In this article, we’ll discuss:
When taking out a business loan
, one of the most common questions that people ask is “how long should my loan repayment period be?” There is no one size fits all answer to this question, so we’ll dig a little deeper in this article to help you decide the term length that is right for you. Generally speaking, the repayment terms of your small business financing will depend on a few factors, such as what you plan to use the funds for, which lender you choose, and the type of loan you get.
What is the average time to pay back a business loan?
The repayment period for business loans can range anywhere from six months to 25 years. But again, the repayment terms will depend on many things.
First, a lender determines the risk in loaning a borrower money. Each lender has its own criteria for assessing this risk. Long-term loans usually equal higher loan amounts and more extended repayment periods than other loans. So a lender will review a borrower’s credit profile more thoroughly with longer-term loans.
This is because the lender sees a higher risk with lengthier repayment terms. Therefore, borrowers with a stronger credit score and better financial credentials can usually command the best repayment terms. The type of business you own also factors into how long you can have to pay off your loan.
A lender will also evaluate your business and personal credit scores, business plan, debt ratio, tax returns, and annual revenue before deciding the term length they will allow. These things will also affect how much you have to pay back on your loan. The less risk you carry for a lender, the lower your interest rate will be, and the less it will cost you to repay the loan.
Here’s a closer look at the types of business loans and their general repayment lengths.
Long-term business loans
A long-term loan offers a repayment period of at least 12 or more months. The majority of small business financing is through term loans. You make regular monthly loan payments or installments with a term loan after the lender issues you a lump sum or loan amount upfront. The loan will have a predetermined repayment schedule. Long-term loans include traditional bank loans, regular term loans, and SBA loans.
Traditional lenders include local banks, commercial banks, and credit unions. While banks offer higher loan amounts at lower interest rates, they severely narrow their pool of eligible borrowers. Unfortunately, most business owners are rejected for bank loans
. But, if you can get a bank loan, the typical repayment period is from five to seven years, depending on the lender.
are available from regular banks and alternative lenders. Most startups and small business owners find that working with an alternative lender, like Biz2Credit, is a better option as it’s easier to meet the eligibility criteria than with a traditional lender.
Alternative lenders are flexible and cater to more borrowers. You’re more likely to have your business loan approved and get faster funding. It’s likely that an online business lender like Biz2Credit can approve your loan within a couple of business days and deposit the funds into your bank account shortly after.
The downside is that your business financing might come at a higher interest rate. Depending on the lender and the financial profile of your business, you may have a shorter loan repayment period.
But when you consider that it can mean the difference between meeting your business needs and your business going under, it’s worth considering. That said, the typical repayment period for a term loan with an alternative funding company is around one to five years.
Real estate loans
Commercial real estate (CRE) loans
are a type of long-term secured business financing that you can use to acquire a new business, renovate an established business, or refinance existing business loans.
CRE’s are high-dollar loans that range from $250,000 to $6 million ($5 million for SBA-7 loans). Business owners can apply for real estate loans through traditional lenders, the SBA, or an online lending marketplace or lender.
The repayment length for an SBA real estate loan is up to 25 years, but a borrower has to make a downpayment of up to 30% if the loan is approved. And in reality, it’s tough to be approved for an SBA-7 loan, plus applications are frequently tied up in red tape.
While the repayment period for a real estate loan is shorter with an alternative lender, you will likely be able to get the funds your business needs in a matter of days rather than months.
Small business administration loans are often considered the Rolls Royce of business loans. The SBA doesn’t loan the money for these loans directly. Instead, the loans are distributed by a regular bank participating in the SBA loan program
, and the SBA guarantees part of the loans. This reduces the risk for lenders, so they reduce the rate for you.
With SBA loans, you will face a higher degree of scrutiny than you would as a regular borrower at traditional lenders because you must also satisfy the SBA’s lending criteria. But, if you can manage to get approval for an SBA loan, you may have up to 25 years to repay the loan, depending on which loan program you’re entered into. SBA loans are also among the lowest interest rates available for business loans, sometimes as low as 5%.
Typically, an SBA loan will grant a 25-year repayment length
for real estate, 10-year payback for machinery or equipment, and seven years for a working capital loan. The SBA also offers a microloan
, which is a smaller funding amount with a shorter time to pay back the loan.
Microloans are generally used for supplies, equipment, working capital, or expanding or starting up a business. The repayment terms for an SBA microloan are usually no more than six years.
Short term business loans
Short-term business loans
, such as working capital loans, equipment loans
, merchant cash advances, invoice financing, invoice factoring, and lines of credit, have a shorter repayment time. When a borrower has a hard time securing a long-term business loan, they often fund their businesses with smaller, short-term loans.
