What is a business term loan? It is a lump sum of money that you repay over a set period, plus interest. Most term loans come with fixed monthly payments, so you always know what you owe. Owners use them to buy equipment, expand, hire staff, or refinance old debt.
A business term loan is one of the most common ways to fund a big, planned project. But it is not the right fit for every need. In this guide, you will learn how a term loan works, what it costs, and who can qualify. You will also see when another option may serve your business better.
How Does a Business Term Loan Work?
A business term loan gives you a lump sum up front, and you repay it with interest over a set period. Payments follow an amortization schedule. Early payments go mostly to interest, and later payments go more toward principal.
Many term loans have fixed rates and set monthly payments. You can often repay early to save on interest, but some lenders charge a prepayment penalty. Banks, credit unions, and online lenders all offer these loans.
How Much Does a Business Term Loan Cost, and How Long Does It Last?
According to NerdWallet, term loans range from about $5,000 to $5 million, with terms from 6 months to 7 years. Annual percentage rates run from about 6% to 99%, and closing or origination fees may apply. Cost and speed depend on the lender and the loan length.
- Short-term (6 months to 2 years): Quick to fund and easier to qualify for, but rates are often higher and payments are larger and more frequent.
- Medium-term (2 to 5 years): More affordable rates, but stricter requirements.
- Long-term (5+ years): Low rates that suit large projects, but slower to fund and harder to qualify for.
Need money faster and for less time? Read our guide to short-term business loans.
What Do You Need to Qualify for a Term Loan?
Lenders look at your time in business, credit, and revenue. NerdWallet reports that banks often want two years in business, while many online lenders accept one year. Credit score ranges are roughly 550 to 700, and alternative lenders usually accept lower scores than banks.
Annual revenue requirements typically fall between $50,000 and $250,000. Expect to share financial statements, business and personal tax returns, bank statements, and legal documents. Some online lenders ask for less. For more tips, see our guide on how to qualify for a business loan.
When Is a Term Loan the Right Choice?
A term loan fits large, planned investments, such as buying equipment, renovating, or expanding. Longer terms can make a big purchase easier to afford. On-time payments may also help build your business credit.
There are trade-offs. Payments start right away, so a term loan is less flexible than a line of credit. Frequent payments can strain cash flow if sales are uneven. Some lenders also require collateral.
If you want flexible, as-needed access to cash, compare a business line of credit. For everyday costs like payroll, a working capital loan may fit better.
Frequently Asked Questions
A business term loan is a lump sum of money that you repay, plus interest, over a set period. Payments are usually fixed and made on a regular schedule.
Terms run from about 6 months to 7 years. Short-term loans fund fast, while long-term loans offer lower rates but are harder to qualify for.
Sometimes. Lenders may ask for collateral, such as equipment or real estate, depending on the loan and the lender.
It depends on your need. A term loan suits large, long-term investments, while a line of credit works better if you want flexible, as-needed access to funds.
Ready to Explore Term Loan Options?
A business term loan gives you a lump sum, a clear repayment plan, and the room to fund real growth. The right loan depends on your goal, your cash flow, and how fast you need the money. Merchant Flow Financial can help you compare options and find a fit. Start your application today, or contact our team to talk through your funding needs.
