A business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate—this type of traditional financing is what most people think of when it comes to small business loans.
The “term” in “term loan” comes from its set repayment term length, which can range from a few months to several years depending on the type of loan. Therefore, although term loans can vary in length, the phrase “business term loan” is most often used to refer to loans with terms of one to five years.
Generally, business owners use the proceeds of term loans to finance specific, one-off investments for their small businesses such as real estate purchases, business expansions, debt refinancing, and more.
Business term loans are issued by banks, credit unions, and online lenders.
Best for: Medium-term loans for a range of business purposes.
TAB Bank is a bank lender that provides medium-term loans ranging in length from one to five years. Offering loans in amounts up to $200,000 with fixed interest rates, TAB Bank can fulfill a variety of small business financing needs (including debt refinancing). Plus, TAB Bank has no prepayment penalties and fewer application requirements compared to SBA loans and other traditional bank lenders.
Best for: Access to short-term working capital or business expansion loans.
Credibly is an online lender that offers both short-term working capital loans, as well as business expansion loans. With these two distinct products, Credibly can meet a wide-range of financing needs, especially with a minimum credit score requirement of 500 and minimum time in business requirement of six months or more. In addition, Credibly offers prepayment incentives—you can avoid interest if you pay off your loan in the first half of the term. You can apply for a loan from Credibly quickly and easily online and receive approval in as little as 24 hours.
As mentioned briefly above, business term loans are likely what you think of when it comes to commercial (or even personal) financing. With a term loan, a small business lender gives you access to a lump sum of capital—which you then pay back, with interest and fees, over a set period of time.
Although your payment schedule will vary based on the type of business term loan and the lender you’re working with, you’ll make equal payments over the course of your loan term.
This being said, business term loans can be issued by banks, credit unions, and online lenders. In general, banks and credit unions will offer the most ideal rates and terms, but will also require top qualifications and will be slower to fund. Online lenders, on the other hand, will offer greater flexibility and faster funding times, but will likely be more expensive and have shorter terms.
Overall, in addition to a predictable payment schedule, one of the benefits of business term loans is that they can be used for a variety of business financing purposes. Therefore, with medium- and long-term loans (vs. short-term loans), you’ll find that these loans are often used for:
In general, business term loans have repayment periods ranging from one to five years.
This being said, you’ll also find short-term loans with terms of one year or less, as well as longer-term loans (like SBA loans) with terms of up to 25 years. In this context, loans with terms of one to five years are often classified as “medium-term loans.”
With this in mind, most business term loans have weekly or monthly repayment schedules, although some short-term loans require daily repayments. Additionally, whereas most short-term loan amounts typically fall under $500,000 (or even $250,000), you’ll find that longer-business term loans are available in larger amounts.
Although the interest rates on business term loans will vary based on the specific lender and your business’s qualifications, you’ll usually find rates that range from 7% to 30%. With bank and SBA loans, however, you might even see interest rates lower than this 7% threshold—especially if you’re a highly qualified borrower.
To get a better sense of how business term loans work, let’s walk through an example.
Let’s say you’re offered a term loan of $250,000 with monthly payments and a two-year term. The interest rate on this loan is 8% and you’re paying the lender an origination fee of 2%.
With this information, you can plug-in the numbers into a term loan calculator to estimate your monthly payments—as well as determine how much this loan will cost your business.
Overall, you’ll be making monthly payments of $11,306.82 to the lender with a total repayment of $271,363.75. The cost of this loan, therefore, is $26,363.75. In addition, you can also use these calculations to determine your APR, as opposed to the simple interest rate. If your interest rate is 8%, but you also have an origination fee of 2%, your APR will end up being higher than that quoted 8%.
In this case, the APR on the loan is 10.01%.