Business Term Loans: Best Options

Updated on January 23, 2023

Let's Get Started

What Is a Business Term Loan?

A business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate—this type of traditional financing is what most people think of when it comes to small business loans.

The “term” in “term loan” comes from its set repayment term length, which can range from a few months to several years depending on the type of loan. Therefore, although term loans can vary in length, the phrase “business term loan” is most often used to refer to loans with terms of one to five years.

Generally, business owners use the proceeds of term loans to finance specific, one-off investments for their small businesses such as real estate purchases, business expansions, debt refinancing, and more.

Business term loans are issued by banks, credit unions, and online lenders.

Business Term Loan Details

Max. Loan Amount	Loan Term	Interest Rates	Speed
Up to $600,000	One to five years	7% - 30%	As fast as one day

Pros

Set payment structure
Suitable for a wide range of business purposes
Term loans from online lenders can fund quickly
with fewer requirements than traditional lenders
Can be a great way to finance a larger investment
while building business credit

Cons

Potential prepayment penalties
Shorter-term loans can be expensive
Often require collateral or a personal guarantee

The Best Business Term Loan Lenders

TAB Bank

Best for: Medium-term loans for a range of business purposes.

Apply Now Learn More

Credibly

Best for: Access to short-term working capital or business expansion loans.

Apply Now Read Our Review

How Do Business Term Loans Work?

As mentioned briefly above, business term loans are likely what you think of when it comes to commercial (or even personal) financing. With a term loan, a small business lender gives you access to a lump sum of capital—which you then pay back, with interest and fees, over a set period of time.

Although your payment schedule will vary based on the type of business term loan and the lender you’re working with, you’ll make equal payments over the course of your loan term.

This being said, business term loans can be issued by banks, credit unions, and online lenders. In general, banks and credit unions will offer the most ideal rates and terms, but will also require top qualifications and will be slower to fund. Online lenders, on the other hand, will offer greater flexibility and faster funding times, but will likely be more expensive and have shorter terms.

Overall, in addition to a predictable payment schedule, one of the benefits of business term loans is that they can be used for a variety of business financing purposes. Therefore, with medium- and long-term loans (vs. short-term loans), you’ll find that these loans are often used for:

Purchasing equipment or inventory
Working capital
Refinancing other business debts
Hiring staff
Meeting payroll or tax obligations
Financing business expansions
Purchasing real estate
Funding general long-term investments

Business Term Loan Rates and Terms

In general, business term loans have repayment periods ranging from one to five years.

This being said, you’ll also find short-term loans with terms of one year or less, as well as longer-term loans (like SBA loans) with terms of up to 25 years. In this context, loans with terms of one to five years are often classified as “medium-term loans.”

With this in mind, most business term loans have weekly or monthly repayment schedules, although some short-term loans require daily repayments. Additionally, whereas most short-term loan amounts typically fall under $500,000 (or even $250,000), you’ll find that longer-business term loans are available in larger amounts.

Although the interest rates on business term loans will vary based on the specific lender and your business’s qualifications, you’ll usually find rates that range from 7% to 30%. With bank and SBA loans, however, you might even see interest rates lower than this 7% threshold—especially if you’re a highly qualified borrower.

Business Term Loan Example

To get a better sense of how business term loans work, let’s walk through an example.

Let’s say you’re offered a term loan of $250,000 with monthly payments and a two-year term. The interest rate on this loan is 8% and you’re paying the lender an origination fee of 2%.

With this information, you can plug-in the numbers into a term loan calculator to estimate your monthly payments—as well as determine how much this loan will cost your business.

Overall, you’ll be making monthly payments of $11,306.82 to the lender with a total repayment of $271,363.75. The cost of this loan, therefore, is $26,363.75. In addition, you can also use these calculations to determine your APR, as opposed to the simple interest rate. If your interest rate is 8%, but you also have an origination fee of 2%, your APR will end up being higher than that quoted 8%.

