Whether you’re an established business borrowing for growth, a new business looking for startup financing, your top concern when you borrow money is likely, “Can I afford it?” The repayment period will be a major factor in determining the amount of your payments, and so you may also be wondering how long you can get a business loan for.
What is the longest term for a business loan?
The longest terms for small business loans are often associated with SBA loans. The SBA Economic Injury Disaster Loan (EIDL), which many small businesses owners secured during the COVID pandemic crisis, for example, carries a very generous repayment term of thirty years.
In addition there are other loans guaranteed by the US Small Business Administration that can last for well over a decade. SBA 7(a) loans for real estate and equipment, for example, can carry repayment terms of up to 25 years.
Commercial real estate loans available through lenders may carry a longer long amortization periods; for example 20 years. But the balance will often be due in a shorter time frame of 5-10 years. Because the amortization period is longer than the repayment period, a balloon payment (or lump sum payment) will typically be required for any remaining balance not paid by the end of the amortization period.
Small business credit cards also offer long-term financing, but at a price. If you make the minimum payment on a credit card you can often stretch out payments for decades, but the high interest rate means you’ll pay back several times the original amount borrowed. (Some business credit cards offer short-term financing at a low interest rate, usually in the form of a 0% introductory rate or welcome offer.)
How long do banks give business loans for?
Bank loans often require repayment in 1-3 years for short-term loans and 3-10 years for long-term loans, though products and terms vary by lender.
The loan repayment schedule will depend on several factors, including:
- Type of loan
- Use of funds
- Borrower qualifications
- Lender policies
Traditional lenders like banks and credit unions often have specific lending policies and procedures. However, well-qualified borrowers, especially those with an established track record, may be able to negotiate more favorable terms.
It’s also worth noting that financial institutions often have fairly stringent eligibility requirements, including good credit scores, at least two years in business and solid revenues documented by bank statements and/or tax returns. (This can also apply to SBA loans, which are made by these lenders.)
How long do alternative lenders give business loans for?
Alternative lenders often make short term loans. They often make loans quickly or will consider loans to businesses that don’t qualify for more traditional financing. Types of business loans offered by alternative lenders include merchant cash advances (or business cash advances), short-term working capital and term loans, invoice factoring, accounts receivable financing and business lines of credit. Alternative business financing may be available through online lenders, small business lending marketplaces, or loan brokers.
These financing options usually have fairly short repayment periods: 6— 18 months is common. But it may be possible to secure long-term loans with repayment periods of 2— 5 years from alternative lenders.
What is the maximum amount for a small business loan?
Most lenders are upfront about the maximum amount they will lend to borrowers. Lenders will sometimes clearly state on their website, “loan amounts up to $500,000” or “up to $1 million”, for example. And some loan programs have clear loan limits. The SBA microloan program, for example, caps loan amounts at $50,000.
However, that doesn’t mean your business will be able to borrow any amount up to the maximum limit. The lender will determine your loan amount based on a number of factors including:
- Annual revenues/cash flow of the business
- Credit history (business and/or personal credit)
- Time in business
- Collateral (for secured loans)
The stronger the qualifications of the business, the more likely you will qualify for a larger loan amount. In particular, lenders want to make sure you can afford the payments and will often base the loan amount on average monthly revenues or other financials.
How to choose the right business loan term length
If you’re shopping for small business financing, you may assume a longer repayment term is better. The longer you have to pay back the loan, the lower your monthly payments, and that in turn improves cash flow.
But longer loan payments also means you’re likely to pay more interest over time, and that may make it harder to make a positive return on investment for the money you borrowed.
- How much do I need to borrow?
- Why am I borrowing?
- What kind of ROI can I expect from the loan?
Ideally, you want to match the type of small business loan to the business need. When making a significant investment in equipment you’ll use for decades, long-term business loans make sense. But if you’re buying inventory to turn around quickly, a short-term loan is appropriate.
The risk in choosing a loan that’s too short is that you won’t have time to earn sufficient revenue to pay it back. And the risk in choosing a loan with too long a term is that you will pay too much over time, and find your business repaying a loan long after the benefit of that funding has ended. Choosing the right loan can help your business leverage borrowed capital successfully.
This article was originally written on December 17, 2021.