The good thing about short-term loan options is that you don’t always have to have a large downpayment or collateral like you would with a long-term loan. In these cases, a lender will want to establish your creditworthiness and get a personal guarantee to sign off on the loan. Here’s a look at a few types of short-term business financing.
Business line of credit
While a business line of credit
is often used over the long term, it is considered short-term financing. A line of credit works similarly to a credit card
and allows you to borrow up to a pre-approved credit limit. You only pay interest on the amount of credit you use, and you can pay it off each month or make a minimum payment. But any balance that’s left will incur interest.
As you repay the credit you’ve used, the credit limit resets, and you can borrow again up to the limit set forth by the lender. Many business owners use their line of credit as working capital to help manage their business cash flow
more efficiently, while some reserve it for emergency use.
Working capital loans
A working capital loan
is financing that covers everyday operating expenses, such as payroll, inventory, or equipment purchases. It is sometimes also used as an opportunity to grow or expand your business.
Typically a working capital loan is best when you need quick funding. Because working capital loans are meant to cover short-term needs, the repayment period is usually shorter, usually from three to 12 months.
Merchant cash advances
Repayment for a merchant cash advance is made through a company’s credit and debit cards sales. In addition, a fee is usually charged. Merchant cash advances are generally best for business owners who don’t have high credit scores and when other financing options are off the table. The payback is usually higher than with other loans.
What are the benefits of long-term business loans?
Long-term loans usually have more relaxed repayment periods with lower interest rates. This means your loan will likely cost you less, and it will be easier for you to pay back the loan. In the meantime, you build valuable business credit that makes it more likely for you to get future financing when you want to grow your business, or you need to invest more in your business.
Is there a benefit to paying off a business loan more quickly?
There are different ways of looking at this. Sure, if you pay your loan off early, you free that monthly payment up and have more cash to grow your business. It also means that you can start turning a profit sooner. But some loans have prepayment penalties or require you to still pay the entire interest amount if you pay the loan off before its maturity date.
Another thing to consider is that the interest you pay on the loan is usually tax-deductible. So if you pay off the loan, you lose that deduction. But it may make sense to pay your business loan off early
if you have a high-interest loan and want to consolidate your debt or refinance to a lower interest rate.
It all boils down to the math. Analyze your situation from every angle and do what’s best for your business and what makes the most sense.
Why are interest rates higher with unsecured loans?
don’t have collateral to back up the loan, which presents a higher risk for the lender. A lender balances this risk by charging a higher interest rate and setting a shorter repayment time to pay back the loan.
Because the lender is taking on a more substantial risk, they are also likely to ask you to share this risk by signing a personal guarantee
. This means if you default on the loan, you could lose any personal or business assets you have.
Unsecured loans can also be challenging to get if your credit isn’t up to par. As with all loans, if you have bad credit, you’ll have difficulty getting an unsecured loan. But if you just have a lower credit score, it’s possible to get an unsecured loan with an online business loan marketplace.
Is there anything else I should know about interest rates and loan repayments?
Yes. When you agree to your loan terms, you’ll want to ensure that the interest rate is fixed if at all possible. The interest rate and monthly loan payment stay the same with a fixed rate. This will help you budget better to repay the loan.
Variable rates fluctuate, and while a variable rate loan might initially start with lower interest rates, the rate could rise significantly later on. Variable-rate loans ultimately depend on market conditions. As inflation increases, interest rates tend to rise, so if you end up with a variable rate business loan, you run the risk of having a harder time repaying the loan in the future if interest rates skyrocket.
What is the advantage of a short-term, unsecured business loan?
An unsecured loan has several advantages under the right circumstances. For instance, it’s tough to get traditional business financing with a bank. When they approve a loan, they require large down payments or collateral, and borrowers often don’t have enough of either to meet the lender’s requirements.
In the meantime, the application process takes more time than business owners have when they’re trying to build their business. So, many borrowers get an unsecured loan through an alternative online lender, and some of them, like Biz2Credit, have a fast funding process. It’s usually easier to receive approval, and some lenders will only require a personal guarantee and no collateral to finance your loan.
The bottom line: What is the best business loan repayment schedule?
As with any decision concerning your business, it all comes down to what is best for you and what your business needs. While longer-term financing is almost always preferable, it’s not always attainable for every business. In that case, a short-term funding option could help meet your business goals faster.
For instance, consider the business journey of Reinaldo (Ray) Anzola
, a Biz2Credit success story. Ray spent his business career finding worn-out restaurants and breathing new life into them. When an opportunity came up to renovate another restaurant, Biz2Credit had fast funding to him within hours of Ray finishing his loan application.
Ultimately, you need a business loan that works for you when you need it. That might mean going with a loan that has a shorter repayment period now and refinancing it later when you’re able to get a long-term loan.
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