Acquiring the necessary funding is often a significant hurdle for businesses. Regardless of industry, size, or shape, most businesses will need additional funding to grow at some point – it’s just a matter of figuring out which type of funding is right for the situation. A popular option is obtaining a business term loan, which can help pay for new equipment, renovations to office space, large inventory orders, or any other financial need your business may face.
A business term loan is a standard loan product, in which the business borrows a specific amount of money, paying it back in equal installments over a number of years. Business term loans function in a similar way to traditional car loans or mortgages, with the obvious difference of being strictly for business use. Some – but not all – business term loans are Small Business Administration loans, also known as SBA loans, which are guaranteed by the Federal government.
Business term loans are a popular option for growing businesses, as they allow firms to raise significant amounts of capital, and enjoy long repayment terms. They generally offer competitive interest rates but can be more difficult to get approved for than some alternatives.
Pros & cons of a business term loan
When exploring business financing options, it is wise to consider the advantages and disadvantages of each funding style. Here are the pros and cons of business term loans, and how they stack up against other small business loans.
Check out our complete guide to Small Business Loans
Advantages of business term loans
Substantial loan limits
Small business term loans can help raise substantial capital in a lump sum; potentially up to $5 million, depending on the scale of your business and your credit history. This makes them a good choice for established firms that need money to scale or invest in expansions, new products, etc.
Long repayment periods
For SBA-backed term loans, repayment periods can stretch as far as 25 years. These long term business loans give firms the flexibility to think about the big picture, planning years or even decades ahead. Longer terms also offer lower payments, helping small business owners maintain cash flow.
Small business administration (SBA) backing
Many (but not all) business term loans are also Small Business Administration loans. These term loans are backed by the federal government, meaning the government guarantees the loan and will step in if the business is unable to pay. This guarantee means banks are more willing to loan funds to a wider variety of businesses, and often at lower interest rates. A business term loan isn’t always an SBA loan, however – only certain loan issuers offer this class of financial product.
Builds business credit profile
Business term loans are issued to a business entity. Making on-time payments can help strengthen your business’ credit profile, making it easier (and cheaper) to get financing in the future. Business loans may be issued based on a combination of your personal and business credit profile, but they primarily help to build a business credit history.
Disadvantages of business term loans
Business term loans are fairly rigid in their structure. The loan is a flat amount, and often there is no option to obtain additional funding (like you could with a business line of credit). The payments are also a set amount per payment period (often weekly, biweekly, or monthly payments), and they begin immediately after funding.
Many business term loans, and particularly SBA-backed loans, carry strict requirements. Firms need to be in business for a certain amount of time and be able to prove a certain level of revenue or profit. The specific requirements vary depending on the lender.
Business term loans can take a while to apply for, get approved for, and actually receive. For this reason, many business owners choose to have a line of credit or business credit card to cover rapid expenses, and business term loans to fund more long-term investments.
Some term loans require collateral – such as equipment or real estate – to back the loan. Others ask for a personal guarantee or a business lien. This means that the lender can sell the collateral if the business fails to pay off the loan. Depending on loan size, creditworthiness, and personal credit score, collateral may or may not be required.
What to look for in a loan provider
1. Competitive interest rates
Because business term loans tend to be relatively large and often long-term, the interest rate (APR) can make a huge difference in the total cost of the loan. For large rounds of funding, even a small difference in rates can make a big difference over the years. Depending on a number of factors, the annual percentage rate on a term loan can vary from as low as 6% to as high as 99%.
2. Range of loan terms
Term loans can range from as little as a few years to up to 25 years. Depending on your firm’s needs, selecting the right financial institution is key. Many traditional banks offer loan terms of up to 10 years, while SBA loan issuers can fund loans with terms of up to 25 years.
3. Competitive fees
Most business term loans have various fees that applicants should be aware of. Origination fees, application fees, prepayment penalties, late payment fees, and more can all add substantial cost to the loan over time. While all providers charge some fees, by comparing different loan issuers you can ensure you’re getting the best deal possible. That said, be sure to look at the big picture – choosing a provider with lower fees but a higher APR may not save you any money in the long run.
4. Maximum loan amount
Applicants should check if the financial institution offers loan amounts that suit their needs. Some term loans can be issued for up to $5 million, but many providers focus on small to midsize loans of up to a few hundred thousand. Shop around to explore your options – but realize that the size and financial health of your business will also affect how much credit a bank will actually extend to you.
5. Customer service
Business term loans are often a long-term affair. Because of this, you should treat your bank like a partner – and you should always be selective in selecting new partners! By focusing on feedback about customer service (largely from customer reviews), you can get a feel for how helpful a bank will be, should any issues arise.
Best business term loan providers
Business term loans are available from traditional banks, credit unions, and online lenders. There’s a lot to consider when choosing a provider, but the recommendations below are based on a combination of available terms/APRs, customer service ratings, fees, and ease of use for business owners.
