A business term loan is the most straightforward funding product on the market. You borrow a fixed amount, agree to a repayment schedule, and pay it back with interest over a set period. No daily holdbacks, no revolving balances, no percentage of future sales. Just a lump sum and a payment plan.
That simplicity is why term loans remain the most popular form of business financing. They work for everything from buying equipment to opening a second location to hiring ahead of a growth phase. But the rates, terms, and qualification requirements vary enormously depending on where you borrow.
A term loan from a bank at 7% looks nothing like a term loan from an online lender at 30%. Same product name, very different math. Here is how to tell the difference, figure out what you qualify for, and avoid the mistakes that cost business owners thousands.
How Business Term Loans Work
You apply, get approved for a specific dollar amount, and receive the funds in your bank account. From that point, you make regular payments (usually monthly, sometimes weekly or daily) until the loan is fully repaid. Each payment covers a portion of the principal plus interest.
The repayment term sets the timeline. Short term loans run 3 to 18 months. Medium term loans run 1 to 5 years. Long term loans extend to 10 years or more, though those are typically reserved for real estate or SBA backed financing.
Interest can be fixed or variable. Fixed rates stay the same for the life of the loan, which makes your payments predictable. Variable rates are tied to a benchmark like the prime rate and can move up or down. For most small businesses, fixed rates remove uncertainty and make budgeting easier.
Amortization Matters
Most term loans are fully amortized, meaning each payment chips away at both principal and interest. Early payments are mostly interest; later payments are mostly principal. Some lenders offer interest only periods at the start of the loan, which lowers your initial payments but means you are not reducing the balance during that window.
What Business Term Loans Cost
The cost of a term loan depends on three factors: the interest rate, the term length, and the fees stacked on top. Get any one of those wrong, and you will overpay by thousands.
Interest rates. Bank term loans typically charge 6% to 13% for qualified borrowers. Online lenders charge 8% to 35%, sometimes higher for riskier profiles. SBA loans offer the lowest rates, generally 10% to 14%, because the government guarantee reduces the lender's risk.
Origination fees. Many lenders charge a one time origination fee of 1% to 5% of the loan amount. On a $200,000 loan, a 3% origination fee costs you $6,000, deducted from your proceeds before you receive a dollar. Always factor this into the total cost.
Rate Ranges by Lender Type
| Lender Type | Interest Rate | Term Length | Funding Speed |
|---|---|---|---|
| Banks | 6% to 13% | 1 to 10 years | 2 to 6 weeks |
| SBA Lenders | 10% to 14% | 5 to 25 years | 30 to 90 days |
| Online Lenders | 8% to 35% | 3 months to 5 years | 1 to 5 days |
| Credit Unions | 6% to 18% | 1 to 10 years | 1 to 4 weeks |
The total cost example. A $100,000 term loan at 10% over 5 years costs roughly $27,500 in interest. The same loan from an online lender at 25% over 3 years costs about $42,000 in interest. Add a 3% origination fee to each, and the online loan costs nearly twice as much. Always compare the total repayment amount, not just the monthly payment.
Who Qualifies for a Business Term Loan
Every lender sets its own qualification criteria, but they all evaluate the same core factors: how long you have been in business, how much revenue you generate, and how strong your credit is.
Time in business. Banks want at least two years. Online lenders will consider businesses with one year, sometimes six months. Startups with less than a year of revenue will struggle to find a term loan from any lender; they are better off looking at revenue-based financing or microloans.
Annual revenue. Most bank lenders want to see at least $250,000 in annual revenue. Online lenders often set the bar at $100,000 or lower. The loan amount you qualify for is usually tied to a percentage of your annual revenue, typically 10% to 30% for first time borrowers.
Credit score. Banks and credit unions typically require 680 or higher. Online lenders will work with 580 or above, though scores under 650 come with significantly higher rates. If your credit is below 580, traditional term loans are unlikely. Here are the realistic options for business owners with bad credit.
Debt service coverage ratio. Lenders want to see that your business generates enough cash to cover the new loan payment plus existing obligations. The standard threshold is a DSCR of 1.25, meaning your net operating income is at least 125% of your total annual debt payments. If you are already carrying heavy debt, that ratio might disqualify you even if everything else looks solid.
What You Can Use a Term Loan For
Term loans are general purpose. Unlike equipment financing (which must be used for equipment) or invoice factoring (which is tied to outstanding invoices), a term loan puts cash in your account to use however you need.
The most common uses include buying equipment or vehicles, renovating or expanding a physical location, hiring employees ahead of a growth push, purchasing inventory in bulk at a discount, acquiring another business, and refinancing expensive existing debt. Some business owners use term loans to fund marketing campaigns or enter new markets, though lenders prefer to see the capital going toward something that generates a clear return.
Industries that lean on term loans the most include construction companies financing large projects, restaurants funding buildouts, medical practices purchasing diagnostic equipment, and trucking companies expanding their fleets.
How to Get the Best Rate on a Business Term Loan
The difference between a good rate and a mediocre rate on a $200,000 loan can add up to $30,000 or more over the life of the loan. These steps move the needle.
