Need to replace aging equipment, stock up on inventory, or open a second location? Small business term loans provide upfront funds so you can cover a large expense without draining your operating cash.
Before applying for a term loan, it’s important to understand the costs, payment schedule, and requirements. Here’s what to look for.
What is a business term loan and how does it work?
Term loans for business provide a lump sum you repay over a set period. Your financing agreement specifies how much you’ll owe and when payments are due.
Most term loans for small businesses have three features:
- Lump-sum funding: You receive the approved amount, minus any upfront fees.
- Set repayment period: You agree to a repayment timeline before accepting the loan.
- Scheduled payments: Depending on the agreement, payments may be daily, weekly, or monthly.
Term loans make sense when you know what an expense will cost. Unlike a revolving business line of credit, you can’t borrow again from the same loan as you pay down the balance, so a line of credit may work better if your expenses change throughout the year.
Types of business term loans and typical term lengths
Short-, medium-, and long-term loans for businesses differ in repayment time, what they’re used for, and how lenders evaluate applications.
Short-term business loans
Short-term business financing can cover inventory, seasonal hiring, and other expenses you expect to recover through near-term sales.
Short-term loans, such as working capital financing, often require daily or weekly payments and may use a factor rate instead of an interest rate. Online lenders may review bank statements rather than asking for extensive financial records. Terms typically range from 6 to 24 months depending on the lender.
Medium-term business loans
Medium-term loans spread repayment over a longer period, often 12 to 60 months. They’re generally used for investments like facility improvements and technology upgrades.
These loans may require more financial documentation than short-term options. Depending on the lender, you could need to provide tax returns, financial statements, and evidence of consistent cash flow.
Long-term business loans
Long-term business financing* supports larger investments that may take several years to produce returns. Think major equipment purchases, expansion projects, and property improvements.
They commonly feature monthly payments and more detailed underwriting. Repayment periods can range up to 120 months, depending on the lender. Longer terms can reduce individual payment amounts, but they may increase the total cost of borrowing.
Business term loan rates, fees, and total cost
Business term loan rates depend on your credit, revenue, repayment period, and lender. Financing costs may be expressed as an interest rate, annual percentage rate (APR), or factor rate.
A factor rate isn’t interest or an APR. A factor rate is a multiplier used to calculate repayment and doesn’t change over the life of the loan. For example, borrowing $50,000 at a 1.20 factor rate means repaying $60,000, plus any additional fees.
Interest is the percentage a lender charges for borrowing money, typically based on the outstanding loan balance. While a factor rate is set at loan origination, the total interest you pay can change if you make larger principal payments or pay off the loan early.
APR is the annualized cost of borrowing, expressed as a percentage of the loan amount. It generally includes interest and lender fees, making it useful for comparing loan offers.
When comparing financing offers, ask about these costs:
- Origination fees
- Payment frequency
- Prepayment terms
- Late fees
- Broker fees
Here’s why the details matter: A $50,000 loan might require you to repay $60,000. If the lender deducts a $2,500 origination fee, you receive $47,500 but still owe $60,000. Before accepting an offer, compare what you’ll receive, what you’ll repay, and when each payment is due.
Use our business loan payment calculator to estimate payments.
Business term loan requirements
Lenders want to know whether your business earns enough to make payments while covering everyday expenses.
Common eligibility factors
- Time in business
- Sales and deposits over recent months
- Cash flow after operating expenses
- Credit profile
- Existing debt
- Collateral or guarantees required
Remember, meeting a lender’s requirements doesn’t guarantee approval. Lenders may also review business health indicators to assess whether you can afford the payments.
Read more about small business loan qualifications.
How to apply for a small business term loan
Before applying for a term loan, make sure you know how much you need and what you can afford to repay.
1. Calculate how much you need
Add up your project expenses, including costs you might overlook. For example, new equipment may also require installation and employee training.
Don’t borrow more than you need just because you qualify for a larger amount.
2. Check what you can afford
Review your revenue, expenses, existing debt payments, and cash reserves. Could you still make the new payments during a slow month?
