A small business loan term is the lifetime of the loan, or how long the borrower will pay back the loan and interest. the borrower and the lender establish a schedule to determine how much will be paid monthly or weekly in some cases. Also called repayment terms, loan terms can range from a few months to 25 years. 

Types of loans and their terms

Small business loans come in several varieties, and your loan term will depend on what kind of loan you get.

If you’re not sure what you need, Llama Loan is here to help. We simplify the process of applying for loans so you can focus on what you do best: your business.

Business term loan

• Typical loan term: Up to 10 years
• Loan amount range: $5,000 to $1,000,000+ 
• Typical interest rates: 6% to 36%
• Time to fund: Next business day to a few months

A standard business loan is a loan for a set amount of money and has a set repayment period. Because they usually have better interest rates than credit cards or lines of credit, business loans allow owners to invest in their business without paying as much in fees.

Traditional business loans usually come in short-term (three months to two years), mid-term (two to five years) or long-term (up to 10 years) lengths. Requirements and details vary by lender, and these loans are available from traditional banks and online lenders.

Business line of credit

• Typical loan term: 6 months to 5 years
• Typical loan amount: $1,000 to $250,000
• Interest rates: 10% to 99%, depending on creditworthiness and lender
• Time to fund: A few days with online lenders; up to two weeks with traditional banks

A business line of credit is a type of revolving debt so small business owners can borrow money as they need up to a certain amount. You do not have to borrow the whole amount at once or even at all, and you pay back the loan based on how much you borrow. You can repay and access the funds as needed during the loan term. 

Equipment financing

• Typical loan term: Up to 10 years
• Typical loan amount: The cost of equipment
• Interest rates: 2% to 20%
• Time to fund: Banks may take a few weeks, but online lenders can be within 24 hours

These loans usually have medium-length terms and are for buying needed machinery. The equipment is collateral for the loan, making it easier for small business owners to qualify. The life of the equipment usually determines repayment terms.

Inventory financing

• Typical loan term: 1 year
• Typical loan amount: A percentage of the inventory cost
• Interest rates: 0% to 80%
• Time to fund: Between a day and two weeks

Inventory financing is similar to equipment financing in that these loans allow a business to buy more inventory. Interest rates tend to be high, and term lengths are short. The idea is to purchase the inventory you know will sell quickly. The inventory serves as the collateral for the loan. 

Inventory financing can be given in a lump-sum loan or as a revolving line of credit specifically for inventory. Lenders often require you to be willing to have an inventory audit with this kind of loan.

Invoice financing

• Typical loan term: A few months
• Typical loan amount: Generally a percentage of each invoice up to 100%
• Interest rates: Typical 3% processing fee and 1% to 2% factoring fee each week
• Time to fund: Up to five days

Invoice financing is like a cash advance for a business, but unpaid invoices act as collateral for the lender. Invoice financing loans are a fast way to get cash and generally have the shortest terms.

Alternatively, you can sell your loans to an invoice factory, which collects on the invoices itself.

Merchant cash advance

• Typical funding remittance: 3 to 18 months
• Typical funding amount: Up to $500,000
• Fees: Funded amount is multiplied by your factor rate to calculate the total combined
• Time to fund: Between a day and two weeks

A merchant cash advance lets you get a large sum of money upfront, but you don’t repay it like a normal loan. Instead, the cash advance is in return for a portion of the future sales or receivables. It also includes a fee or factor rate. The loan is usually repaid by the funder automatically taking small amounts every time a customer of yours pays with a credit card.

Because these loans are repaid based on daily sales, many factors required to qualify for most business loans don’t apply. Factors like time in business or having large collateral may not be an issue if you can show you have the sales for the funded remittance.

Microloan

• Typical loan term: 6 years
• Typical loan amount: $500 to $50,000
• Interest rates: 6% to 9% for SBA microloans, varies from other sources
• Time to fund: 30 to 90 days for SBA loans, varies from other sources

Microloans are smaller loans with more flexible terms and lower interest rates than other small business loans. These factors make microloans ideal for small business owners who might not qualify for a traditional bank loan. Microloans generally don’t have terms for more than seven years.

These loans typically come from community lenders that serve a particular area or underserved communities. The Small Business Administration (SBA) has microloan programs for veterans, women, low-income borrowers and minorities. 

SBA loan

• Typical loan term: Up to 10 years for most purposes; up to 25 years for real estate. 7 years is common.
• Typical loan amount: $1,000 to $5 million
• Interest rates: 2.25% to 4.75%, depending on the loan type
• Time to fund: A few weeks or longer

The U.S. Small Business Administration (SBA) offers several loan programs. The 7(a) loan programs have several short and long financing options. The details of what the loan will look like depend on the program.

To qualify for a loan, your business needs to meet the requirements set by the SBA. Basic requirements are that your business must be a for-profit organization and do business in the U.S. You also need to have a certain amount of equity in the business and have not been able to receive funding in other ways. These loans are hard to qualify for but will have the least added costs.

How to pick a business loan term

Most of the time, you can’t pick any loan term you want. You will have to look at what lenders offer you. However, you can narrow down the types of loans and the lenders that offer loan terms that are best for you.

The first thing you should do is evaluate what your business funding needs are. You may want to ask yourself questions like:

• How much debt can you take safely?
• What will the total cost of the loan be, including any applicable fees and interest?
• Can you wait, or is the financing essential for your business?
• How much capital and cash flow do you have?
• Do you have collateral to offer?
• How are you covering your regular business expenses, and can you add the additional cost of a loan?

These questions will help you make strategic decisions when financing your business. You need to balance several factors when finding the right small business loan term. A shorter loan will generally have larger payments while a longer term will spread the amount out over time. You don’t want a short-term loan that you may miss payments on or that causes unneeded financial stress. However, you don’t want a term that is longer than necessary because you’ll pay more in interest.

By answering the questions above and thinking carefully about how you intend to use the money, you can narrow down the options to the ones that are in the best interests of your business. You can then compare terms and choose what makes the most sense for you.

Llama Loan can help you easily compare options to decide which loan is ideal for your situation. We make it simple to compare loan terms so you can spend less time searching for loan options and spend more time on running your business.