Business Loan Terms: How Long Are The Usual Terms?

For many entrepreneurs, securing a business loan is a crucial step toward growth or stability. However, understanding the business loan term length is just as important. The term length determines how long you’ll have to repay the loan, influencing your monthly payments, cash flow, and overall financial planning. Knowing how long you’ll be paying off the loan helps you manage your budget and ensures that the loan fits with your business’s financial goals.

Typical Business Loan Terms: How Long Can a Business Loan Be?

Business loan terms can span anywhere from a few months to several decades, largely depending on the loan type and its intended purpose. For instance, loans for short-term working capital needs may only last one or two years, while loans for large investments like real estate can stretch for decades.

Short-Term Loans: 1 to 3 Years

Short-term loans usually come with repayment terms from just a few months up to a few years. These loans are crafted to address immediate financial needs, often used to cover temporary working capital shortages. Lines of credit and invoice factoring are two common examples of short-term loans.

Lines of Credit

These offer flexible access to funds, similar to a credit card, and are usually repaid within 6 to 18 months.

Invoice Factoring

When businesses opt to sell their unpaid invoices to a factoring company for quick cash, the loan term is usually brief, typically lasting no longer than a year.

Mid-Term Loans: 3 to 10 Years

For businesses seeking more significant funding or those that need more time to repay, mid-term loans are a great option. These loans usually last between 3 and 10 years and can be used for various purposes, such as buying equipment, expanding operations, or covering operational costs.

Term Loans

These loans are a popular choice for businesses looking for lump sums of money. The average small business loan term for a term loan can range from 3 to 5 years for smaller loans, and up to 10 years for larger loans.

SBA Loans

Loans guaranteed by the Small Business Administration (SBA), such as the 7(a) Loan Program, generally come with repayment terms between 7 and 10 years, depending on how the funds will be used. SBA loans offer competitive interest rates and are a favorable choice for businesses looking for mid-term financing.

Long-Term Loans: 10 to 25+ Years

Long-term loans are essential for substantial investments, like real estate or major capital purchases. These loans typically have terms ranging from 10 to 25 years or even longer, providing businesses with the time they need to pay off major investments without putting too much pressure on monthly cash flow.

SBA 504 Loans

These government-supported loans are tailored for acquiring real estate or significant fixed assets. The business loan term length for an SBA 504 loan can extend from 10 to 25 years.

Commercial Mortgages

For businesses looking to purchase commercial property, commercial mortgages come with long repayment terms, often ranging from 15 to 25 years.

Why Does a Lender Adjust Your Business Loan Term Length?

While there are typical business loan terms for each loan type, lenders may adjust the term during the approval process. This can happen for several reasons, including the nature of the loan’s purpose, the business’s financial health, and the lender’s risk tolerance.

Matching Loan Term to Loan Use

Lenders typically set the loan term to match the expected useful life of the asset being financed. For example, if you’re using a loan to buy equipment, and the equipment has a useful life of seven years, a lender may offer a term that aligns with the equipment’s expected lifespan. It would not make sense to take out a 10-year loan for equipment that will likely need replacement in a shorter period.

Managing Risk

Lenders also adjust business loan term lengths to manage their risk. In industries where businesses tend to have a higher risk of closure or financial instability, lenders may prefer shorter terms to reduce the period of risk exposure. For example, if the historical data for your industry suggests that businesses typically stay open for only 7 years, a lender may be hesitant to approve a 10-year loan.

What to Consider Before Accepting a Business Loan Term

Understanding the average small business loan terms is only part of the equation. Before accepting a loan, make sure that your business can manage the monthly payments associated with the term length. Longer loan terms usually result in lower monthly payments, though they may lead to higher total interest over time. In contrast, shorter loan terms come with higher monthly payments, but they can save you money on interest in the end.

Ask yourself:

• Can my business afford the monthly payment over the chosen loan term?
• Is the loan term aligned with the purpose of the funding?
• How will the loan affect my cash flow in the long term?

Tailoring Your Loan Term to Your Business

Choosing the right loan term is a balancing act between managing cash flow and securing long-term financial goals. If you’re unsure about how long your loan should be, consider discussing your options with a financial advisor or your lender. They can help you determine the most appropriate term length based on your current financial position and plans.

Can I Adjust My Loan Term?

In some cases, lenders may be open to negotiating the terms. But that is if your business can demonstrate solid financial health or if there’s a misunderstanding about the loan’s purpose. If a lender offers you a shorter term than expected, it’s essential to review your financials. This will allow you to see if your business can handle the higher monthly payments. You may also consider lowering the loan amount or seeking alternative financing options with more favorable terms.

The Power of the Right Business Loan Term

Choosing an ideal business loan term length can greatly impact your business’s financial health. The right term allows you to match loan payments to your cash flow without overburdening your budget. While shorter terms come with higher monthly payments, they let you pay off the loan faster. Longer terms provide lower monthly payments, giving your business more breathing room if you need time to grow. Ultimately, finding a term that aligns with your financial needs can help you manage your finances seamlessly.