What are business term loans and how do they work?
Written byGerri Detweiler
Reviewed by Robin Saks Frankel
Summary
- A business term loan provides a lump sum of funding to be paid back on a fixed schedule.
- Repayment terms may be as short as a few months to several years.
- Banks and SBA loans often offer lower rates and monthly payments; online lenders often offer faster speed and more flexible approval with higher cost.
- Most lenders review credit, revenue, and time in business.
What is a business term loan?
A business term loan lets a business borrow a specific amount of money and pay it back on a set schedule. The repayment term is where the word term in term loan comes from. Bank loans or SBA loans often feature monthly payments over several years, while online lenders may require weekly payments.
As with most mortgages or auto loans, payments usually cover interest and principal so you don’t face a large balloon payment at the end of the term.
How do business term loans work?
While term loans typically feature a specific repayment term, interest rates may be fixed or variable. Fixed rates stay the same for the entire loan period, while variable rates can change if the rate they are tied to — such as the prime rate — changes. Loans may also be secured, which means you pledge collateral, or unsecured, which means there is no collateral. Either type of loan may require a personal guarantee.
Business term loans are popular for:
- Expanding a business
- Purchasing equipment
- Real estate
- Refinancing debt
Short-term loans may also be used for:
- Inventory
- Working capital
Types of business loan terms by length
Most business term loans run one to five years, though some equipment and real estate loans can stretch to 10 or even 25 years.
Loan type | Typical term | Common lenders | Best for |
Up to 2 years | Online lenders and some banks | Fast funding, smaller working capital needs, higher costs | |
Medium-term loans | 2 to 5 years | Online lenders and banks | Equipment, moderate-size expansion |
Long-term loans | 5 to 10 years for most uses; up to 25 years for some equipment loans and commercial real estate (CRE) | Banks, SBA lenders, CRE lenders | Real estate, major equipment, large-scale growth |
Business term loan rates and fees
Rates vary widely depending on the lender, the type of financing, and the borrower’s qualifications.
Banks and SBA lenders usually offer the lowest rates for term financing to qualified borrowers. Online lenders may charge more — sometimes a lot more — in exchange for speed and more flexible qualification standards.
Why APR matters
Annual percentage rate (APR) is designed to express the total yearly cost of borrowing money as a percentage. APR is required for consumer loans, but it’s not always required for commercial loans. The APR can help you compare different types of financing.
Why amortization matters
Loans come with an amortization schedule — a timeline of payments required to pay back the loan. A fully amortizing loan requires payments of principal and interest, so the balance reaches zero by the end of the term. Some types of financing, like business lines of credit, may feature interest-only payments that can mean a balloon payment may be required in the future.
Amortization matters in two key ways:
- You need to be able to make the payments until the loan is paid back. Business owners sometimes don’t fully understand how those payments affect cash flow.
- The time it takes to pay back financing impacts the APR. You can pay the same amount of interest or fees on two different loans, for example, but if it only takes six months to pay one back, it will have a higher APR than one that takes longer to pay back.
Factor rate vs. APR
Some short-term and alternative products, like merchant cash advances, quote a factor rate instead of an interest rate. A factor rate is a flat multiplier applied to the amount you borrow. For example, a 1.3 factor rate means you must repay 1.3 times the amount of the advance. It can translate into an effective APR of 30% to 60% or more, depending on the time it takes to pay it off.
Fees to watch for
Loans and financing may also carry fees. Two key fees to look for with term loans are origination fees and prepayment penalties.
Origination fees are charged upfront, often as a percentage of the loan (1% to 4% of the loan amount, for example). Prepayment penalties may be charged if you pay back financing early. Some loans, like SBA 504 loans, feature declining prepayment penalties that get lower or disappear over time.
What is required to get a business term loan?
Every lender will set its own requirements to qualify for a loan, but most look at three main factors: credit, business revenue, and time in business. Here’s how these factors may be evaluated:
- Credit scores: Some lenders check business credit, some check personal credit, and some check both. Banks often check personal credit, and borrowers with strong credit scores (usually 720 or higher) tend to get the best rates. Credit scores in the mid to low 600s may make it harder to qualify for some loans. Business credit score ranges vary significantly by bureau.
- Time in business: Less than a year in business can mean higher rates if you’re approved at all, two to five years is considered established, and five-plus years can help unlock opportunities for better rates.
