3 Typical Small Business Loan Terms

he terms of a business loan can be­ challenging for business owne­rs seeking financing. This guide e­xplores various loan types: term loans, cre­dit lines, and SBA options. You'll understand key financing aspe­cts to choose wisely for your business ne­eds.

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Different Types of Small Business Loans 

Entrepreneurs have different loan options when it comes to financing small businesses. All of them have distinctive uses and conditions. Some of the major types of loans given to small businesses are as follows:

Term loans

A term loan me­ans you get all of your borrowed money upfront. You the­n pay the lender back ove­r a set time period, ofte­n lasting one to five years. Te­rm loans are helpful if you nee­d to make a big purchase just once, like­ buying equipment, doing renovations, or growing your busine­ss. They usually need collate­ral and good credit history,but you get predictable­ monthly payments and a simple repayme­nt plan.

SBA loans

These borrowing schemes tend to have lesser risks for financial institutions hence, they can be accessed by borrowers with low credit scores or little collateral. The well-known SBA initiatives include the 7(a) loan program, which caters to general business needs, and the 504 loan program designed specifically for property acquisition or equipment purchase.

Lines of credit

Line-of-credit is a type of flexible financing that allows small business owners to borrow money as required up to an agreed limit. This sort of lending can be especially useful for managing cash flow or handling short-term working capital requirements. Interest is assessed only on the amount borrowed and can be made either in full or partly as long as the minimum payment is met. 

Lines of credit might be either secured or unsecured, and they are generally revolving in nature, meaning that once the balance is paid down, it is replenished by available credit.

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Repayment Terms for Each Type of Loan

Repayment terms for small business loans can vary significantly depending on the type of loan and its intended purpose. Understanding these terms is crucial for effective financial planning and ensuring a manageable repayment schedule. Here is a brief account of the usual payback periods:

Short-term loans

The name short-term loans suggests that such credits are offered for a relatively short time frame, which may range from a few months to one year. They are typically used for urgent cash flow situations.

Mid-term loans

Mid-way loans, also called term debts, are frequently sought by small enterprises to fund major capital expenditures or expansions. Most of these loans are typically repaid within 1-5 years, which means that business organizations can generate revenues and acquire cash flows to pay off the loan facility in time. Integrated with other factors, such as commercial real estate or equipment, mid-term credit may be given at a fixed interest rate throughout the term.

Long-term loans

Long-term loans are usually used for large investments or projects that require high capital output. Depending on the conditions of the borrower and their lenders, these credits can be paid back in five to twenty-five years. 

The most common reasons people take out long-term loans include buying commercial properties, making major renovations, or just getting expensive machines from companies that manufacture them. Due to the long repayment period, monthly payments on long-term loans may be lower, yet they might cost more in interest over the loan's lifespan.

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Loan Amounts for Different Loan Types

When it comes to securing finance for a small-scale business, the amount available as a loan can vary significantly depending on the kind of loan and conditions set by the lender.

Traditional bank loans

In general, banks bestow loans of varied ranges, starting from a few dollars up to huge sums. If your business is well established and you have a good credit history or collateral, then the bank can provide you with a loan that runs into tens of thousands or even millions of dollars. However, for startups and businesses operating with limited capital and assets and having no credit history, these figures may be lower, usually up to $100,000.

SBA loans

The SBA has various programs that provide loans to small businesses. The most popular of these is the 7(a) program, which allows borrowers to get up to $5 million, with the average loan amounting to around $375,000.

This usually means that a candidate can seek the highest loan amount given, which amounts to $5 million.

Alternative lenders

Alternative lenders have become popular recently for their fast approval processes and relaxed borrowing requirements. Although the number of loans that alternative lenders normally provide may not be as large as that of traditional banks, they can offer sizable capital to small businesses. Such lenders usually offer loans between $5,000 and $500,000. However, some can provide larger sums for well-qualified borrowers depending on factors such as revenue, credit rating, time in business, and purpose. 

Lenders keenly consider these factors while deciding on suitable lending amounts and terms to lower risks while also providing enough funds required for business growth.

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Interest rate ranges

Interest rates can seriously affect a company's financial well-being over the long run. Knowing the interest rate ranges of different loan types is important for making informed borrowing decisions.

Traditional bank loans

Rates on bank loans differ extensively from one another due to various factors like the amount borrowed, duration of repayment, credit scores, and collateral.

In general terms, bank loans for good credit borrowers with a strong history and substantial collateral tend to have the lowest interest rates available at 4-8% for short-term loans or 6-12% for longer-term ones.

SBA loans

The SBA cooperates with lenders to reduce interest rates on its loan programs. For the popular 7(a) scheme, the interest rate is usually put in the range of 5-8% for less than seven-year loans and up to 10% for long-term funding. This program mainly covers real estate as well as equipment purchases and, more often than not, demands an interest rate that ranges between 4-6%.

Alternative lenders

Alternative lenders, including online lenders and peer-to-peer platforms, offer more access and quicker approval processes, although they may charge higher interest rates than conventional bank loans. Their interest rates vary from 10% to 30% depending on a borrower’s creditworthiness, loan size, and repayment period.

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Eligibility Requirements

• Creditworthiness: For a traditional loan, a personal and business credit score of between 600 and 680 is normally the minimum, while for alternative lenders, a credit score of at least 500 suffices.

• Annual Revenue: The amount ranges from $50,000 to $250,000. It can be even more difficult depending on the lender and the type of financial product.

• Time in Business: Some alternative lenders can finance businesses that have been in operation for less than one year. Nevertheless, most lenders prefer companies that have been in operation for one to two years.

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To Conclude

This guide provides an outline of some crucial factors to consider when looking for financing options for small businesses, helping you determine which loan program could be suitable for your entrepreneurial adventure.

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Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

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