Small business term loans offer a lump sum of money that’s repaid in fixed installments over a set timeframe. They’re commonly used for major purchases, expansion, or operational growth. Here’s a quick breakdown:
- Eligibility: Lenders look at credit scores (690+ preferred), at least 2 years in business, and stable revenue.
- Loan Types: Secured (requires collateral) or unsecured, with fixed or variable interest rates.
- Repayment Terms: Short-term (3–12 months), medium-term (1–3 years), or long-term (up to 10 years).
- Interest Rates: Start at 7.99%, influenced by credit score, loan term, and collateral.
- Application Requirements: Tax returns, bank statements, financial reports, and business documentation.
Pro Tip: Organize your documents early, improve your credit score, and consider applying with a bank you already have a relationship with.
Whether you’re purchasing equipment or expanding operations, understanding term loans can help you make better financial decisions.
Loan Eligibility Requirements
Business and Financial Qualifications
Getting a small business term loan hinges on meeting specific financial and operational benchmarks. Here’s what most lenders look for:
Credit Scores: While there’s no universal minimum, a solid personal credit history is key. For SBA loans, lenders often prefer scores around 690 or higher.
Time in Business: Many traditional lenders require at least two years of operation to ensure your business has a track record of stability.
Revenue Requirements: Lenders examine cash flow, net income stability, debt-to-income ratios, and recent financial performance.
Required Application Documents
To make the loan application process smoother, have these documents ready:
| Document Type | Details Required | Typical Timeframe |
|---|---|---|
| Tax Returns | Business and personal returns | Last 3 years |
| Bank Statements | Business account activity | Last 3 months |
| Financial Statements | Balance sheets and P&L reports | Current and projected |
| Business Documentation | Licenses, registrations, permits | Current versions |
These documents help verify your eligibility before moving on to specific SBA loan requirements.
"Regardless of your SBA lender or loan program, you’ll need to meet a standard list of eligibility requirements…" – NerdWallet
Tip: Start organizing these documents early. Keeping digital copies can save time and prevent delays.
SBA Loan Requirements
SBA loans come with additional criteria beyond standard term loans. To qualify, your business must:
- Operate as a for-profit entity
- Be physically located in the U.S. or its territories
- Show personal equity investment
- Clearly demonstrate a need for financing
- Meet the SBA’s size standards for small businesses
For SBA 7(a) loans up to $500,000, lenders rely on the FICO Small Business Scoring Service (SBSS), requiring a minimum score of 155 to pass the prescreen.
Key Financial Considerations:
- No delinquency on government debt
- Evidence of strong business character
- Proof that funding isn’t available through other sources
- Sufficient cash flow to repay the loan
Loan Terms and Interest Rates
Payment Terms and Schedules
Term loans are designed to align with your business’s cash flow needs. Here’s a breakdown of common repayment periods:
- Short-term loans: 3–12 months
- Medium-term loans: 1–3 years
- Long-term loans: Up to 10 years
Most lenders require monthly payments, but some may offer bi-weekly or quarterly schedules. These consistent payments simplify budgeting and cash flow management.
Example Payment Scenario: If you borrow $50,000 at a 7% fixed APR with a five-year term, the total interest paid would amount to $9,403.60. This example shows how loan terms influence the total borrowing cost. Next, we’ll look at how rate types can further affect your expenses.
Fixed vs. Variable Rates Compared
Choosing between fixed and variable rates is a critical decision. Here’s how they stack up:
| Feature | Fixed Rate Loans | Variable Rate Loans |
|---|---|---|
| Starting Rate | Typically higher | Usually lower |
| Payment Stability | Predictable monthly payments | Payments may fluctuate |
| Market Impact | Shielded from rate hikes | Sensitive to market changes |
| Best For | Long-term planning, strict budgets | Short-term needs, flexible budgets |
| Risk Level | Lower risk | Higher risk |
"The interest rate you pay on a business loan is determined by a number of factors, including the prime rate, your credit score, the type of loan you’re seeking, and whether you’re willing to put up collateral." – American Express
These differences highlight how loan rates interact with market and personal factors, which we’ll explore next.
What Affects Your Interest Rate
Several factors determine the interest rate you’ll qualify for:
Business Profile Factors:
- Credit score and history
- Time in business
- Annual revenue
- Industry type
- Collateral availability
Market Factors:
- Current prime rate
- Economic conditions
- Loan term length
- Loan amount
Pro Tip: Boosting your credit score and offering collateral can help secure a lower rate. Borrowers often negotiate better terms by showcasing strong financial management and consistent business performance.
For startups anticipating revenue growth, shorter loan terms may be advantageous. On the other hand, established businesses making significant investments might prefer longer repayment periods. Currently, interest rates for term loans begin at 7.99%, but your specific rate will depend on your qualifications.
Loan Application Steps
How to Apply
Here’s how you can apply for a small business term loan:
Document Preparation
Make sure you have these documents ready before starting your application:
- A detailed business plan, including sales forecasts
- Up-to-date financial statements
- Credit reports for both personal and business accounts
- Legal documents and collateral information
Once everything is gathered, organize your application package carefully.
Application Submission
Your application should clearly outline:
- The purpose of the loan
- The amount you’re requesting
- Your preferred repayment timeline
- A summary of your business’s current financial situation
Processing Times
Loan processing times depend on the type of loan you’re applying for:
| Loan Type | Processing Time | Notes |
|---|---|---|
| Traditional Bank Loans | 2 weeks – 3 months | Often requires in-person meetings |
| SBA Loans | 30–90 days | Includes a detailed review process |
| Term Loans | 24 hours – 3 months | Varies based on loan size and complexity |
| Equipment Financing | 24 hours – 2 weeks | Faster if equipment serves as collateral |
"Your credit score is one of the most important factors lenders consider when underwriting your loan application. The higher your credit score, the more likely you are to qualify for a loan, as well as access the most competitive rates and terms."