Biz2Credit is an online loan provider for small businesses. They specialize in small to medium-sized loans and have issued more than $3 billion worth of loans to more than 20,000 small businesses.
Biz2Credit uses a simple online application process to get your business funded fast. Term loans can be funded within as little as 72 hours, which is much faster than most traditional bank loans.
- Business term loans from $25,000 to $250,000
- Terms from 12 months to 36 months
- Estimated APR as low as 8.99%
- Most applicants have a minimum credit score of 660
- Most applicants have at least 18 months in business and $250k in annual revenue
- Very fast funding – as little as 72 hours
- Get approved in as little as 24 hours
- Competitive rates for short-term loans (1-3 years)
- Dedicated support specialists to guide you through the process
- Excellent customer feedback
- A versatile option for small to midsize loans
- Relatively low maximum loan amount ($250,000 for term loans)
- Limited term options (1-3 years)
Rapid Finance is an online provider of business financing. They offer a wide variety of financing solutions, from term loans to merchant cash advances. They offer a wide range of loan sizes, stretching from as little as $5,000 to as much as $1,000,000. Rapid Finance has currently funded more than $2 billion in small business loans, helping thousands of entrepreneurs fund their dreams.
As the name suggests, Rapid Finance can get your business funded fast. Once approved, funds can be transferred to you in a matter of hours. With Rapid Finance, there is much less processing time and red tape, when compared to traditional banks.
Rapid Finance also offers Small Business Administration (SBA) loans. These loans can be issued in amounts of up to $5.5 million.
Rapid Finance details
- Business term loans from $5,000 to $1 million
- Terms from 3 months to 60 months
- SBA loans of up to $5.5 million; terms of up to 25 years
- Choice of a bridge loan, small business loan, asset-based loan, SBA loan, and more.
- Requirements vary depending on the loan type
- APR varies depending on loan type and credit profile
- Huge range of loan options
- Terms from 3 months to 25 years, depending on loan type
- Offers SBA loans, which are a great long term loan option
- Fast funding
- Offers both secured loans and unsecured loans
- Flexibility in loan payment frequency (daily, weekly, or monthly)
- More stringent requirements for some loan products
- Available rates vary significantly by applicant and type of loan; upfront rate transparency is limited
OnDeck is a small business financing provider with a streamlined selection of financial products to suit your business needs. They are a large scale provider, having issued more than $13 billion worth of business loans. OnDeck also has a great reputation; they hold an A+ rating with the BBB and have earned a 4.9/5 average rating on TrustPilot.
OnDeck mainly issues small business term loans and business lines of credit. They specialize in short-term business loans, with terms of up to 18 months. They serve a wide variety of customers and are one of few providers to offer business funding to those with mediocre credit (although loan rates will be higher for these borrowers).
- Business term loans of $5,000 to $250,000
- Loan terms of up to 18 months
- Minimum credit score of 600
- Estimated APR from 9.9% to 99%
- Requires 1 year in business minimum
- Loyalty benefits for repeat clients helps with refinancing
- Extends working capital to those with moderate credit scores
- No prepayment penalties for qualifying borrowers
- Transparent pricing and fees
- Less paperwork than many lenders
- Short maximum loan length (18 months)
- Limited selection of financial products
- Requires frequent payments (most are daily or weekly)
- Requires personal guarantee and business lien
- Higher interest rate for many borrowers
Funding Circle is a business loan provider with several products to fit your financing needs. They have served over 90,000 small businesses worldwide and provided funding exceeding $12 billion. They offer fast funding, a wide variety of loan terms, and competitive rates for many borrowers.
Funding Circle’s main selling point is flexibility. They offer terms as short as 3 months and as long as 10 years – a much wider range than most competitors. And they also have specialty loan products, like SBA loans, which may be a better fit for some firms.
Funding Circle details
- Business term loans from $5,000 to $500,000
- Estimated APR 12.18-36.00%
- Terms from 3 months to 10 years
- Minimum credit score of 660
- No minimum revenue requirement for loan applicants
- Wide variety of loan term lengths
- Quick application and funding
- Also offers SBA loans and other financial products
- Requires personal guarantee and business lien
- Higher rates for some borrowers
BlueVine is a business loan provider that also offers other financial services, like a business checking account. It’s a good option for newer businesses, as it offers a wide variety of tools. The checking account in particular is attractive; it earns 1% interest on balances up to $100,000, and there are no fees.
BlueVine is also a good option for newer companies because of their loan requirements. They require firms to be in business for only 6 months before applying for a loan, while most competitors require 1-3 years.
- Business term loans of up to $250,000
- Rates as low as 4.8%
- Terms from 6 months to 12 months
- Minimum credit score of 600
- Requires 6 months in business and $10,000 in monthly revenue
- Requires only 6 months in business to apply
- Low revenue requirement
- Easy application process and fast funding
- Also offers other financial products, like rewards checking
- Requires personal guarantee
- Shorter-term loans generally have higher rates