Last Updated on September 29, 2022
When running a small business, you may need to get a loan to expand your operations. However, there are many small business loans out there that have varying terms and conditions.
By understanding the terms, amounts, time to funding, and eligibility requirements, you can spot a quality small business loan for your company.
Whether you need a short- or long-term loan, keep reading to learn more about common small business loan terms.
Banks make their money through loans. They offer you a sum of money that you pay back with interest, with the terms laid out in the loan agreement. You will decide the principal, interest rate, collateral, and repayment schedule.
Principal refers to the amount borrowed, and collateral is any property that the bank seizes if you do not follow the repayment schedule. Banks must abide by the Truth in Lending Act to define the loan terms clearly. Furthermore, some state laws may limit the interest charged.
A long-term bank loan needs repayment in 3-10 years, depending on the amount. You will need to look for an alternative lender for a short- or medium-term loan.
The average loan amount for a bank term loan is around $500,000. Generally, you will take out loans over $50,000 from a bank. The time to funding is between two weeks and two months.
Bank loan eligibility requirements include:
- Credit score over 650
- Annual revenues over $100,000
- Being in business for 1+ years
You could apply for a personal loan if you do not have a business credit history and have a strong credit score yourself. Some banks may offer you one without collateral, but you will have a much easier time qualifying for one by showing a willingness to lose something.
Business Lines of Credit
A business line of credit prepares you for emergency financial needs and helps you expand your company. You can develop a business credit history and have access to financing whenever you need it.
Business lines of credit can help you cover immediate expenses like inventory and employee pay, as long as you stay within your limit. You do not have to pay interest on everything you take, only on what you spend.
The common loan terms for this option are between six months and five years. Online lenders may offer them for up to two years, while banks can go for five. Usually, borrowing limits range from $10,000 to $100,000. If you provide collateral, you may get up to $3,000,000.
Time to funding depends on your lender. It can be anywhere from one day to one month. If you want a secured line of credit, you become eligible by providing collateral. These have lower interest and are easier to obtain.
If you do not have collateral, you can look for an unsecured line of credit. However, not many lenders provide these due to the risks involved. Furthermore, they cost more to repay.
Other eligibility requirements include:
- Being in business for at least six months
- Annual revenue of $25,000 or more
- Strong credit score
Equipment financing involves the business owner working with a lender to finance one or more pieces of company equipment, either used or new. You can spread the cost of expensive tooling over a few years until you can afford to pay it off.
Most loans allow for flexible spending, but equipment financing only applies to the tools outlined in the loan agreement. You should only go for this option if you need specific items to operate your business that you cannot afford presently.
The terms last during the equipment’s expected lifetime, usually two to ten years. You can finance the entire cost of tooling. The minimum amount is often $100,000, but you can apply for a loan of over $2,000,000. Most lenders will offer you the money within five days.
In most cases, the equipment acts as the collateral, making it a self-secured lending option. However, some lenders may require additional collateral. Generally, you cannot go for equipment financing for pieces that lose value quickly. You can opt for equipment leasing if you want something that degrades rapidly.
Some of the eligibility requirements of equipment financing include:
- Credit score above 550
- Being in business for 1+ years
- Annual revenue over $100,000
With invoice factoring, you sell your open receivables to a company for quick cash. You do not need to wait for customer payment to get working capital. These loans help you grow your business and maintain operating expenses.
After the customer gets billed, the unpaid amount goes to the invoice factoring company who advances your business about 90% of the price that day. Then, the customer pays on their regular terms to the factoring company instead of you. You will get the rest of the profits back, minus the factoring fee that the company takes.
Common loan terms for invoice factoring may vary between each invoice. Some lenders may have you under an annual contract, but most last less than three months. The amounts you can take change based on how much your products and services cost.
The time to funding is almost immediate, and you can get paid in under five days.
The eligibility requirements for invoice factoring include:
- Owning a business with a formal corporate structure
- Having government or commercial clients with good credit scores
- Profit margins over 15% for small businesses
- No encumbrances or liens in the invoice
- No open bankruptcies
- Having a payment plan for tax problems
- Passing a background check
You can get a long-term loan from your bank or an online lender. These loans usually have higher amounts than short-term ones, and you can take years to pay them off. Keep in mind that you may enter a large amount of debt by taking a long-term loan.
