When most people picture a business loan, they’re thinking of a term loan. You borrow a fixed amount, pay it back over a set period with interest, and that’s it. Simple in concept — but the details matter enormously when your cash flow and credit are on the line.
What Is a Business Term Loan?
A term loan is a lump-sum advance from a lender that you repay in regular installments — usually monthly — over a defined repayment period. Terms typically range from one year to ten years, though some real estate-backed loans stretch to 25 years. Interest rates can be fixed or variable.
There are two primary categories:
Short-term loans (3–18 months): Faster to obtain, higher interest rates, usually used for working capital or urgent needs. Repayments may be weekly or even daily with some online lenders.
Long-term loans (2–10+ years): Lower rates, more stringent qualification requirements, better for large investments like equipment, real estate, or significant expansion.
What Do Term Loans Cost?
Interest rates on term loans vary widely based on lender type, your credit profile, and loan purpose:
- Bank term loans: 6%–13% APR for well-qualified borrowers
- SBA loans (bank-backed): 10.5%–16.5% variable, but with favorable terms
- Online lender term loans: 15%–45% APR depending on risk profile
- Short-term loans: Effective APRs can exceed 80% when fees are annualized
Always ask for the APR — not just the “factor rate” or flat fee — so you can compare apples to apples.
Who Qualifies?
Lender requirements vary, but typical minimum thresholds for traditional term loans include:
- Credit score: 650+ for bank loans; 580–620 for online lenders
- Time in business: 2+ years for banks; 6–12 months for online lenders
- Annual revenue: $100,000–$250,000 minimum, depending on loan size
Startup businesses with less than a year of operating history will find term loans from banks nearly impossible to obtain and will likely need to look at SBA microloan programs or alternative lenders.
When a Term Loan Makes Sense
Term loans are ideal when:
- You need a large, one-time capital investment (equipment, renovation, acquisition)
- You have predictable monthly revenue to service regular payments
- You want to build business credit with a structured repayment history
- You’re refinancing existing higher-rate debt at a lower rate
They are not the right tool for businesses with irregular cash flow, those needing revolving access to capital, or owners who need funds within 24–48 hours.
How to Apply
- Check your credit: Pull both personal and business credit reports. Dispute any errors before applying.
- Gather documents: Tax returns (2 years), bank statements (3–6 months), P&L statements, and business licenses.
- Know your number: Borrow what you need — no more. Lenders view overborrowing as a risk signal.
- Compare at least three lenders: Banks, credit unions, and one online lender to benchmark rates.
- Read the fine print: Check for prepayment penalties, origination fees, and balloon payments.
Term loans remain one of the most cost-effective ways to fund business growth when you qualify for them. The key is entering the process prepared.