In this case, the APR on the loan is 10.01%.

Qualifications for a Business Term Loan

Annual Revenue

Over $300K

Credit Score

680

Time in Business

Over 3 Years

*Based on past Fundera Customers

Types of Business Term Loans

As we mentioned, the phrase “business term loan” can actually encompass a variety of financial products that all share this term structure.

Therefore, it’s important to distinguish between the different types of business term loans. Generally, as we’ve already seen so far in this discussion, the most common way to differentiate business term loans is by the length of their repayment period—short-term, medium-term, or long-term.

Short-term loans: Short-term loans have repayment periods of one year or less (sometimes up to 18 months). These loans are usually issued by online lenders, have the most flexible qualifications, and are the fastest to fund. Short-term loans, however, are also typically the most expensive type of business term loan. Learn more about short-term business loans.

Medium-term loans: Medium-term loans have repayment periods of one to five years. These loans are available from online lenders, as well as banks and credit unions. Although these products may have higher requirements and be slower to fund than short-term loans, they’re usually much more affordable. Learn more about medium-term loans.

Long-term loans: Although in some instances medium-term and long-term loans are used interchangeably, in general, long-term loans are those with terms longer than five years. Some of the most notable long-term loans are SBA loans—with terms of up to 25 years. Long-term loans require top borrower qualifications and are slow to fund, but also offer the lowest interest rates. These term loans almost always are issued by traditional lenders like banks and credit unions. Learn more about long-term business loans.

As you can see, although business term loans are often broken up into these categories, you’ll want to keep in mind that they can also be differentiated by their issuer—bank loans, credit union loans, online loans, etc.

Pros and Cons of Business Term Loans

When it comes down to it, term loans aren’t the only form of financing for small businesses. From lines of credit to asset-based financing, there are a variety of types of small business loans you might consider—so how do you know if a term loan is right for your needs?

To help make that decision, you can review our pros and cons breakdown below:

Pros:

Set payment structure: As we mentioned earlier, one of the biggest advantages of term loans is their payment structure. Regardless of the repayment length of your loan, you’ll receive a set payment schedule and know exactly how much you owe with each payment. In this way, term loans are one of the most predictable forms of business financing—making it easy to understand the total cost of the debt, as well as the payments. Plus, with these predictable payments, it’s much easier to manage your cash flow and other business finances.

Suitable for a wide range of business purposes: Another top benefit of business term loans is that they can be used for a variety of purposes. In general, most term loan lenders will have very few restrictions on the way you can use your loan. This being said, however, the length of your term will play some role in the way you can use your loan—a medium-term loan is more suitable for large equipment purchases, whereas a short-term loan is better used for small working capital needs.

Term loans from online lenders can fund quickly with fewer requirements than traditional lenders: Although business term loans can be issued by banks and credit unions in addition to online lenders, online term loans can be a top option for businesses who are looking for speed and flexibility. Overall, online lenders can offer streamlined applications, more flexible requirements, and faster funding times in comparison to banks—and even though online business loans typically have higher interest rates than bank loans, medium-term loans from online lenders can still be extremely affordable.

Longer-term loans are ideal for financing larger investments: For medium- and long-term loans, you’ll find no better way to finance a large business investment. Overall, these term loans are some of the most affordable financing products on the market—especially bank and SBA loans—and give you access to large amounts of capital to finance bigger investments over time. Plus, if you make your payments responsibly, term loans are great for building or improving business credit.

Cons:

Potential prepayment penalties: One of the most notable drawbacks of business term loans is the potential for prepayment penalties. Although not all lenders charge these fees, some enforce prepayment penalties to ensure they receive the interest they’re owed, even if you pay back your loan early. Before you agree to work with a term loan lender, you should always ask about their prepayment policies.

