What is a business term loan?

A business term loan is what you might think of as a “traditional” business loan. It’s traditional in the sense that you can be approved for a certain lump sum amount that is deposited into your business bank account and is repaid in regular weekly or monthly payments over a certain time period.

Business term loans are generally very flexible in terms of their usage; they’re best for general working capital, which you can spend on one asset, or supplementing multiple expenses. Depending on the type of business term loan that you get, you may find that your capital is good for investments and larger purchases. 

Finding the best term loan for your company is a matter of choosing the right type of term loan that meets your business needs, and getting the right amount of capital that you can repay.

Advantages and disadvantages

There are many advantages to a business term loan. With a business term loan, you are able to access a large, lump sum of capital at once. And, as we mentioned before, they generally don’t have many restrictions on what you can use your capital for, which can be a big help for business owners.

Disadvantages include that you’ll have to pay interest on the entire loan, unlike some loans in which you only pay interest on what you use. And, if you don’t properly judge how much capital you can repay, you may find that your repayments come due faster than you can afford them.

An overview of business term loans

  • Used as flexible working capital or investment
  • Repaid on a set schedule
  • Repaid weekly or monthly
  • Bad credit sometimes accepted

Who qualifies for a business term loan

There’s a range of qualification requirements for a business term loan. Short-term loans have shorter repayment periods and higher interest rates, but they are slightly easier to qualify for. Medium-term loans have better terms, with longer repayment periods and lower rates. Finally, long-term loans have the longest repayment terms and lowest interest rates.

Qualifications vary for different lenders, but these are ballpark figures to help you understand whether a business term loan is in reach for you:

Minimum qualifications: Short-term loans

Short-term loans, which have repayment periods up to 2 years, are the easiest to qualify for:

  • $100,000 to $150,000 minimum annual revenue
  • 650 minimum credit score
  • Two years or more in business

Minimum qualifications: Medium-term loans

Medium-term loans, which have repayment periods up to five years, have slightly more stringent requirements:

  • $250,000 minimum annual revenue
  • 680 minimum credit score
  • Three years or more in business

Minimum qualifications: Long-term loans

As long-term loans are usually secured through traditional lending institutions, such as banks, these loans are much harder to qualify for. Lenders may require several hundreds of thousands of dollars in revenue, very good to excellent credit, and several years in business. As a baseline, many require a 700 credit score and 5 years in business.

How do business term loans work?

Business term loans have the traditional set up that most people think of when they think of term loans. These are their characteristics:

  • Borrowers get approved for a lump sum of capital
  • Repayment period is six months to 10+ years, depending on the type of loan
  • Weekly or monthly payments
  • Shorter approval timelines for shorter terms

Approval timelines

Different loan types have different timelines to approval. One of the benefits of short-term business loans is that, in certain cases, you can gain approval to capital in a matter of a single day. That can make a huge difference for business owners with cash flow issues, or those who are in a crunch.

Medium-term business loans often have a quick turnaround time, too, although they may take a couple of days longer for approval. In contrast, SBA term loans and other long-term loans can take several months, and require significantly more paperwork.

The best thing you can do to speed up any timeline for approval is to gather your documentation early. Although different lenders require varying documents, many ask for the same types of papers, regardless. For instance, one lender may ask for two months of financial statements; another might ask for four. No matter what, you can work in advance to locate your documents and get them ready.

Difference between types of term loans

We’re talking quite a bit about short-term and medium-term loans, but what’s the difference? And are long-term loans a factor, too?

Short-term loan: A short-term loan is generally a term loan of a year or less, sometimes up to 18 months. These loans often have lower credit requirements to qualify, and you can get a hold of them quickly. The tradeoff is that their annual percentage rate can be high, which is the price that you pay to be able to access capital with a term structure very quickly. Repayment can be weekly; on some occasions, daily.

Medium-term loan: These loans, sometimes simply called “term loans,” enable borrowers to receive a lump sum of capital with a term of one year to around five years. Terms vary depending on your lender, how much you’re requesting, and your credit history. But, for argument’s sake, medium-term loans don’t tend to extend past that five-year mark. These loans have more favorable terms than short-term loans, so they’re a bit harder to get your hands on. Repayment generally happens monthly.

Long-term loan: Long-term financing is available too, particularly through banks backed by the US Small Business Administration. With SBAloans, the SBA guarantees up to 85% of the loan, depending on the amount, which enables the banks to offer desirable terms. Some long-term loans, like SBA 504/CDC loans, have terms up to 25 years, with seven-year terms on the shorter side for other types of SBA loans. You can generally secure higher capital amounts with long-term loans, too. Obviously, longer repayment terms are considered more favorable, so these are generally restricted to the most qualified candidates. 

Business term loan vs. other loan products

If you’re hoping to find a working capital loan, a business term loan is often a good place to begin looking. Let’s compare term loans to other types of working capital loans so you understand the differences among the alternatives for working capital business loans:

Business lines of credit: A business line of credit is similarly flexible to a business term loan, however, the biggest difference is that you “draw” when you need against a pre-approved credit line, and only pay interest on what you use. A business line of credit generally re-ups once you repay the balance that you’ve withdrawn. You can think of it as a marriage between a business credit card and a traditional—aka term—business loan.

Invoice financing or invoice factoring: Invoice financing or factoring enables you to get advances on any unpaid invoices. This is particularly helpful if you provide many of your customers’ trade credit, but don’t have the cash flow to support waiting for the payments. A lending partner either fronts you the money on the invoice, or outright purchases your invoice (in the case of factoring). Both sums will come minus fees, but these loans can provide you with the working capital you need at the right time.