– Randa Kriss, lead writer covering small business
Knowing the processing timelines can help you plan better. To improve your chances of approval, take the following steps.
Improving Approval Chances
Want to boost your odds of getting approved? Here’s what you can do:
Build Your Business Credit
Start by setting up a business identification number with Dun & Bradstreet. This step helps establish your business credit profile.
Use Professional Resources
Reach out to your local Small Business Development Center (SBDC). They can review your application and provide feedback to address weak points.
Keep Records Accurate
Check your application materials for errors or outdated information. Even small mistakes can slow down the process or lead to rejection.
Pro Tip
If possible, apply through a bank where you already have an account or existing relationship. This can increase your approval chances and might even speed up the process.
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Loan Repayment Guide
Payment Methods
Term loans usually require regular payments, which can be scheduled monthly, weekly, or daily.
Direct Debit (ACH)
Automatic ACH payments help ensure withdrawals are made on time, reducing the risk of late fees.
Electronic Funds Transfer (EFT)
EFT payments are processed faster than ACH, allowing for quicker payment completion.
| Payment Schedule | Best For | Considerations |
|---|---|---|
| Monthly | Seasonal businesses | Larger payments that align with revenue cycles |
| Weekly | Steady cash flow businesses | Smaller, easier-to-manage payments |
| Daily | High-volume retail | Minimal disruption to daily cash flow |
| Bi-monthly | Service-based businesses | Balances cash flow with payment size |
Choose a repayment schedule that fits your business’s cash flow and operational needs.
Selecting Your Payment Plan
Your repayment plan impacts both your cash flow and the overall cost of your loan. Here are some points to weigh when deciding on terms:
Short-Term Plans (3–36 months)
These are ideal if your business:
- Expects a rise in revenue soon.
- Wants to build credit quickly.
- Needs funds for a one-time expense.
- Is dealing with loans that have high interest rates.
Long-Term Plans (Up to 10 years)
These work well for businesses that:
- Need to manage cash flow over time.
- Have made significant equipment purchases.
- Plan to refinance later.
Payment Management Tips
Build a buffer during profitable months
Save extra funds during high-revenue periods to cover payments during slower times.
Monitor your spending
Professional accounting services can help track cash flow and ensure you have enough funds for loan payments while managing your business’s growth.
Pay down your principal when possible
Using surplus revenue to reduce the principal can lower the total interest costs over the life of the loan.
Stay in touch with your lender
If you’re facing payment challenges, contact your lender immediately. Many lenders offer assistance programs or can adjust payment terms to help you stay on track.
Conclusion
Term loans provide structured financing tailored to specific business needs, with repayment terms generally spanning several months to up to 10 years.
Interest rates typically range from 4% to 30%, and closing costs can fall between 1% and 7%. These costs should be carefully considered in your financial planning. A strong application should include complete financial statements, recent tax returns, a detailed business plan, and current credit reports.
"A term lending is a good option for financing capital improvements, purchasing equipment, buying real estate, or other similar needs. Although term loans often include favorable rates, many businesses will experience difficulty qualifying with traditional lenders."
- Businessloans.com
Here are a couple of tips for managing your loan repayment effectively:
- Set up automatic payments to avoid missing deadlines.
- Align repayment schedules with your cash flow and review any penalties for early repayment.
For real estate investments, SBA loans can offer terms up to 25 years, while standard term loans usually cap at 10 years. This allows businesses to select repayment terms that suit their financial situation and growth plans.
FAQs
What’s the difference between secured and unsecured small business term loans, and how do they affect my options?
Secured and unsecured small business term loans differ mainly in whether or not collateral is required. Secured loans require you to pledge assets, like equipment or property, as collateral. This can make it easier to qualify, often with lower interest rates and higher borrowing limits. However, if you default, the lender can seize the collateral.
Unsecured loans, on the other hand, don’t require collateral but may come with higher interest rates and stricter approval criteria. In many cases, lenders might ask for a personal guarantee instead, which means you’re personally responsible for repayment if your business can’t pay.
Choosing between the two depends on your business’s financial health, available assets, and comfort level with risk. If you have valuable assets and want lower rates, a secured loan might be the better option. For quicker access without risking assets, an unsecured loan could be a better fit.
What can I do to qualify for a lower interest rate on a small business term loan?
To secure a lower interest rate on a small business term loan, start by building a strong credit profile for both yourself and your business. Lenders place significant emphasis on your credit score when evaluating your application. Aim to pay bills on time, reduce outstanding debts, and address any errors on your credit report.
Prepare a detailed business plan that outlines your financial stability and how you intend to use the loan. This demonstrates to lenders that your business is well-managed and has growth potential. Offering collateral – such as equipment, real estate, or other assets – can also reduce the lender’s risk and may help you qualify for a more favorable rate.
Finally, shop around and compare offers from various lenders. Interest rates and terms can vary, so taking the time to evaluate multiple options can help you find the best deal for your business needs.
What should I do if I’m having trouble keeping up with my small business term loan payments?
If you’re struggling to keep up with your term loan payments, the first step is to contact your lender as soon as possible. Many lenders are open to discussing solutions that can help you avoid default.
You might be able to renegotiate your loan terms, such as extending the repayment period or adjusting the interest rate, to make monthly payments more manageable. Another option could be refinancing the loan, which involves replacing your current loan with a new one that offers better terms, such as lower interest rates or smaller monthly payments.
Proactively communicating with your lender and exploring these options can help you regain control of your finances while keeping your business on track.