- Annual revenue: Traditional banks may require annual revenue of $250,000 or more, while online lenders may accept revenue of as little as $50,000 to $100,000 a year.
What other factors do lenders look at?
There are other factors that business financing companies evaluate may include:
- Industry: Most lenders prefer to lend to businesses in certain industries but not others. Your NAICS code is often used to identify your industry, and it may appear on your business credit reports.
- Collateral and personal guarantees: Among small businesses carrying debt, 51% used business assets as collateral, and 59% used a personal guarantee to secure it, according to a 2026 report by the Federal Reserve.
- Debt service coverage ratio (DSCR): Lenders may compare your cash flow to your required loan payments. A DSCR of 1.25x is typically the minimum for most term loans; 1.5x or higher is considered comfortable.
Nav is not a lender or a credit bureau. Credit information is provided by third-party sources.
What documents do I need?
It’s a good idea to be prepared for the application process so you can provide any documents the lender needs. Not all lenders will require all of these documents, but keeping them organized will make it easier to respond to if they are requested.
These may include:
- Bank statements (last 3 to 6 months)
- Current profit and loss statement
- Balance sheet
- Schedule of debts
- Business formation documents for LLCs, partnerships, or corporations
- Lease (if business location is rented)
- Business, professional, or occupational license
- Two years of tax returns (business and personal)
Term loans vs. lines of credit vs. SBA loans
If you’re new to shopping for business financing, some of the terminology can be confusing. Here are three of the most popular options you may come across:
- A business line of credit (LOC) is a revolving account where you borrow up to your credit limit, repay the debt, then borrow again if needed. You pay interest on the money you borrow.
- A term loan is a loan for a fixed amount of money that is paid back over the term of the loan.
- Most SBA loans are term loans but a few types offer lines of credit. The SBA’s working capital line of credit program (WCP) is one example.
One isn’t necessarily better than the other — it depends on how the funds will be used. It’s not unusual for businesses to use both a line of credit and a term loan.
Term loans | Line of credit | SBA loans | |
Structure | Lump sum, fixed repayment schedule | Revolving, draw funds and repay when needed | Primarily term loans but some programs offer LOCs |
Best for | Larger purchases or investments | Working capital, cash flow | Larger amounts, longer terms, lower rates |
Cost* | Fixed or variable rates, lower cost from traditional lenders | Usually variable rates with lower cost from traditional lenders | Fixed or variable rates with maximum rates set by the SBA |
Speed | Banks: 2–4 weeks | Banks: 2–4 weeks | A month or more |
*Find current business loan rates here.
Pros and cons of business term loans
Where do I get a business term loan?
Here’s where to start if you’re looking for a business term loan:
Banks and credit unions
Traditional lenders often offer the best rates for well-qualified borrowers, but require strong credit, established revenue, and more documentation.
SBA lenders
Small businesses that meet SBA loan requirements may look to banks and other lenders that originate SBA-loans. Terms are often favorable, with low SBA loan rates and predictable repayment schedules. SBA loans can require more documentation than online alternatives.
Online lenders
Many online lenders tout fast, flexible approval and quick funding — sometimes in as little as one to three days. Costs are typically higher than traditional options.
Marketplaces
Compare offers in one place rather than going from one lender to another.
The following offers come from Nav’s trusted partners:
Short-term funding
Medium-term financing
Long-term financing
See offers tailored to your business in Nav’s Small Business marketplace.
How do I apply for a business term loan?
Here’s how to apply for a term loan step-by-step:
- Decide the amount and use. Take the time to figure out how much you need to borrow, and how you’ll use the funds to grow your business.
- Check your credit and gather documents. Pull your personal and business credit, and have bank statements, tax returns, and financial statements ready.
- Compare offers. Review interest rates, fees, and the total cost. If an APR isn’t provided, use a business loan calculator.
- Fund. Once you are approved and accept the terms, funds are often directly deposited into your bank account.
- Pay back the financing. Make sure you understand the payment schedule. Funds may be taken from your bank account or merchant account — be sure to keep a sufficient balance.
The bottom line
A term loan can often be a good choice for businesses that need to borrow a specific amount of money and want a predictable repayment schedule. Borrowers with the strongest qualifications often get the best rates and terms. Before you apply, you may want to check your personal and business credit profile to see where you stand.