Apply to at least three lenders. Rate quotes vary more than most borrowers expect. One bank might offer 9% while another offers 12% for the same borrower. Online lender rates vary even more. Collecting multiple quotes takes time, but it is the single highest return on effort in the entire process.
Get your financials organized before you apply. Lenders want two years of tax returns, year to date profit and loss statements, a balance sheet, bank statements from the last three to six months, and a debt schedule. Having these ready speeds up the process and signals to the lender that your business is well managed. Scrambling to produce documents mid-process slows everything down and does not inspire confidence.
Offer collateral if you can. Secured loans carry lower rates because the lender has a fallback if you default. If you own commercial real estate, equipment, or significant receivables, pledging them as collateral can reduce your rate by 2 to 5 percentage points.
Borrow only what you need. Larger loans are not always better terms. Borrowing $150,000 when you only need $100,000 increases your total interest cost and strains your cash flow with higher monthly payments. Right size the loan to the actual investment.
Watch for prepayment penalties. Some lenders charge a fee if you pay off the loan early. This penalty can range from 1% to 5% of the remaining balance. If there is any chance you will want to refinance or pay down the loan ahead of schedule, make sure the contract allows it without a penalty.
Business Term Loan vs. Other Funding Options
A term loan is not always the right choice. Here is how it stacks up against the alternatives.
Term loan vs. line of credit. A business line of credit gives you revolving access to funds, so you draw only what you need and pay interest only on what you use. That flexibility makes lines of credit better for variable or recurring expenses. A term loan is better when you know exactly how much you need and want predictable payments.
Term loan vs. SBA loan. An SBA loan is a term loan with a government guarantee. The guarantee gives lenders more confidence, which translates to longer terms and lower rates. The tradeoff is time. SBA loans take 30 to 90 days to close. If you can wait, the savings are significant. If you cannot, a conventional term loan from a bank or online lender gets you funded faster.
Term loan vs. merchant cash advance. A merchant cash advance costs 3 to 10 times more than a term loan. The only reasons to take an MCA over a term loan are speed (funded in 24 hours) and qualification (credit scores as low as 500). If you qualify for a term loan, take it. The math is not close.
Term loan vs. equipment financing. If you are buying a specific piece of equipment, equipment financing uses the equipment as collateral and often offers better rates than an unsecured term loan for that purpose. For anything beyond equipment purchases, a term loan gives you more flexibility.
Common Mistakes With Business Term Loans
Focusing only on the monthly payment. A lower monthly payment usually means a longer term, which means more total interest paid. A $100,000 loan at 12% over 3 years costs about $19,500 in interest. The same loan stretched to 7 years costs about $46,000. The monthly payment dropped, but the total cost more than doubled.
Ignoring the personal guarantee. Nearly every small business term loan requires a personal guarantee. That means if the business defaults, the lender can come after your personal assets: savings, home equity, vehicles. Treat the personal guarantee as real risk, not a formality.
Borrowing against hope. Taking a term loan based on revenue projections that have not materialized yet is one of the most common ways business owners get into trouble. Lenders look at trailing revenue for a reason. Borrow based on what your business does today, not what you think it will do in six months.
Not reading the covenants. Some term loans come with financial covenants that require you to maintain specific ratios (debt to equity, current ratio, minimum cash balance) throughout the life of the loan. Violating a covenant can trigger a default, even if you are current on payments. Read every covenant and make sure you can meet the requirements.
Frequently Asked Questions
What credit score do I need for a business term loan?
Banks and SBA lenders typically want 680 or higher. Online lenders will work with scores as low as 580, sometimes 550. A score above 700 opens the door to the most competitive rates, usually under 10%. Your credit score affects both approval odds and the rate you receive, so checking and improving your score before applying is one of the highest leverage moves you can make.
How long does it take to get a business term loan?
Bank term loans typically take two to six weeks from application to funding. Online lenders can fund in one to five business days. SBA term loans take the longest, often 30 to 90 days. The timeline depends on how quickly you provide documentation, how complex your financials are, and whether the lender needs an appraisal of any collateral.
Can I get a business term loan with less than two years in business?
Yes, but your options narrow. Most banks want two years of operating history. Online lenders often approve businesses with one year, and a few work with companies that have six months. Newer businesses pay higher rates and receive smaller amounts because the lender is taking on more risk. Check your eligibility to see which lenders fit your profile.
What is the difference between a business term loan and a line of credit?
A term loan gives you a lump sum upfront that you repay on a fixed schedule. A line of credit gives you access to a pool of funds you draw from as needed and only pay interest on what you use. Term loans work better for one time investments. Lines of credit work better for ongoing cash flow needs or unpredictable expenses.
Do business term loans require collateral?
It depends. Bank term loans over $50,000 almost always require collateral such as real estate, equipment, inventory, or accounts receivable. Online lenders often offer unsecured term loans up to $250,000, though with higher rates. Most lenders also require a personal guarantee regardless of whether the loan is secured.