It can be confusing for small business owners to navigate all the available loan products being offered by banks, lenders, and online financial companies these days. The best way to know which loan is best for your business situation, however, is to explore all your options and understand the requirements and benefits of each.
Business Loan Terms Overview
From long-term financing to a quick cash advance, the more you understand, the more likely you are to narrow down the long list to just those that work for you. Then, you can just apply to those that meet your financial goals and are most likely to approve you. Nav’s Business Loan Builder plan can help you get ready to apply and meet your business’s financial goals.
Here, learn about different options you have for financing your business.
|Type of Loan
|Up to $5 million
|Up to $500,000
|Lines of credit
|50-80% of invoice value
|Until customer pays invoice
|Merchant cash advance
Traditional bank loans
These are the loans people tend to think of first when considering small business financing options for their companies. Loan applications with banks can be a complicated and often lengthy process. While some banks will allow you to apply online, the majority still require a face-to-face meeting.
Existing bank or credit union customers may get a reduction in the already-low interest rates of 3-6%, as well; these are usually offered if you’re willing to make automatic payments from a connected account at the same institution. Many of these loans are considered long-term loans, especially if they are used to buy commercial real estate.
How much you can borrow from a bank may depend on the bank’s specific loan programs, but generally, you can expect to borrow for $10,000 to $1 million, depending on your qualifications.
Bank loans allow you to repay what you borrow over one to five years.
Some banks charge origination or other fees, though they will vary. One example is 0.5% of the amount financed.
Some banks may charge a fee if you pay your loan off early, so read the fine print to see if this applies.
The Small Business Administration offers several loans including the SBA 7(a) loan, the SBA 504 loan, and the SBA microloan.
For the borrower in a hurry, SBA loans might not be the best choice, although SBA express offerings are shortening that timeframe for qualified businesses with excellent credit who need an approval answer within a few days. SBA loan rates are also very competitive – among the best in the industry, at 5.5-11%.
SBA loan programs are the cream of the crop when it comes to business financing, offering some of the lowest rates and highest dollar amounts. SBA lenders use the FICO SBSS score to pre-screen applicants for several of the SBA loan programs. You can check your FICO SBSS score before you apply with Nav’s Business Loan Builder plan.
There are several SBA loans, and the most popular is the 7(a) program. With the standard 7(a), you can borrow up to $5 million, and with the Small 7(a) loan, you can borrow up to $350k.
Depending on the SBA loan, you can see a maturity term of 10-25 years:
- 25 years for real estate
- 10 years for equipment
- 10 years of working capital or inventory loan
SBA loans also come with fees that vary by the loan program, but range from zero to 3% of the guaranteed portion.
Be aware that if you take out an SBA loan with a repayment period of 15 years or longer, you may have prepayment penalties if:
- If you prepay 25% or more of the balance due
- Your prepayment is made within three years after you receive your first disbursement
Here’s what you’ll pay:
- During the first year after disbursement: 5% of what you’ve prepaid
- During the second year after disbursement: 3% of what you’ve prepaid
- During the third year after disbursement: 1% of what you’ve prepaid
The exact definition of a medium-term loan will vary by industry or financial institution, but many brick-and-mortar institutions define them as those that need to be paid back within two to five years and often require collateral as security. If your credit score is excellent, however, it’s possible to get one without security. Interest rates can vary, hitting 30% at the peak.
If you’re looking for up to $500,000, a medium-term loan may be a good fit.
Typically, these loans are repaid over two to five years.
Be on the lookout for hidden fees like origination fees, as they can add to the cost of your loan.
Like with bank loans, some medium-term loans may have prepayment penalties.
Usually offered by alternative lenders, short-term business loans are designed to be repaid within a few months but can sometimes have repayment periods of up to 18 months. Those will excellent credit will benefit the most from these, paying similar rates to other loans. Those with subpar credit histories, however, can often pay up to 80% in interest with short-term loans.
While some short-term loans may be on the lower end amount-wise, you can find lenders willing to let you borrow up to $500,000.