Shorter-term loans can be expensive: As we’ve discussed, online term loans are almost always more expensive than their bank counterparts. This isn’t to say, of course, that you can’t find affordable business term loans. Instead, it’s simply important to remember that short-term loans, in particular, can be expensive—especially for less-qualified borrowers. Therefore, as you explore your business term loan options, you’ll always want to evaluate the total cost of the debt and ensure that it’s something your business can afford.

Often require collateral or a personal guarantee: Finally, whereas asset-based loans may offer greater flexibility in terms of collateral or guarantees, you’ll find that almost all business term loans are secured—in other words, they require physical collateral or a personal guarantee. Additionally, some lenders will take out a UCC-lien on your business assets as another form of security. In general, however, the better your business’s qualifications, the more leeway you’ll have in negotiating collateral requirements.

Best Business Term Loan Options

So, if you think a term loan is right for your financing needs, you might be wondering where to find the best one for your business.

Ultimately, although there are a variety of term loan lenders out there, you might start by looking into these top options:

Lender	Funding Amounts	Interest Rates	Terms	How to Qualify	Best For
TAB Bank	Up to $200,000	8.99% to 35.99%	One to five years	660 credit score; $120,000 annual revenue; two years in business	Affordable medium-term bank loans with less documentation than SBA loans
Credibly	Up to $400,000	Factor rates as low as 1.15	Six to 18 months	500 credit score; $15,000 average monthly bank deposits; six months in business	Fast access to shorter-term working capital loans
Opportunity Fund	Up to $250,000	5.9% to 29.5%	One to five years	$50,000 in annual revenue; one year in business	Microloans for newer businesses and underserved business owners
Credibility Capital	Up to $350,000	8% to 20%	Up to three years	Strong personal credit; currently generating revenue; two years in business	Quick, affordable term loans with some flexibility in requirements

As you can see, most of these top options are medium-term loans from online lenders. Therefore, if you’re looking for alternative solutions, check out our guides below:

How to Get a Business Term Loan

As you can see, there are a number of worthwhile options to consider in order to find a term loan for your business.

This being said, as you compare different lenders, you’ll first and foremost want to evaluate your business to determine what products you can actually qualify for.

Although business loan requirements vary from lender to lender, in general, you’ll want to have a minimum credit score of 600, at least one year in business, and a minimum annual revenue of $100,000 to be able to qualify for most products.

Of course, as we’ve mentioned, bank and SBA loans will require the highest level of qualifications, whereas short-term loans will offer greater flexibility. Once again, however, the better your qualifications, the better rates and terms you’ll be able to receive with your loan.

Applying for a Business Term Loan

With this in mind, once you’ve determined where you’re likely to qualify, you’ll be ready to start preparing your business loan application.

Again, the application process will largely depend on the lender—alternative lenders typically offer online-based, streamlined applications with minimal documentation, whereas banks are more likely to require extensive documentation and an in-person or paper application. Overall, however, you should expect to provide some (if not all) of the following when applying for a business term loan:

Basic personal and business information, including a drivers license, voided business check, proof of ownership, business license, etc.
Personal and business bank statements
Financial statements such as your balance sheet and profit and loss statement
Personal and business credit score
Personal and business tax returns
Proof of collateral (if required)

Moreover, as we mentioned, many lenders will require that you sign a personal guarantee for your loan, whereas others will take out a UCC-lien on your business’s assets. Before signing any agreement, therefore, you’ll want to thoroughly review all of the details to ensure you understand the terms, fees, and liabilities.

Use our guide for more information on how to apply for a business loan.

The Bottom Line

At the end of the day, business term loans are one of the most common forms of commercial financing—and for a good reason. Between short-term loans and long-term loans, online loans and bank loans, you have a wide variety of options to choose from to find the right solution for your business’s needs.

With all of these options, however, it’s important to remember that the best loan for your business is the most affordable one—and therefore, you shouldn’t be afraid to explore and compare offers from multiple lenders before making a final decision.