Business Term Loans

Where to Get One

Banks and credit unions. Usually the lowest rates and longest terms for established businesses with good credit, solid financial statements and collateral. Approval can take several weeks.

SBA-guaranteed lenders. Participating lenders make SBA 7(a) and SBA Express loans with a partial federal guaranty, which can make longer terms available to businesses that do not meet a bank's conventional standards.

Non-bank lenders. Faster decisions, often within days, and more flexibility on credit and time in business. Terms tend to be shorter, payments more frequent and costs higher.

What Lenders Review

Most lenders review a similar set of documents, although non-bank lenders may ask for fewer of them.

1. Business and personal tax returns, often for the last two or three years

2. Recent bank statements

3. Profit and loss statement and balance sheet

4. A debt schedule listing current loans and leases

5. Details on the use of funds, such as an equipment quote or purchase agreement

6. Ownership and formation documents

Underwriters focus on whether cash flow can comfortably cover the new payment on top of existing obligations. Many also ask for collateral and a personal guarantee from the main owners.

Costs Beyond the Interest Rate

• Origination or closing fees. Often deducted from the proceeds, which reduces the cash you actually receive.

• Prepayment penalties. Some loans charge a fee for paying off early. SBA 7(a) loans with maturities of 15 years or more carry a fee if you prepay 25% or more of the balance in the first three years.

• Packaging or broker fees. Ask who is charging each fee and what it covers.

• Variable rates. If the rate floats with an index, your payment can rise. Check how often it adjusts and whether there is a cap.

Frequently Asked Questions

Is a business term loan secured or unsecured?
It can be either. Banks usually require collateral, while some non-bank lenders offer unsecured loans backed by a personal guarantee and a general lien on business assets.

How fast can I get a business term loan?
Non-bank lenders can fund within a few business days. Bank and SBA loans usually take several weeks, depending on the amount and whether real estate is involved.

Can I pay a term loan off early?
Usually, but read the prepayment section of the agreement first. Some loans charge a penalty, and some fixed-fee loans do not reduce the total cost when paid early.

Find the Right Term Loan for Your Plans

Start with what the money will buy and how long it will produce value, then choose a term that keeps the payment comfortable. Comparing a few offers on total cost, fees and flexibility will show you which financing fits your business best.

A business term loan gives a company a single lump sum up front, which it repays with interest on a set schedule over an agreed period. It is the most familiar form of commercial credit, offered by banks, credit unions, non-bank lenders and through SBA-guaranteed programs.

Because the amount, the term and the payment are fixed at the start, a term loan is easy to plan around. That makes it a natural fit for one-time costs with a clear purpose, such as buying equipment, opening a location or refinancing more expensive debt.

How a Term Loan Works

The lender approves a principal amount, a rate and a repayment period. Once the loan closes, the full amount is deposited, and you begin making payments, usually monthly with banks and sometimes weekly with non-bank lenders.

Most term loans are fully amortizing. Each payment covers that period's interest plus part of the principal, so the balance falls to zero by the final payment. Early payments are weighted toward interest, and later payments are weighted toward principal.

Some loans use a different structure. An interest-only period at the start keeps early payments low, and a balloon loan leaves a large balance due at maturity that is usually refinanced or paid from a sale.

Short, Medium and Long Terms

Term length usually follows what the money is buying.

• Short term, roughly under two years. Common with non-bank lenders and used for inventory, a seasonal push or a short-lived opportunity. Payments are larger and more frequent.

• Medium term, roughly two to five years. A common range for equipment, vehicles, technology and expansion projects.

• Long term, beyond five years. Usually reserved for real estate, major renovations and business acquisitions. SBA 7(a) loans, for example, can run up to 25 years for real estate.

Lenders generally avoid financing an asset for longer than it will last. A loan that outlives the equipment it bought leaves you paying for something you no longer use.

How the Term Changes Your Payment and Total Cost

A longer term lowers the payment but raises the total interest. Here is a hypothetical $100,000 loan at a fixed 10% annual rate with monthly payments:

• 3-year term. About $3,227 a month, with roughly $16,162 in total interest.

• 5-year term. About $2,125 a month, with roughly $27,482 in total interest.

The longer term frees up about $1,100 a month of cash flow but costs about $11,300 more over the life of the loan. Neither choice is right in every case. If the lower payment lets you keep a healthy cash cushion, the extra interest may be worth it.

Common Uses

• Equipment and vehicles. Machines, trucks and tools that will earn revenue for years.

• Expansion. Build-outs, a second location or a new product line.

• Business acquisition. Buying a competitor, a partner's stake or an existing company.

• Debt refinancing. Replacing several high-cost obligations with one predictable payment.

• Real estate. Buying or improving owner-occupied property, usually with a longer term.

For ongoing, up-and-down needs such as covering payroll between customer payments, a revolving line of credit is usually a better match than a lump sum.