As a small business owner, you know how important it is to have easy access to funds. Luckily, there are many ways to get funding, depending on your business. The most common way to get funds is getting a small business loan – a financial tool ideal for most small businesses.
Access to small business loans is easy for many entrepreneurs, but there are numerous details you have to know before applying for one. For example, you have to know what type of small business loan you need, which lender to choose, the interest rates and fees, repayment terms, and various details relevant to your business (such as age, revenue, credit rating, and so on).
As a borrower, it’s essential to understand each aspect of a loan. Many borrowers are mainly focused on repayment terms. Specifically, this means how much time you have until you have to pay back the lender. This is an important detail because it helps you compare different financial offers from various lenders.
What Are Loan Repayment Terms?
A loan repayment term is the amount of time a borrower has before having to pay back the loan. The terms vary a lot depending on the type of business loan. It also depends on your business, the type of financing, the lender, certain market conditions, and the amount you borrow.
So how long are business loan terms? Let’s break down various loan terms for multiple types of small business loans:
These loans are offered by the United States Business Administration (SBA) as a way to assist small business owners. Their most common financial product is the 7(a) Loan Program, which is offered as a short- and long-te
SBA 7(a) Loans
rm financing program for businesses. Here’s an overview:
- The repayment term is ten years maximum for working capital, equipment, and inventory; the maximum is 25 years for real estate loans;
- The loan amount is $5 million maximum, with two exceptions: the Export Express and the Express loans have a maximum loan amount of $500,000 and $350,000, respectively;
- The interest rates are varied:
- for a loan maturity under seven years, the interest rate starts from 2.25 percent and goes up to 4.25 percent, depending on the amount borrowed;
- for a loan maturity over seven years, the interest rates are from 2.75 percent to 4.75 percent, depending on how much money you need;
- Eligibility – all for-profit operations may be accepted, the company has to do business in the United States, and you need a reasonable amount of equity in the business.
Term Loans
Term loans offer business owners a single lump sum of money that has to be repaid, plus interest, over an agreed-upon repayment schedule. The borrower must meet specific qualifications and other conditions set by the lender. Common examples include real estate loans and commercial loans.
- The repayment terms – some are short-term (3 to 24 months), mid-term (under five years), or long-term (up to 10 years)
- The loan amounts – these can vary a lot, from $50,000 and can go over $1,000,000; typically, they hover around $500,000;
- The interest rates – vary tremendously, depending on the market, lender, and other factors;
- Eligibility – virtually any business is eligible, but it has to meet the lender’s requirements.
Bank Loans for Small Businesses
These loans are the most favorable for small businesses but are difficult to get. This is because banks have strict requirements, and many companies find them challenging.
- The repayment terms – typical repayment terms start from 3 and may go up to 10 years;
- The loan amounts – vary a lot, but the average loan is around $500,000;
- The interest rates – can be as low as 3 percent and as high as 22 percent; it heavily depends on the lender, the borrower, risk assessment, and various market conditions;
- Eligibility – any business can be eligible, but it has to meet the lender’s requirements, like loan amount, the age of the business, or its creditworthiness.
Microloans
These very small loans are ideal for small businesses that need a quick financing solution but cannot get it elsewhere. They are offered by mission-focused lenders. Some are specifically designed for female entrepreneurs, minorities, or veterans.
- The repayment terms – usually up to 6 years; lenders may set special terms for certain borrowers;
- The loan amounts – vary depending on the lender but are usually under $50,000;
- The interest rates – are higher than other loans, starting from 8 percent and going up to 15 percent;
- Eligibility – most businesses are accepted, but they have to meet certain requirements, like creditworthiness, business history, or collateral.
Invoice Financing or Factoring
This is a special loan program where you sell the invoices to a factoring company that is responsible for collecting payment. You essentially use unpaid invoices as collateral to receive money from a lender. They are good short-term financing options, especially for businesses that use many invoices.
- The repayment terms – concise, typically 30 to 90 days, according to the invoice terms;
- The loan amounts – a percentage, up to 100 percent, of each invoice;
- The interest rates – there is a processing fee, usually 3 percent, and a factoring fee of 1 to 2 percent, depending on the lender;
- Eligibility – businesses have to issue many invoices, usually as B2B invoices; lenders also pay attention to creditworthiness.
Equipment Financing
This financing tool is designed for businesses that want to invest in new equipment or machinery. They are medium-term loans that can be paid off in several years, depending on various factors.
- The repayment terms: usually for the life of the equipment;
- The loan amounts: up to 100 percent of the equipment cost;
- The interest rates: can vary a lot, from 2 to 20 percent;
- Eligibility: lenders will pay attention to creditworthiness, revenue, and the type of equipment needed.
