Business loan

What are the common small business loan terms? – Forbes Advisor

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

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

Overview of business loan terms

There are many types of small business loans, each with their own terms and conditions. Here are some of the most common types of financing for small businesses, along with business loan terms you should be aware of:

Term loans

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

  • Repayment Terms : Short term (three to 24 months); medium term (up to five years); long term (up to 10 years)
  • Loan amounts: $5,000 to $1 million+
  • Interest rate: 6% to 36%
  • Funding time: 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 income, and you’ve been in business for six months or more.

SBA Loans

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

  • Repayment Terms : Up to 25 years old
  • Loan amounts: Up to $5 million
  • Interest rate: Base rate, plus 2.25% to 4.75% for 7(a) loans
  • Funding time: 30 to 90 days, depending on loan program
  • Qualification requirements: Businesses must operate for profit in the United States, have reasonable equity to invest, and have experience with alternative financial resources before applying for an SBA loan. Borrowers must also have a credit score of at least 640, although applicants with a score of 680 or higher are more likely to qualify.

Traditional bank loans

Traditional bank loans are usually available from banks, credit unions or other lending institutions. These loans are generally used to finance the purchase, expansion or start-up of a business. Depending on the lender, these loans may have lower interest rates than other options. Still, it can be difficult to qualify, especially for new businesses.

  • Repayment Terms : Three to 10 years
  • Loan amounts: $250,000 to $1 million
  • Interest rate: 3% to 22%
  • Funding time: From two weeks to several months
  • Qualification requirements: Borrowers generally must have a minimum credit score of 640 or provide collateral, but these requirements vary by institution. Many banks also impose minimum income and time in trading requirements.

Commercial lines of credit

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

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

Microcredits

Microloans are designed for small businesses and entrepreneurs who need small amounts of money to start or expand their business. 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 it an ideal option for small business owners who may not have access to conventional bank loans. That said, borrowers cannot use microloans to buy real estate or pay off existing debts.

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

Factoring of invoices

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

  • Repayment Terms : 30 to 90 days
  • Loan amounts: Up to 100% of the amount of each invoice
  • Interest rate: 3% processing fee, plus factoring fee of 1% to 2% of invoice amount
  • Funding time: As little as 24 hours
  • Qualification requirements: Factoring companies review a company’s financial records, including accounts receivable, bank statements, and unpaid invoices. These lenders also assess the credit worthiness of the company’s customers to assess the level of risk.

Inventory financing

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

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

Equipment financing

Equipment financing allows business owners to borrow money to pay for equipment. The equipment secures the loan, so interest rates are lower than for many types of financing. Similarly, financing times can be quick and repayment terms are usually tied to the useful life of the equipment. However, when financing equipment, a down payment is required, usually between 5% and 20% of the purchase price.

  • Repayment Terms : Useful life of equipment (often two to seven years)
  • Loan amounts: Up to 100% of equipment cost
  • Interest rate: 2% to 20%
  • Funding time: 24 hours to a few weeks
  • Qualification requirements: Business owners must 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 future sales of their business. Loans are often repaid by direct debit from company credit card sales, making them ideal for businesses with a strong credit history and high sales volume.

  • Repayment Terms : Three to 18 months
  • Loan amounts: Up to $500,000
  • Interest rate: Factor rate of 1.1 to 1.5
  • Funding time: As little as 24 hours
  • Qualification requirements: Typically, businesses must 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 records, copies of tax returns for the past two years, and recent business bank account statements.

Summary of Business Loan Terms

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