3. Gather your documents
Depending on the lender, you may need:
- Business bank statements
- Business and personal tax returns
- Profit and loss statements
- Business ownership information
- Existing debt details
- Financial projections
Learn more about what to prepare when applying for financing.
4. Compare offers
Look at total repayment, fees, payment frequency, and funding timelines. Ask lenders to explain any charges you don’t recognize.
5. Read the agreement
The business financing agreement explains your obligations. Review the amount you’ll receive, the total repayment amount, any additional fees or guarantees required, and the consequences of missed payments.
6. Accept financing
Signing the loan agreement and paying any origination fees initiates the loan.
See how to get a small business loan for more guidance.
Business term loan vs. line of credit and other financing
Say you need $80,000 for equipment you plan to use for years. A term loan could fit because you know the equipment cost and the expected return upfront.
But if you regularly need money for inventory before making sales, a line of credit may be more useful.
Here’s how the options compare:
Financing | How it works | Common uses |
|---|---|---|
Term loan | Lump sum, scheduled payments | Renovations, expansion |
Line of credit* | Borrow against a revolving credit limit | Recurring or changing expenses |
Working capital loan | Upfront funding, typically shorter terms | Inventory, hiring, operations |
Equipment financing* | Financing often secured by equipment | Machinery, vehicles |
SBA-backed loan* | Loan backed by an SBA guarantee | Eligible expansion, acquisitions, refinancing |
Explore other small business loan types to compare your options.
How to choose the best business term loan for your company
The best business term loans aren’t necessarily the largest or fastest. What matters is whether the financing fits your plans and your budget.
Before signing, ask:
- Is the lender legitimate? Verify its business information, reputation, and disclosures.
- What will I pay in total? Compare the amount you receive with the full repayment obligation.
- Does the term make sense? Do years of payments make sense for a short-term need?
- Can I handle the schedule? Daily withdrawals affect cash flow differently from monthly payments.
- When will I receive funding? Confirm the expected timeline.
- Will payments affect my business credit? Ask whether the lender reports to business credit bureaus.
- What happens if I pay early? Check for any early repayment savings or penalties.
- Can I afford a slow month? Make sure the payments won’t leave you short on payroll or other bills.
For more guidance, read about managing business loan repayments.
Frequently asked questions
Will prequalifying for a business term loan affect my credit?
Credibly uses a soft credit inquiry during the initial application, which generally doesn’t affect your score. Other lenders may use hard inquiries, so ask before applying.
Learn more about what lenders review beyond a credit score.
Can I get a term loan if I already have other business debt?
Potentially. Lenders may review your existing payments, revenue, and available cash flow to determine whether you can afford another loan.
Can I refinance an existing business term loan?
Most standard term loans, equipment loans, SBA 7(a) loans, and SBA 504 loans can be refinanced, but it depends on the lender.
Do term loan payments help build business credit?
They may if the lender reports payments to business credit bureaus. Ask about reporting before you sign, and remember that on-time payments don’t guarantee a score increase.
Can I use a term loan to buy another business?
Some term loans, including eligible SBA 7(a) loans, can be used for business acquisitions. Approval depends on the lender, the purchase, and your financial qualifications.
Can I use a business term loan for more than one expense?
Often, yes. You may be able to cover equipment, inventory, and hiring with one loan. Your loan agreement should cover any restrictions.
Can a term loan have a fixed or variable rate?
Yes. Some loans have fixed rates; others have variable rates. Other products use factor rates. Confirm how your financing is priced before signing.
Can I pay a business term loan off early?
It depends on the lender. Many lenders allow early payoffs, but you might face an early repayment penalty. Review the prepayment terms before signing.
What happens if I miss a term loan payment?
You may face late fees, negative credit reporting, or a default. If you expect to have trouble making a payment, contact your provider to discuss your options.
What should I review in a term loan agreement before I sign?
Review the actual amount you’ll receive, the total repayment cost (including fees), the payment schedule, any guarantees or collateral, what happens in case of a default, and early payoff terms.
* Some products are made available through Credibly’s network of external funding partners.
Credibly merchant cash advances and working capital loans to merchants in California are provided by Retail Capital LLC. All other Credibly products in all other jurisdictions are provided by Credibly of Arizona LLC.