Long-term loans have a lot of flexibility, and you may get a lower interest rate than with a short-term loan. Also, you make lower monthly payments, making it beneficial for businesses with a tight budget.
Common loan terms are between one and five years for amounts ranging from $5,000 to $500,000. If you want more money, you can pay the loan and interest for up to 25 years. It takes around 48 hours to get your loan.
Eligibility requirements for long-term loans depend on the lender and amount. However, most include:
- Consistent income
- Decent credit score
Ensure you research your particular lender’s requirements to see if you qualify before applying.
Merchant Cash Advances
A merchant cash advance (MCA) is the business equivalent of a paycheck advance. You get money from potential sales in a lump-sum payment. Then, you pay it back as you make customer sales.
The lender charges a factor, similar to invoice factoring, rather than an interest rate to make money. Factors are often 1.2 to 1.4 times the borrowed amount.
The lender takes a percentage of sales daily from a connected merchant account. If you work with customers, you can consider this loan option. Most people who opt for MCAs work in medical offices, retail stores, or restaurants.
The common loan terms for merchant cash advances usually last 3-18 months. Most MCAs cover between $5,000 and $500,000. However, you should only look for a larger one if you have massive profits due to the brief payback period. You can get the money in under 48 hours, depending on the lender.
If you want a merchant cash advance, ensure you meet a few eligibility requirements:
- Credit score over 500
- 51% or greater ownership
- At least three months in business
- Have over $10,000 in deposits every month
- No more than five NSFs each month
- Make at least five deposits each month
- Being in an unrestricted industry
If you’re in an MCA and want to get out of it, read our guide on how to get out of an MCA.
SBA loans are offered by the U.S. Small Business Administration. The SBA collaborates with lenders to give you loans, but they do not lend their money. You can readily get a high-quality loan by opting for an SBA-approved one. They let you choose from various loans, such as:
- 7(a) loans
- 504 loans
Average loan terms range from 5-25 years. You can get amounts between $500 and $5,500,000, depending on the loan type and company. The average amount is $350,000, and you can get your money in one to three months.
Since each lender has different requirements, the SBA provides foundational guidelines for eligibility, including:
- Being a for-profit business
- Working in the United States and its territories
- Exhausting other financing options
- Having invested equity into your business
- Enough income to repay the loan
- Having a sound purpose and strong character
- Meet size standards
Other details like credit score and specific revenue minimums depend on the lender.
Short-term loans can support temporary capital needs for a small business. You repay the principal with interest by a date outlined in the loan agreement. Short-term loans differentiate from long-term ones because of their repayment period.
You have between three and 18 months to pay these back, depending on the lender. Some may extend the loan terms to two years, but that would fall into the medium-term territory. Medium-term loans have repayment periods of 1-5 years.
Most short-term loans come from alternative or online lenders. They offer smaller amounts than long-term ones as you do not have as much time to pay back. Furthermore, you may get a higher interest rate to seem profitable to the lending company.
The average loan amount is between $5,000 and $250,000. You can get your money within one to two days if you go through an online lender. If you have a small business not eligible for credit from a bank and need some start-up income, you may want a short-term loan.
The eligibility requirements change with each lender, but you will have a better chance of qualifying by meeting these standards:
- Being in business for 1+ years
- Annual revenue over $50,000
- Passing a background check
If you are a startup and have not established consistent revenue yet, you will have a much harder time qualifying for a loan. You can research a few options, but you may need to look for angel investors instead.
If you need help with funding your small business, ensure you weigh your options before applying for one. Look into the eligibility requirements from each lender and perform some feasibility calculations to see if you can pay back your loan within the repayment period.
Depending on the size, age, and needs of your company, you will need a different loan. If you are starting, you may want a short-term loan. More established and profitable businesses can get away with a long-term loan.
If you don’t want to take on a loan, explore our guide on ways to fund your business without a loan.
Grey was previously the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helped businesses find the information they needed to make informed decisions about invoice factoring and A/R financing.