just because you get approved for a loan doesn’t mean the payments will fit your budget.
- Balance cost and flexibility: Compare the total interest and fees alongside the payment amount. Longer loan terms come with higher overall costs, but the trade-off may be worth it if it’s easier on your monthly cash flow.
Frequently asked questions
Business loan terms can range from a few months to 25 years, depending on the lender and loan type. Short-term loans may require payment within two years, while real estate loans offer terms up to 25 years.
Available loan amounts can range from a few thousand dollars to several million. For example, SBA microloans offer up to $50,000, while SBA 7(a) loans are available up to $5 million.
Bank loans and SBA loans typically require monthly payments, but some short-term loans can require daily or weekly payments. Check your repayment schedule to confirm the amount and frequency before accepting an offer.
Yes, some loans offer 10-year repayment terms, like SBA 7(a) loans.
Many lenders allow early repayment, but your agreement may include a prepayment penalty. Review the payoff provisions and request a payoff quote to determine whether paying early will save you money.
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