Business Finance
4 Financing Rights of Every Small Business Owner
Small business loans are a convenient way for many small business owners to get their businesses started or fund growth opportunities. Based on information such as credit score, approved funding amount and a series of other factors, businesses agree to take on debt for a specific amount of time, known as a small business loan term.
The terms of a small business loan dictate the duration within which a small business owner must repay the funds they have borrowed, along with any applicable interest. In this guide, we discuss typical business loan terms.
If you're not familiar with small business loans, the terminology can be a bit confusing. Here's a quick breakdown of some of the common terms you might read throughout this guide:
We'll review each of these characteristics for common types of business loans.
Keep reading to learn about common small business loan terms and other factors that will affect how each type of business loan is repaid.
A term loan is simply a type of loan issued by a bank or other financial institution that needs to be repaid within a certain amount of time. Some of the financial products listed below might be considered term loans, but this is a general term that encompasses all similar loans. There are a variety of term loans with repayment terms ranging from less than a year to 25 years.
Most term loans provide up to $500,000 in funding, but this varies by lender. Interest rates, time to funding, and qualification requirements can also vary drastically. You will likely have to provide credit information, and you may get more favorable terms by applying through a lender that you've worked with in the past.
SBA loans are provided by eligible lenders or banks and guaranteed by the U.S. Small Business Administration. There are several types of SBA loans, and your repayment terms will depend on the type of loan. Smaller loans for working capital and fixed assets have terms of up to 10 years, while large loans for real estate have terms of up to 25 years. Loan amounts will range from $500 up to $5 million. Interest rates will vary based on Federal Reserve actions and differing lenders, but they are typically lower than other types of business loans.
To qualify for an SBA loan, you must be a legally-registered for-profit business located and operating in the U.S. You must also meet business size standards and credit eligibility requirements and have no other financing options. The average SBA loan funds are typically received within 30 and 90 days of applying.
A traditional bank loan is a type of term loan offered by a bank or financial institution rather than by investors, business organizations, or other alternative lenders. Repayment terms will range for each lender, but they are generally between one and 25 years. Loan amounts also vary, with some borrowers qualifying for a few thousand dollars and others upwards of millions of dollars. Interest rates are difficult to estimate because they depend on current economic circumstances, your creditworthiness, and the lender's product offerings.
Traditional bank loans may have requirements similar to SBA loans, but they are likely to be more strict. You may also have to put up collateral for some loans or agree to take personal responsibility for the debt if your business can no longer repay. Time to funding will also vary, but online lenders can be a good option if you're looking to secure funds quickly.
Microloans are smaller loans, typically up to $50,000, with shorter repayment periods. Most microloans are provided by the SBA, but some banks and financial institutions have begun offering them as well. SBA microloans have repayment terms of up to six years. Other lenders may allow up to seven years. Time to funding for microloans can range from a few days to a few weeks.
Borrowers must meet other SBA requirements to get a microloan. However, if you opt to look for other microlenders, you might find that credit requirements are more lenient than with traditional loans. That being said, you might also end up with higher interest rates, while SBA microloans still have more favorable terms.
Business lines of credit function more like credit cards, where you can borrow any amount up to your credit limit and repay the borrowed amount plus interest. You make a monthly payment to pay down your balance, and then you can borrow from the remaining credit as needed. Many business lines of credit need to be repaid within five years, but you may go through reviews to determine eligibility for renewal.
Most business lines of credit will range between $2,000 and $250,000. With good credit, you might find a business line of credit with interest rates comparable to traditional loans, but many will have significantly higher interest rates. The requirements for business lines of credit are similar to those for traditional bank loans. Some banks can take a couple of weeks to fund your line of credit, while some online applications can be processed in as little as a day.
Invoice factoring is when your business can sell its outstanding invoices to a factoring company that will pay between 80% and 90% of the invoice amount and then collects the payment from your clients to repay your loan. This may be a good option for businesses with risky credit since it relies on your clients' payment history rather than the business's finances.
Recourse factoring companies will require that you buy back the invoice if your clients don't pay, while non-recourse factoring companies assume responsibility for the unpaid debt. When your clients pay the factoring company, you will receive any funds left after repaying the cash advance plus fees and interest. Interest rates for invoice factoring are much higher than traditional bank loans.
Equipment financing allows you to use loans, leases, or lines of credit to purchase business equipment. Most equipment financing loans will have repayment terms between three and 10 years. There is no set range for equipment loan amounts, so you'll likely find lenders that offer very small loans or very large loans, depending on your needs. Interest rates are similar to those of traditional bank loans.
Requirements for equipment financing will include credit and financial history checks. However, many equipment loans also list the items you purchase as collateral in case you can't make payments.
Inventory financing is similar to equipment financing, except the loan or line of credit is used to fund the purchase of inventory. Your repayment terms will vary depending on the type of financing, but most inventory financing is either a short-term loan repaid within a few years or a revolving line of credit that can be used over and over again. The type of financing will also determine loan amounts, interest rates, and eligibility requirements. Like equipment financing, your inventory will be listed as collateral.
A merchant cash advance (MCA) is a type of alternative lending where a company gives you a lump sum of money in exchange for future debit or credit card sales. The company either withdraws a certain percentage directly from each sale or takes a fixed amount from your bank account on a schedule, regardless of your sales, until your cash advance plus fees are repaid.
Instead of interest rates, the MCA company will give you a factor rate. For example, if you receive a $10,000 MCA with a factor rate of 1.2, your total repayment would be $12,000 ($10,000 x 1.2). Most MCAs need to be repaid within three to 18 months, with amounts between $5,000 and $500,000. MCAs will typically have set income requirements to qualify.
Ask yourself the following questions to determine which type of business loan and business loan terms are right for you:
You should have a full understanding of your business's needs and finances before applying for a loan. Consider whether you can qualify for a loan and if you can afford to take on more debt.
Financing can give you the opportunity to take your small business to the next level. Funding Circle provides a variety of loan options with small business loan terms ranging between six months and seven years. Fill out our easy online application to learn more about your loan options.
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