As business owners look for the right loan to finance their operations, one of the most important aspects to consider is the length of the business loan term. The length of the business loan term will determine how long it takes to pay off the loan and how much interest is charged over that period. Knowing how long a business loan will last and when it must be paid off can be a significant factor in deciding whether or not this is the best option for your particular financing situation.

What Is the Average Length of a Business Loan Term? 

Business loans are a significant source of funding for many businesses, so it’s essential to understand typical business loans’ average length. Small business owners should be aware that loan terms vary depending on the type of loan and lender. According to recent research, the average term for small business loans is three years, with short-term loans having terms as short as one year and long-term loans stretching up to 25 years or more.

Different Business Loan Terms and Their Length

Small business owners often need financial assistance to cover operations and investment costs. A business loan is an excellent way for entrepreneurs to get the funding they need, and these loans usually come with specific terms that must be met for them to be approved. 

Small business owners need to understand the different types of loans available and the repayment terms associated with them. Below we’ll cover the typical business loan terms by type:

1. Term Loans

Term loans are a popular option for small businesses looking to secure long-term financing. These loans can range from $250,000 to $500,000 and provide an upfront lump sum of cash that is paid back over ten years. With term loans, the borrower will typically receive fixed payments made regularly throughout the loan period. 

The funds obtained through term loans can be used for numerous purposes, including rent or payroll expenses, purchasing inventory and equipment, advertising costs, expanding operations, and more. Aside from the funds received upfront, borrowers should also consider borrowing limits and interest rates when deciding if this type of loan is right for them. 

2. SBA Loans

The Small Business Administration (SBA) provides small businesses with loans of up to $5 million, which can be used for working capital, purchasing equipment and supplies, real estate investments, and more. With repayment terms of up to 25 years, SBA loans are a great way to get the funding your business needs without breaking the bank. 

3. Traditional Bank Loans

Traditional bank loans can be an excellent option for businesses looking to secure financing. Traditional bank loans offer repayment terms of 3 to 10 years and loan amounts of $250,000 to $1 million, with interest rates ranging from 3-22%. The time it takes obtain funding from a bank loan varies widely – typically taking two weeks up to several months. 

4. Business Lines of Credit

Business lines of credit are an excellent way for businesses to quickly access cash to meet their short-term financing needs. They offer loan amounts ranging from $1,000 to $250,000 with repayment terms between six months and five years. Interest rates vary between 10 and 99% depending on the lender and the applicant’s creditworthiness. The time it takes for businesses to receive their funds varies from a few days up to two weeks. 

5. Microloans

Microloans offer small businesses access to capital that may require more than traditional financing methods. These loans provide up to $50,000 in credit with repayment terms of up to six years. Interest rates vary from 6-9% for SBA microloans, depending on the lender and other criteria. Funding from this type of loan is usually 30-90 days from the time you apply. 

6. Invoice Financing

Invoice financing is an attractive and viable way to turn unpaid invoices into immediate working capital. It allows businesses of all sizes to get paid faster, bridge cash flow gaps, and access funds quickly and easily. With invoice financing, repayment terms are typically between 30 and 90 days, and loan amounts can be up to 100% of each invoice amount with a processing fee as low as 3%. This makes it a cost-effective way to manage cash flow while securing the business’s bottom line. 

7. Inventory Financing

Inventory financing is ideal for businesses that need short-term capital to purchase and stock inventory. With repayment terms of up to one year, loan amounts ranging from 20 to 65 percent of the inventory cost, and interest rates ranging from 0 to 8 percent, inventory financing is a viable option when tight cash flow and time constraints loom.

The best part about inventory financing is the ability to finance large purchases quickly with minimal paperwork requirements. In most cases, funding can be obtained in as little as 24 hours, with some lenders taking a couple of months. 

8. Equipment Financing

Equipment financing is one of the most efficient ways to acquire the capital you need to purchase new equipment for your business. With repayment terms ranging from two to seven years, depending on the usable life of the equipment, and loan amounts up to 100% of the cost, it’s an attractive option for businesses. Not only that but with time-to-fund being as little as 24 hours up to a few weeks, getting your business up and running in no time is easy! 

9. Merchant Cash Advance

Merchant cash advances are an excellent way for small business owners to get the extra funding they need on short notice. Unlike traditional loan options, merchant cash advances offer quick turnaround times and flexible repayment terms. Repayment terms for merchant cash advances can range from three to 18 months, with loan amounts up to $500,000. Best of all, many merchant cash advance lenders can provide funds in as little as 24 hours after approval – that’s even faster than credit cards!

Average Repayment Times

Knowing how long you’ll be paying back the loan will help you decide if that option suits your business needs. 

• When it comes to financing a business, the length of repayment terms for a loan is an essential factor to consider. Average business loan terms can range from short-term loans, which typically have repayment structures of 3-18 months, to long-term loans with repayment periods of up to 7-10 years. The average time frame for repaying a business loan depends on various factors, such as credit history, the amount you are requesting, loan type, and the overall financial health of your business.

What is the Average Loan Amount?

It depends on credit score and other factors such as the type of business and its location. Generally speaking, the average small business loan in the U.S. is $633,000, according to the Federal Reserve. However, the amount a company can receive varies greatly depending on eligibility criteria, such as credit score and collateral provided by the borrower. 

Benefits of Longer Terms Loans

There are many benefits associated with having a longer loan term on a business loan which is explained below:

• These loans typically involve lower monthly repayments than those on shorter terms. This makes it easier for businesses to budget their repayment costs, which is particularly beneficial for smaller firms with tighter cash flow restrictions. 
• When borrowing for an extended period, there is usually more flexibility over the loan amount and repayment schedule and potential savings through reduced interest rates or incentives offered by lenders. 
• Businesses can use a longer-term loan to finance more significant investments, such as new premises or equipment, without worrying about high upfront costs.
• Long-term business loans can provide considerable financial flexibility and stability for many entrepreneurs. 
• These loans allow businesses to borrow money over an extended period, providing them access to funds they might not otherwise have available. 
• A more extended repayment period will enable businesses to spread their payments over time, making them more manageable and creating cash flow stability.
• For starters, longer terms can give businesses more flexibility in managing their cash flow and budgeting for repayment. 

Drawbacks of Long Terms Loans

Long-term business loans offer many advantages to businesses, but they also come with a few drawbacks, which are explained below:

• These long-term loans are often unsecured, meaning that the lender relies on the borrower’s good credit and ability to repay the loan. This can make it difficult for small businesses or startups who may not have the established credit history necessary to qualify for such a loan. 
• Long-term business loans may also require collateral from the borrower, such as real estate or other assets, for them to be eligible for the loan.

Conclusion

The length of average business loan terms can vary significantly depending on the type of loan and the lender. Short-term financing is typically used for immediate needs and often involves higher interest rates than long-term loans. Long-term financing, on the other hand, is used for more permanent investments and may involve lower interest rates. When deciding which type of business loan to pursue, it is essential to understand the advantages and disadvantages of each and consider your financial situation before making a final decision.