SBA loans: These loans, considered some of the best financing options available, are financed through lenders (generally small banks) and guaranteed by the US Government’s Small Business Administration. Many SBA loans are long-term loans, with terms up to 25 years and capital amounts available up to $5.5 million. Although these are fantastic ways to get a hold of working capital, SBA loans are the hardest to qualify for, requiring significant revenue, time in business, and a high credit score.

How do you apply for small business term loans?

You’ll be happy to find out that, if you have your paperwork together and are prepared to submit your loan application to a lender, you can gain approval quickly—sometimes in fewer than a couple of days.

Documentation to apply for business term loans

Now that you know the amount of capital you want, based on how much you can repay, here’s what else you need to gather in order to apply for business term loans:

  • A knowledge of your personal credit score
  • Lenders will pull this, but you should know your  range in order to understand what you will be eligible for
  • Your business licenses and legal documentation, such as incorporation documents and permits to operate
  • Personal identification
  • Two to three months of financial statements
  • Two years of personal tax returns

Longer-term business loans may require significantly more documentation, such as your business plan, profit and loss and balance sheets, your business debt schedule, and other forms specific to either the bank or the loan program that you’re applying to.

Here’s a look at our guide on how to get a small business loan for a more detailed picture.

How can my business use a business term loan?

Working capital—that’s the name of the game here. Working capital is the money that you use to run your business day to day; it’s able to be spent flexibly on as many or as few business expenses as you’d like. 

Business term loans give you access to working capital, which can help with any of the following:

  • Payroll expenses
  • Inventory purchases
  • Equipment financing
  • General operational costs
  • Investments
  • Large fixed-asset purchases

Using a business term loan for larger investments

A note about those big investments and fixed-asset purchases: Business term loans can also be used for very large purchases, such as heavy equipment or real estate. A great example of this is SBA loans, some of which are particularly meant to capitalize on these big investment purchases. It’s important to know, though, that small business owners generally can’t get access these loans  overnight; they may take weeks or months to get and often they require collateral.

What about the alternatives, such as short- and medium-term business loans? Due to their abbreviated repayment periods, short-term loans are not always best for large purchases or investments such as buying a building to expand. You’ll want to look closely at your medium-term loan options to figure out if you can make a big purchase with one; for instance, medium-term loans with repayment periods of three to five years can be better suited for this purpose.

How much does a business term loan cost?

Business term loans are priced based on the interest rate quoted by the lender. Due to looser restrictions on qualifications, and  tighter turn-around time on repayment, short-term business loans are more expensive than some loans, including medium-term business loans. Let’s discuss the fees:

Short-term loans

  • Repayment is generally weekly 
  • Interest rates begin around 10%, but can go to 80% or 90% for poor credit or high risk
  • You’ll generally pay above the low end, but below the high end
  • Lenders will also charge varying fees, depending on whom you borrow from
  • Some lenders will not charge origination fees (fees for taking out the loan) or early repayment fees, such as BlueVine

Medium-term loans

  • Generally monthly loan payments
  • Interest rates generally begin around 8%, and can go to 50% for poor credit or high risk 
  • You’ll generally pay above the low end, but below the high end
  • Lenders will also charge varying fees, depending on whom you borrow from
  • Some lenders will not charge origination fees or early repayment fees, such as BlueVine

Long-term loans

  • Generally monthly loan payments
  • Interest rates begin around 8%
  • The better your credit score, the lower your interest rate
  • Lenders will also charge varying fees, depending on whom you borrow from
  • Sometimes, your relationship with the institution can help you get these fees down

Business term loan repayment example

Let’s say you take out a short-term loan of $30,000 with a term of 12 months. Your yearly interest rate is 15%. Here’s what that repayment schedule would look like:

  • You’d owe $30,000 of principal
  • Principal represents the original amount of the loan
  • You’d owe $2492.99 in interest fees
  • Your monthly payments would be $2707.75

This total does not include lenders’ fees, which will vary depending on the lender whom you borrow from.

Where to find the best business term loan option

As one of the most traditional business loans, you have many different options for where you can find business term loans. Depending on your credit score, you may have to be a bit flexible with where you pursue your options.

Traditional banks

Traditionally, many small business owners try to pursue business term loans at banks. This is still possible, but the reality is that, since the 2008 recession, banks have been very limited with the number of loans they’ll approve. Because they’ve scaled back, and there’s still demand, this means that bank-originated business term loans only go to highly qualified candidates, and often candidates with whom the bank has an existing relationship.

That’s not to say you shouldn’t try to get a term loan at your local financial institution. If you think your credit may be good enough, and your revenue figures are strong, it may be worth trying to apply, since bank loans often offer preferable terms, including lower interest rates, to borrowers.

Alternative lenders

Online or “alternative lenders” are a fantastic option for business term loans. You can get funds same-day—much faster than traditional institutions. Since alternative lenders are generally easier to work with, they’re more willing to accept candidates with less-than-perfect credit and business history, which opens up options to all types of business owners. This can mean that rates will be slightly higher to compensate for risk. Finally, you may enjoy these lenders’ more tech-forward approach, which can include a faster application process and easy integration into your business bank account or accounting tools.

BlueVine

BlueVine is among the online lenders that offer business term loans. Along with competitive rates, BlueVine offers up to $250,000 over 6 or 12 months and keeps fees low: they don’t charge early repayment fees, which is beneficial for you as a small business owner. You can apply for a business term loan directly through BlueVine in a few minutes, and find out if you’re approved often within a day.