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In most cases, long-term business loans are used to purchase something specific that will enable the company to grow and make more money. Machinery, vehicles, commercial real estate and hiring new staff are examples of what you could use your loan for. The rule of thumb is that the loan term should be as long as or shorter than the useful life of the investment — for example, you wouldn’t want to have to get a new work van before you’ve paid off the loan for the older one.
The average size of a business loan from an online lender or U.S. bank ranges from $5,000 to nearly $600,000, though loan amounts can be more or less than the average. Businesses receive a lump sum of the total loan amount after they receive approval. They must pay back the amount of the loan with interest in periodic payments over the term of the loan.
The U.S. Small Business Administration (SBA) partners with financial institutions to guarantee loans for small business owners. An SBA guarantee reduces risk for lenders, making it easier to approve borrowers who may not otherwise qualify for financing.
The SBA 7(a) loan program offers several types of general financing for businesses. Repayment terms are up to 25 years, depending on the type of 7(a) loan you choose and what’s being financed with the loan, such as equipment or real estate. SBA 7(a) loan amounts range from less than $25,000 to as much as $5 million.
Traditional banks commonly issue large business loans with favorable rates and terms. Repayment terms often span from just a few years to as many as 20 years. However, business owners typically need high credit scores, strong cash flow, profitability and substantial time in business to be approved for a bank loan. In addition, banks usually have slow approval and funding processes.
If you do qualify, though, you could be approved for funds that you could pay back at a manageable rate. For instance, Bank of America’s secured business loans start at $25,000, with rates as low as 3.50% and repayment terms up to four or five years, depending on the type of loan.
Online, non-bank lenders offer both long-term and short-term loans, though their terms tend to be shorter. Repayment terms for online loans typically range from three months to five years. Amounts tend to be somewhat smaller than those of bank loans, often between $5,000 and $500,000.
Online lenders are known to charge high interest rates and fees, though borrower requirements are generally more lenient than they would be at a bank. Online lenders can also usually provide funding in a few days.
Long-term business loans need to be paid back with interest. Rates differ based on the lender you’re working with and your loan details. If you take out a term loan from a traditional bank, your annual interest rate could range from around 2.5% to 5% or more. If you work with an online lender, you may see annual interest rates between 13% and 71%.
Additionally, a term loan will likely come with closing costs and other processing fees. Be sure to check your contract for other hidden costs like early repayment fees.
The longer your repayment term, the more likely you’ll be on a monthly payment schedule. This type of business loan may not be a good fit until you’re in a position where you have reliable cash flow and a little money to put aside each month. Defaulting on a term loan could be devastating for a business — you could badly damage your credit and lose your business and, in some cases, personal assets.
You can shop for small business loans by visiting nearby banks, contacting your local SBA office, reaching out to your city’s chamber of commerce or searching online. Once you choose a lender, the application process would likely start with some paperwork requesting basic information about your company, how much money you need and how you plan to spend it.
Next, a lender may review these basic requirements:
See if you qualify for a term loan
The timeline for approval and time to funding would depend on the individual lender. As mentioned earlier, online lenders are often fastest to fund loans, while traditional banks may take a bit longer.
Your term loan application may require a few additional documents. It may be helpful to have some essential information on hand before sitting down to apply: