A business term loan is a lump sum of money that’s repaid over a set period of time, plus interest. Term loans can be used for multiple purposes such as real estate, debt consolidation or working capital.
Because they typically come with fixed interest rates and set monthly payments, term loans can be one of the most affordable types of small business loans. They are offered through banks, credit unions, online lenders and other non-bank, alternative lenders.
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
Business term loan basics
Is a term loan right for your business?
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 from 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.
Less flexibility than business 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.
Collateral — an asset, such as equipment or real estate that the lender can sell if you can’t make payments — may be required.
Recurring repayments may constrict cash flow if you borrow too much or have inconsistent sales.
How do business term loans work?
Business term loans can range in size from $5,000 to $5 million, with annual percentage rates (APRs) falling anywhere from 6% to 99%. These loans often have fixed interest rates, but you may find some lenders charge a variable rate that changes based on the market. Additional fees, like closing and origination fees, may vary based on the lender and the type of term loan.
Like mortgages and car loans, small-business term loans usually 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 often be repaid early to save on interest, although lenders may charge a prepayment penalty.
You can use a business term loan for a variety of purposes, including:
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Purchasing equipment or inventory.
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Renovating an existing location or expanding to a new location.
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Buying commercial real estate.
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Refinancing existing debt.
Types of business term loans
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Medium-term loans (2 to 5 years) |
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Best business term loans
| Product | Max loan amount | Min. credit score | Learn more |
|---|---|---|---|
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Fora Financial – Online term loan |
$1,500,000 | 570 | |
SBA Express loan |
$500,000 | 650 | |
OnDeck – Online term loan |
$250,000 | 625 | |
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SBA 7(a) loan |
$5,000,000 | 650 | |
National Funding – Online term loan |
$500,000 | 600 | |
iBusiness Funding – Online term loan |
$500,000 | 660 | |
Bank of America Business Advantage Unsecured Term Loan |
Undisclosed | 700 | |
Accion Opportunity Fund Small Business Working Capital Loan |
$250,000 | 600 |
Minimum qualifications for a business term loan
Time in Business: 6 months to 2 yearsA two-year minimum is standard for many lenders, especially banks, but many online lenders ask for just one year in business. A few, like Fora Financial and National Funding, require only six months.
Credit Score: 550 to 700Alternative lenders like Fora Financial and OnDeck tend to have lower credit score requirements, while more traditional lenders like Bank of America will require great credit.
Annual Revenue: $50,000 to $250,000It’s rare to find term loans with annual revenue minimums below $100,000. However, iBusiness Funding and Accion Opportunity Fund require only $50,000 annual revenue for their business term loans.
How to apply for a business term loan
If you think a term loan is right for your financing needs, you can follow these steps to apply:
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Evaluate your qualifications. Check your credit score, annual revenue and time in business. These are three of the key business loan requirements lenders will look at to determine whether you qualify for financing.
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Compare lenders. Decide which type of lender is best for your needs. Online lenders may have more flexible qualifications and faster funding times, but the trade off is typically higher interest rates. Banks, credit unions and SBA lenders can offer more affordable rates, but their products can be harder to qualify for.
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Prepare your documentation. Once you’ve decided which lender is right for you, prepare the documentation for your application. Commonly required documents include business financial statements, business and personal tax returns, business and personal bank statements, and business legal documents. (Some online lenders require only minimal documentation to apply.) As much as you can, keep up-to-date financial records and meet with your business accountant on a regular basis.
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Complete and submit the application. Follow the lender’s instructions to complete the application and provide all necessary documents. Take advantage of any assistance the lender offers to guide you through the application process.
Alternatives to business term loans
If you’re unsure whether a term loan is right for your business, or you’re having a hard time qualifying for one, consider these alternatives:
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Business lines of credit. Instead of borrowing one lump sum of cash and paying it off over a set period, business lines of credit allow you to continue to borrow funds on an as-needed basis, up to a predetermined amount. Once you repay the initial amount borrowed, you can take more money out. This gives business owners a bit more flexibility, especially when covering short-term or unexpected needs.
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Invoice factoring or invoice financing. If you run a business-to-business company and have cash tied up in unpaid invoices, you may be able to leverage those invoices for an advance of cash. While invoice financing allows you to use invoices as collateral for a business loan, invoice factoring involves selling your invoices to a factoring company at a discount. These tend to be best for business owners who need money quickly and can’t qualify for more traditional financing, like a term loan or line of credit.
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Merchant cash advances. If you can’t qualify for other types of business financing and have consistent credit card sales, a merchant cash advance (MCA) may be an option. MCAs serve as an advance of money, which you repay using a percentage of future debit or credit card sales. SS recommends exhausting all other financing options before turning to MCAs, since they’re expensive and not federally regulated.
What is a business term loan?
What is an example of a business term loan?
What are the three types of term loans?