What Are Common Small Business Loan Terms?

What are business loan terms?

Business “loan terms” consist of all the rules or conditions set by your lender. They explain how much you can borrow, how much you will pay back and at what time. Knowing what different business loan terms mean can help you compare your options and choose the right one for your business.

Here are some common business loan terms you should know:

• Loan amount: The total amount of money you borrow.
• Interest rate: The percentage charged by the lender for borrowing the principal loan amount. It’s sometimes expressed as a factor rate, which is a decimal figure. A factor rate of 1.3 means you’ll pay back $1.30 for every $1 borrowed.
• Annual percentage rate (APR): The interest rate plus any lender fees, providing a complete cost of the loan per year.
• Term length: The time period over which you’ll repay your loan. It often ranges from a few months to several years.
• Repayment schedule: How often you’ll need to make payments (daily, weekly, monthly) and how much those payments will be.
• Fees: Origination fees, admin fees or prepayment penalties, which can all increase the total cost of the loan.
• Collateral: An asset your lender can seize if you do not repay your loan.
• Personal guarantees: A commitment that you, as the business owner, are personally responsible for repaying the loan if your business cannot. It’s sometimes used in place of collateral.

» MORE: How to get a business loan

Loan terms by different loan types

Not all business loans are created equal. While they all will have some variation of the loan terms outlined above, different types of business loans will have different minimum criteria for each of those terms.

Traditional term loans

A term loan is the most typical type of business loan. You get a lump sum of money that you repay with interest over a set period.

• Loan amount: Typically $5,000 to $500,000
• Term length: 1 to 10 years
• APR: 8.49% to 36%
• Typical funding speed: 24 hours
• Collateral/guarantee required: Often required
• Eligibility requirements: Varies by lender; often a 600 credit score or higher, six months in business and $8,000 in monthly revenue

Short-term loans

Short-term loans work just like traditional term loans but have much shorter payback periods. Because of this, you often qualify for a smaller loan amount and make daily, weekly or monthly payments.

• Loan amount: $3,000 to $500,000
• Term length: 3 to 18 months
• APR: 8.49% to 36%
• Typical funding speed: 24 hours
• Collateral/guarantee required: Often required
• Eligibility requirements: Varies by lender; often a 600 credit score or higher, six months in business and $8,000 in monthly revenue

SBA loans

SBA loans often have lower interest rates, longer terms and more stringent eligibility requirements because they’re backed by the Small Business Administration.

• Loan amount: $5,000 to $5 million
• Term length: 5 to 25 years
• APR: 3.5% to 16.5%
• Typical funding speed: 1 to 3 months
• Collateral/guarantee required: Often required
• Eligibility requirements: Varies by lender; often a credit score of 620 to 680, at least $50,00 in annual revenue, at least two years in business, U.S.-based business, proof of profitability; must meet SBA’s small size requirements

Business lines of credit

A line of credit has a flexible credit limit you can draw from as needed.

• Loan amount: $10,000 to $250,000
• Term length: 6 months to 5 years (revolving)
• APR: 8% to 60%
• Typical funding speed: 24 hours
• Collateral/guarantee required: Usually
• Eligibility requirements: Varies by lender; often a 600 credit score or higher and at least six months in business

Merchant cash advance

A merchant cash advance is an advance on future sales. It’s repaid through a percentage of daily revenue.

• Loan amount: $5,000 to $500,000
• Term length: 3 to 24 months
• Factor rate: Typically 1.1 to 1.4
• Typical funding speed: 24 hours
• Collateral/guarantee required: No
• Eligibility requirements: Varies by lender; often a 500 credit score or higher and at least three months in business; regular credit card sales

Equipment financing

Equipment financing loans are specifically for purchasing business equipment and technology.

• Loan amount: Up to 100% of equipment value
• Term length: 1 to 5 years
• APR: 7.5% to 24%
• Typical funding speed: 24 hours
• Collateral/guarantee required: Equipment itself as collateral
• Eligibility requirements: Good credit score preferred, but less of a requirement than traditional loans because of collateral; down payment often required

Microloans

Microloans are small, short-term loans often used by startups or small businesses. They can consist of SBA microloans, asset-based financing, business credit cards or personal loans for business use. They’re also known as startup loans.

• Loan amount: $500 to $50,000
• Term length: 1 to 6 years
• APR: Up to 31%
• Typical funding speed: 2 to 4 weeks
• Collateral/guarantee required: Usually
• Eligibility requirements: Often requires at least six months in business and a good personal credit score

Inventory or purchase order financing

This type of financing is for businesses with physical products. You use it to buy more inventory or fulfill purchase orders.

• Loan amount: $15,000 to $25 million
• Term length: 60 to 90 days
• APR: 20% to 75%
• Typical funding speed: 2 to 4 weeks
• Collateral/guarantee required: The inventory or purchase orders serve as collateral
• Eligibility requirements: Proven sales record, must produce physical goods, proof of existing purchase orders, must be business-to-business (B2B) or business-to-government (B2G)

Invoice factoring

Invoice factoring, also known as accounts receivable factoring, is when you sell your unpaid invoices at a discount for immediate cash.

• Loan amount: 70% to 90% of invoice value
• Term length: Not applicable (one-time transaction)
• Factor rate: 1% to 5%
• Typical funding speed: 1 to 2 weeks
• Collateral/guarantee required: The invoices serve as collateral
• Eligibility requirements: Outstanding invoices from creditworthy customers

Other considerations when choosing a business loan

“Business loans with the best rates and terms are often available to those owners with strong personal credit history, money or collateral to put down on the loan, and a defined business plan that demonstrates how the loan will be repaid,” said Katie Kramer, executive director of the Ohio Statewide Development Corporation (OSDC).

“If any of those items are missing, businesses could overcome that with a strong guarantor willing to promise repayment in the event the loan defaults.”

Finding the best business loan involves more than just comparing interest rates and loan amounts. Additional factors to consider include:

• Fees: Beyond interest rates, look out for origination fees, processing fees or annual fees that add to the total cost of the loan.
• Usage or industry limitations: Certain loans may have restrictions on how you can use the funds or may not be available for specific industries.
• Customer service: Good customer service from a lender can be crucial, especially if you encounter problems or have questions.
• Application process: Consider how easy or complex it is to apply. An overly complicated process might delay getting the funds you need.
• Funding speed: If you need funds quickly, check how long it takes for the loan to be approved and for you to receive the money.

» MORE: Personal loan for business: what you should know

FAQ

Bottom line

By taking the time to learn about common business loan terms, you can find the best business financing to support your goals in both the short and long run. While rates and amounts are important, don't overlook other factors like fees, prepayment rules, usage restrictions and the application process itself.