What Are Common Small Business Loan Terms? (2024)

Whether you want to grow your business or need some help with short-term cash flow issues, small business loans can help your business grow and succeed. However, it’s essential to understand available types of financing and the small business loan terms associated with them before you apply.

Here’s an overview of standard business loan terms so you can decide which loan is best for you.

Business Loan Terms Overview

There are many types of small business loans, each with its own terms and conditions. These are some of the most common types of small business financing, along with business loan terms you should be familiar with:

Term Loans

Term loans provide businesses with a set amount of money that borrowers must repay over a fixed period. This type of loan can be helpful for companies that need a large sum of money up front to cover expenses or otherwise invest in the business. Term loans usually have lower interest rates than credit cards or lines of credit, and they can provide businesses with some peace of mind knowing that they have a set amount of money to work with.

• Repayment terms: Short-term (three to 24 months); mid-term (up to five years); long-term (up to 10 years)
• Loan amounts: $5,000 to $1 million+
• Interest rates: 6% to 36%
• Time to fund: 24 hours to a few months
• Qualification requirements: Requirements vary by lender, but many financial institutions require a minimum credit score of 600, at least $8,000 in monthly revenue and that you’ve been in business for six months or more.

SBA Loans

Eligible businesses can qualify for U.S. Small Business Administration (SBA) loans. Loan funds can be used for a wide range of purposes, including working capital, debt refinancing and the purchase of equipment, supplies or inventory. Low interest rates and long repayment terms make SBA loans more competitive than other small business loans. Likewise, minimum qualification requirements may be more accessible than those imposed for other loan types.

• Repayment terms: Up to 25 years
• Loan amounts: Up to $5 million
• Interest rates: Base rate, plus 2.25% to 4.75% for 7(a) loans
• Time to fund: 30 to 90 days, depending on the loan program
• Qualification requirements: Businesses must operate for profit in the U.S., have reasonable owner equity to invest and have already used alternative financial resources before applying for an SBA loan. Borrowers should also have a credit score of at least 640, though applicants with scores of 680 or above are more likely to qualify.

Traditional Bank Loans

Traditional bank loans are typically available through banks, credit unions or other lending institutions. These loans generally are used to finance a business purchase, expansion or startup. Depending on the lender, these loans may have lower interest rates than other options. Still, it can be challenging to qualify—especially for newer businesses.

• Repayment terms: Three to 10 years
• Loan amounts: $250,000 to $1 million
• Interest rates: 3% to 22%
• Time to fund: Two weeks to several months
• Qualification requirements: Borrowers must typically have a minimum credit score of 640 or provide collateral, but these requirements vary by institution. Many banks also impose minimum revenue and time in business requirements.

Business Lines of Credit

A business line of credit is a type of business financing that allows businesses to borrow money as needed. This type of loan is ideal for companies with unpredictable or cyclical expenses, as it will enable them to borrow money when needed and then pay it back over time. Because business lines of credit are revolving, business owners can repay and access the funds repeatedly until the loan term ends.

• Repayment terms: Six months to five years
• Loan amounts: $1,000 to $250,000
• Interest rates: 10% to 99%
• Time to fund: A few days to two weeks
• Qualification requirements: Most lenders require borrowers to have a minimum personal credit score of 680, but some impose less rigorous requirements. To qualify, a business must also meet minimum revenue requirements (anywhere from $10,000 per month to $250,000 per year) and minimum time in business requirements (often six months to two years).

Related:Best Business Lines Of Credit

Microloans

Microloans are designed for small businesses and entrepreneurs who need small sums of money to start or grow their businesses. These loans are offered by the SBA and other community lenders, ranging from $1,000 to $50,000.

SBA loans also offer borrowers more flexible repayment terms and lower interest rates than traditional bank loans or business lines of credit. This makes them an ideal option for small business owners who may not have access to conventional bank loans. That said, borrowers cannot use microloans to purchase real estate or pay off existing debts.

• Repayment terms: Up to six years for SBA microloans
• Loan amounts: Up to $50,000
• Interest rates: 6% to 9% for SBA microloans
• Time to fund: 30 to 90 days
• Qualification requirements: Businesses must meet the SBA’s general eligibility requirements in addition to lending and credit requirements imposed by the intermediary lender.

Invoice Factoring

Invoice factoring enables business owners to borrow money against the value of their outstanding invoices. This type of loan is ideal for businesses with a large number of invoices due soon, as it allows them to borrow money quickly and easily. Invoice factoring may be a good option for businesses without established credit because factoring companies typically make lending decisions based on the creditworthiness of the business’ clients.

• Repayment terms: 30 to 90 days
• Loan amounts: Up to 100% of each invoice amount
• Interest rates: 3% processing fee, plus a factoring fee of 1% to 2% of the invoice amount
• Time to fund: As little as 24 hours
• Qualification requirements: Invoice factoring companies look at a business’ financial documents, including account receivable, bank statements and outstanding invoices. These lenders also evaluate the business’ clients’ creditworthiness to assess the risk level.

Inventory Financing

Inventory financing is a type of loan secured by the value of the purchased inventory. Businesses that expect to receive a large influx of orders are best-suited to this type of financing, as it allows them to quickly and easily finance the purchase of additional inventory. That said, repayment terms are shorter than with other business loans, and interest rates can be high.

• Repayment terms: Up to one year
• Loan amounts: 20% to 65% of the inventory cost
• Interest rates: 0% to 80%
• Time to fund: 24 hours to a couple of months
• Qualification requirements: To qualify for inventory financing, businesses must sell products or materials and meet minimum time and business requirements (usually six months to one year). Many lenders also set inventory minimums and require the business to have a well-organized inventory management system.

Equipment Financing

Equipment financing lets business owners borrow money to pay for equipment. The equipment secures the loan, so interest rates are lower than for many types of financing. Likewise, funding speeds can be fast, and repayment terms are typically tied to the useful life of the equipment. When financing equipment, however, it’s necessary to make a down payment—usually between 5% and 20% of the purchase price.

• Repayment terms: Usable life of the equipment (often two to seven years)
• Loan amounts: Up to 100% of the equipment cost
• Interest rates: 2% to 20%
• Time to fund: 24 hours to a few weeks
• Qualification requirements: Business owners should have a credit score of at least 600 to qualify for equipment financing. Some lenders also impose operating history requirements.

Merchant Cash Advance

A merchant cash advance is a type of loan that allows businesses to borrow money against the future sales of their business. Loans are often repaid through automatic debits from the business’ credit card sales, making them ideal for companies with a strong credit history and high sales volume.

• Repayment terms: Three to 18 months
• Loan amounts: Up to $500,000
• Interest rates: Factor rate of 1.1 to 1.5
• Time to fund: As little as 24 hours
• Qualification requirements: Generally, businesses should have at least $10,000 in monthly business deposits, but this number varies by lender. Lenders often review at least three months of credit card processing statements, copies of tax returns from the last one or two years and recent business bank account statements.

Business Loan Terms Summary