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Business loans can help businesses grow, provide short-term operating costs, or be used for investment in equipment and staff. However, if you are looking for a business loan, it’s important to understand the conditions under which you are borrowing.
Loan terms refer to the terms and conditions involved when borrowing money. This can include the interest rate and fees associated with the loan, penalty fees that borrowers might be charged, and any other special conditions that may apply.
Your loan terms will also define the loan’s repayment period, which is how long you have to repay it in full. Business loan terms can range from a few months to more than 25 years.
Key Takeaways
- Every business loan has a loan term, which is how long you have to repay the loan in full.
- Loan terms can vary significantly, from a few months to more than 25 years.
- Different types of business loans have different loan terms.
- The loan term you are able to negotiate will depend on the size and strength of your business and your business plan.
Business Loan Terms by Type of Loan
The average business loan term varies considerably by the type of loan you take out and what you plan to use it for. You will negotiate a loan term when you are applying for your loan, but each type of loan has an average loan term and interest rate.
Each loan can vary significantly, but the examples below are typical terms and conditions for that loan type.
Bank Term Loans
- Average loan term: Varies depending on use; generally one to 10 years
- Maximum loan amount: Varies depending on the borrower and bank, but can be from $50,000 to $5 million
- Typical interest rate: Varies widely depending on use, borrower’s creditworthiness, and market rates
Small Business Administration (SBA) 7(a) Loans
- Average loan term: Up to 10 years for working capital; up to 25 years for real estate
- Maximum loan amount: $5 million
- Typical interest rate: Base rate plus (depending on the size) 6.5%, 6%, 4.5%, 3%
Small Business Administration (SBA) 504 Loans
- Average loan term: 10, 20, or 25 years
- Maximum loan amount: $5 million
- Typical interest rate: Pegged to an increment above the 10-year U.S. Treasury/Totals approximately 3% of the debt
Business Lines of Credit (LOCs)
- Average loan term: 12 to 24 months
- Maximum loan amount: Varies by lender, generally $20,000 to $100,000
- Typical interest rate: Varies by lender and borrower, but can range from 10% to 99%
Small Business Administration (SBA) Microloans
- Average loan term: Up to six years
- Maximum loan amount: $50,000
- Typical interest rate: Varies, but generally between 8% and 13%
How to Choose the Right Business Loan Term
Choosing the correct type of loan for your business—and the correct loan term—will depend on what you need the loan for. In general, you should aim to take the shortest loan that is feasible for your business.
This will allow you to get out of debt more quickly and reduce the amount you pay in interest. That said, you should also be realistic about how quickly you can repay the loan. Missing payments can lead to financial penalties, or (in extreme cases) your lender seizing your collateral.
So, it is important to have a realistic business plan in place before applying for any kind of financing. If you can reasonably prove that a loan will improve the profitability of your business, you are more likely to be approved for a loan and more likely to be able to pay it back.
What Is a Loan Maturity Date?
A maturity date is the date by which a debt should be repaid in full. For a business loan, this is the date which the loan should end if you make repayments on time.
Is There a Penalty for Paying Off My Loan Early?
It depends on the business loan you take out. You should check your terms and conditions carefully to make sure you won’t be penalized if you plan to pay back your loan early.
What Is the Longest Term You Can Get on a Business Loan?
It’s possible to negotiate a repayment period of 25 years or more. Use caution when taking out such a long-term loan, because you’ll be paying interest for a long time, which can add up to a significant amount.
What Is the Maximum Amount for a Small Business Loan?
You can borrow up to $5 million through an SBA loan, but the maximum amount you can borrow will depend on the size of your business and your lender’s confidence in it.
The Bottom Line
The average length of a business loan depends on the type of loan and what the borrowing business plans to use it for. Loan terms can range from a few months to more than 25 years. It’s important to carefully define what you need a loan for before deciding on your loan term.
