Understanding Common Small Business Loan Terms

Understanding Common Small Business Loan Terms

Whether you’re looking to expand your startup or small business or require short-term cash flow, small business loans offer secure funding options. But before you apply, it’s crucial to comprehend the small business loan terms

Typically, a small business loan term determines the period you can repay the borrowed funds, including interest to the lender. Also known as “repayment terms,” conventional loan terms vary from lender to lender, depending on your business type.

You create a repayment schedule outlining your weekly or monthly payment amounts with your lender. It is important to consider annual percentage rates and eligibility requirements when analyzing your payback conditions.

The article elaborates on essential details you need to know about business loan terms for your business.  

Why Choose Small Business Loans

Common Small Business Loan

To Launch Business

Investing in your venture is a costly affair. Small business loans are easy to start by obtaining the capital for your startup.

To Expand Business             

Investment is necessary for the growth of any business. A small business loan can help you expand, start a marketing effort, or hire more employees.

To Purchase Equipment

 You may need funds if your business relies on heavy machinery and equipment. Equipment financing is one way to minimize high upfront expenses. A small business loan can help replace a broken item or support new acquisitions that will help your company expand.

To Cover Cash Flow Gaps.

Small business loans can be used as funding to fill cash flow gaps or seasonal slowdowns.

To Improve Working Capital

Have an unexpected opportunity?

Increase your operating capital to deal with unforeseen setbacks so you don’t lose out simply because of short cash.

Understanding Small Business Loan Terms

Understanding Small Business Loan Terms

Small business loans have many types comprising specific terms. The most common loan terms many entrepreneurs choose for small business financing include the following:

Term Loans

 One of the most sought-after small business loan terms is “Term loans .” These provide your startup with a fixed amount of funds you need to repay over an approved period.

Companies that require a sizable sum of upfront capital to pay expenditures or make other investments in the business may find this form of loan beneficial.

Term loans typically have lower interest rates compared to credit cards. The loan type provides you the peace of mind that you have a fixed amount of cash to work with.

There are three types of repayment terms in this loan type:

  • Short-term (three to 24 months)
  • Mid-term (up to five years)
  • Long-term (up to 10 years)

You can borrow $5,000 to $1,000,000+ with 6% to 36% interest rates for financing. You can return the borrowed amount in a day or a few months, depending on your repayment schedule.

Eligibility Requirements: Lender-specific requirements vary, but many financial institutions want a minimum 600 credit score, $8,000 monthly revenue, and six months of business operation. 

SBA Loans

 Your business can qualify for SBA loans –Small Business Administration loans for various purposes, including debt refinancing, equipment purchasing, inventory, and working capital.

Small Business Loan Terms - SBA Loan

SBA loans are more affordable due to their low-interest rates and lengthy repayment durations. The minimal qualification standards are also less stringent than those of other loan types.

Depending on your loan program, funding might take up to 90 days. The repayment schedule can be up to 25 years. The loan amount limit for SBA loans is $5 million. However, each small business loan program has an interest rate ranging from base rate plus 2.25 percent to 4.7 percent for 7(a) loans.

Eligibility Requirement:   To request an SBA loan, your business operates in the USA and should have a reasonable amount of owner equity to invest. It also should have applied to other available financial options. Additionally, you have a better chance of approval if your credit scores are 640 or higher than this.

Traditional Bank Loans

Banks, credit unions, or other banks and lending institutions typically offer traditional bank loans. These loans fund a business’s purchase, growth, or establishment and offer lower interest rates, depending on the lender. Even so, qualifying can be difficult, especially for startups.

The loan type has a three- to ten-year repayment duration. Its loan sizes range from $250,000 to $1 million, with 3% to 22% interest rates.

Eligibility Requirement: Generally, borrowers must have a credit score of 640 or above to qualify for the SBA loan program. However, individual institutions may have different standards. Many banks have minimum revenue and tenure in business criteria.

Business Lines of Credit

 This business financing allows startups and small businesses to apply for loans when needed. If your company has cyclical or unexpected expenses, business lines of credit are ideal. 

The loan type suits the companies with irregular or recurring expenses, enabling them to borrow capital funds as needed and gradually repay them. As a business owner, you can continually repay and access the cash since revolving lines of credit are available till the loan period is up.

The average business loan repayment term ranges from 6 months to 5 years with 10% to 99% interest rates. Once you qualify for the loan, you get the money within 2 weeks.

Eligibility Requirements: Most lenders require that customers have a personal credit score of at least 680; however, some have less stringent standards. A company must also satisfy minimum time in business criteria and revenue requirements of between $10,000 and $250,000 per month.

Microloans

If you’re looking for a small sum of capital to kickstart or grow your venture, microloans are the right choice. The loan type is designed for entrepreneurs who require modest capital to launch or expand their enterprises.

The SBA and other local lenders offer these loans to small businesses to borrow capital up to $50,000. Unlike conventional bank loans, SBA loans offer borrowers more flexible repayment terms and cheaper interest rates.

Therefore, they are an excellent choice for small businesses that need access to traditional bank loans. However, microloans are not for investing in real estate or settling debts already owed. The business loan term for repayment is six years for microloans, including a 6% to 9% interest rate. After qualifying, you will receive the funds within 90 days.

Eligibility Requirements:  Your small business needs to meet the eligibility qualification set by SBA and any credit requirements the intermediary lender has imposed.

Invoice Factoring

Invoice factoring is another popular small business loan type for funding capital for your startup. It allows entrepreneurs to borrow funds based on the value of their unpaid invoices.

Because it enables them to access cash quickly and efficiently, this kind of loan is perfect for firms with many invoices approaching their due dates. Because factoring providers sometimes base their loan decisions on the creditworthiness of the business’ clientele,

Invoice factoring is a suitable option for companies without established credit to use invoice factoring. It is because many factoring providers sometimes base their loan decisions on the creditworthiness of the clientele a business has.

An average business loan term for repayment is one to three months. You can borrow a 100% loan against your invoice amount. Note that the provider typically charges a 3% processing fee plus 1%–2% of the invoice amount in factoring fees.

Eligibility Requirement: Companies that provide invoice factoring examine a company’s financial records, such as accounts receivable, bank statements, and unpaid invoices. To determine the risk level, these lenders also check the creditworthiness of the company’s customers.

Prepayment Penalty on Small Business Loan

You may find many lenders that charge their borrowers a penalty fee for delaying loan payments.

Usually, many lending institutions do it to make up for the lost interest they anticipated receiving throughout the loan.

For instance, prepayment of 25% or more of the loan sum during the first two years of the loan term can be penalized for SBA borrowers with loan terms of 15 years. Review the terms of your company loan agreement to determine if your lender levies this cost.

Loan Maturity Date

Loam maturity is a loan payback period. It typically specifies how long you have to pay the loan with interest. It differs from the loan maturity date that marks the end of your payment period. The loan balance and any additional fees must be paid on the maturity date.

Conclusion

The more you know about long-term financing or a short cash advance, the more likely you are to choose the options that suit your business. Understanding small business loan terms is vital to fulfilling your financial goals and ensuring you don’t put yourself in a bad situation. Make sure to always approach financing cautiously to protect yourself and your company.

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