It’s all in the name: short-term loans tend to have short repayment periods, from six months to 18.
Be on the lookout for origination fees, which can be 0-4% of what you borrow.
Most short-term loans do not charge fees if you pay your loan off early.
Business lines of credit
These small business loans give you funding like a traditional loan but offer you access like a credit card. You can borrow just what you need, as long as you don’t go over your limit and pay the minimum owed each month.
Typically, with a line of credit, you can borrow $5,000 to $100,000. Once you pay back what you borrow, you can access the funds again and again.
None. Like a credit card, you pay on what you borrow, and then it’s available again.
Lines of credit may charge interest, monthly or annual fees, or a mix of both. Note that many of them will charge interest (at a rate of 7 to 36%) on day one, unlike credit cards, which often come with a 21 to 30-day grace period.
None, since it is revolving credit.
If you just need to upgrade your grills, factory lines, or 3D printers, the equipment financing option may be for you. With an APR of anywhere from 15-25%, getting a good deal will entirely depend on the loan amount and your business credit score.
A good personal credit score, along with the equipment you’re financing as collateral, could help a borrower lower their rate. Equipment loans are rarely considered short-term financing, with much longer repayment periods than some other financing options.
You can borrow from $5,000 to $5 million, and can use the equipment you’re buying as collateral on the loan.
Typically, equipment loans must be repaid within 12-72 months.
There may be origination and other fees. Read the fine print.
Some lenders may charge prepayment penalty fees.
Many new businesses may have trouble getting financing when they have a short history to demonstrate their track record. That’s why invoice financing is popular among startups and others who have billed for products and services, but just haven’t been paid yet.
By getting a loan based on future accounts receivable, the lender is assuming the low risk. Expect to pay a bit more for the privilege, however; invoice financing can be among the most expensive in the industry, from 13 to 60% APR.
Invoice financing companies will lend a percentage of the invoices you’re using as collateral, typically 50-80%.
The loan is paid back when the customer has paid the invoice.
You’ll pay a percentage of the invoice value as a fee, usually 3-5%.
There are no prepayment penalties.
Merchant cash advance
One of the more expensive ways to borrow money, a merchant cash advance uses your credit card sales records to determine how much cash flow you normally have, then offers you a cash advance based on those numbers.
To pay the loan back, a small percentage of each credit card sale will be taken. You’ll need to do a bit of planning to accommodate the repayment of the loan, but it’s a loan option that is available to those with even less-than-excellent credit scores. The cost to borrow in this manner, however, is high. Some accounts may be charged an APR of 350%!
Typically, you can borrow $2,500 to 500,000 with merchant cash advances.
Be aware that you’ll need to repay your merchant cash advance quickly, in anywhere from three to 36 months.
Most merchant cash advances have origination fees up to 2.5% of what you borrow.
Prepayment fees are uncommon.
Common Business Loan Terminology
In addition to understanding the various types of loans, there are many additional factors that can affect the affordability of your loan, how you repay it, and the value you get from it. Since many of the terminologies will also be included in your application and loan contract, it’s smart to familiarize yourself.
These common loan terms are used by most banks, and even just one can be the difference between an affordable monthly loan payment and something that can make repayment difficult.
Accounts receivable (or “AR”) is a term used to describe all the monies that a company is owed but hasn’t collected yet. For most businesses, this can be measured by invoices created or sent but not paid.
Accounts receivable is a key indicator in the health of a business, and some business lenders will issue credit based on the total AR outstanding at any time.
Whether a fiscal business year starts in January or some other month, the total twelve-month sales done by a company is its annual revenue. Not to be confused with profit, it is the gross amount collected, not including business expenses or debt yet to be paid.
Anytime you apply for a credit card or loan, you’ll see the term “APR.” Short for Annual Percentage Rate, it calculates the cost to borrow money. It combines the compounding business loan interest rate and fees into one number, giving you a better overall view of what you can expect to pay to borrow money in a given year. Most lenders will share the APR freely with you before you apply, but if they don’t, a simple APR calculator can help.
Business Credit Scores
Just like you have personal credit scores that document your creditworthiness, you can also have scores for your business. These will track things like on-time payments, amounts owed, variety of debts, and length of credit history.
The better business credit scores you have, the more likely you’ll be to qualify for those great interest rates on loans and credit cards!
Business Credit Reports
Business credit reports can be pulled in the same way personal ones can, but they aren’t automatically generated just by being in business. To ensure that your on-time payments are being tracked and recorded in your history, ask your vendors and merchants if they can report your on-time payments to credit bureaus. A credit report can take time to build, but it’s worth it.
Cash (and cash equivalents) coming in and out of a company is its cash flow. This includes money being paid to the company by customers and payroll going to employees from the business.
Money flowing in and out, measured by reports, is its cash flow. Companies try to focus on cash flow coming in and increase that number over time.
Many loans are considered secured loans. That is, they require you to put something of value that you already own for security in case you can’t make payment. This item is referred to as “collateral.” It can be the actual item you are financing (such as a house or car) or an unrelated item.
If you were to take out a $1 million-dollar loan for refinancing debt, for example, the bank may ask that you offer up a piece of collateral unrelated to the loan to ensure that they aren’t taking unnecessary risk. Your home or a piece of business property might be used to secure the loan to the bank’s satisfaction.
According to the makers of the FICO (Fair Isaac Corporation), it is calculated based only on information received from the three credit bureaus. “By comparing this information to the patterns in hundreds of thousands of past credit reports, FICO Scores estimate your level of future credit risk, or how likely you are to repay a loan on time.” FICO claims that 90% of top lenders use their scores.
When you borrow money and put up your car or home as collateral, you are granting a lien to the bank for that item. If you were to then not be able to pay the loan, the bank could seize the car or home to help them recover the losses.
If you are financing an item with a loan (such as business equipment), the lien would usually be put against the item being financed. A loan without a lien is considered an unsecured loan.
The difference between a secured loan and an unsecured loan can be a big one. With unsecured business loans, you aren’t offering up any collateral to guarantee payment. If you were not to make your monthly payments, the bank has nothing to take from you to help them recover what it is owed.
A secured loan, on the other hand, uses something as collateral – either the item the loan is paying for (such as a piece of property, a car, or equipment) or another item put up to help secure the loan.
Many small business loan terms, especially those through SBA-approved lenders, dictate how you use the money. Working capital is one of the allowed ways to spend loan funds. Working capital is comprised of all of the liquid assets (such as cash) and other assets that can be accessed easily to pay for the daily operations of a business.
When businesses get funding to use as working capital, they spend it on everything a business needs, from payroll to raw materials to paying the light bill.
Frequently asked questions
It’s impossible to cover all the nuances of various business loans and standard funding in one article, but the questions people usually have are also mentioned here:
What’s the benefit of a business loan payment calculator?
Like any other loan calculator, business loan calculators can tell you a number of things, including how much your monthly loan payment will be for the length of the loan, the amount of the loan, and various origination fees and interest rates. These can help you plan out your monthly budget.
Simply tweak the monthly loan amount to what you can afford to see what you should borrow. Likewise, you can lengthen or shorten the loan term to see how much long-term business loans will cost compared to a short-term loan.
How do SBA loan terms differ from other loans?
SBA loans aren’t actually given out by the SBA. The Small Business Administration matches lenders with qualified borrowers and often subsidizes the loan to help reduce risk to the lender and encourage them to offer more loans to less-qualified businesses owners.
Because of this, the loan terms come partially from the SBA and business lending guidelines under the program, but lenders also have some flexibility in how they lend. Rates (within a range), payment terms, and other considerations may be set by the lender independently from the SBA.
What is the maximum term for a business loan?
Loan terms vary by the type of loan, lender, and your qualifications, but on the long end, some loans have maturity terms of 25 years.
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This article was originally written on August 12, 2019 and updated on December 29, 2021.
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