Business Loan Terms: Length, Requirements & Repayment

Business Loan Terms: Key Takeaways

• Business loan terms refer to parts of the loan agreement that explain how much you’re borrowing, how much time you have to repay the lender, what you’ll need to pay, and what the lender expects from you
• The length of a business loan can range from six months to 25 years, depending on the type, purpose, and amount
• To get approved, you’ll need good credit, steady business income, at least a year in operation, and sometimes collateral or a personal guarantee

More than half of all firms are actively looking for funding, according to the 2024 Small Business Credit Survey (SBCS). This makes business loans a popular tool for growth.

But before you apply, it’s important to understand the full picture, especially the terms of the loan.

In this guide, we’ll break down:

• What business loan terms include
• Common loan lengths
• What lenders look for when reviewing your application

Understanding Business Loan Terms

Running a small business often means juggling rentals, upgrades, and investments. Whether you’re buying equipment or renovating, it’s important to understand what your loan will actually cost you.

The most important components of a business loan include:

Loan Amount

This is the total amount you’re borrowing, also known as principal.

Choosing the right loan size is key: borrowing too little might not cover your needs, while taking too much can put pressure on your finances and create unnecessary stress.

Interest Rate

The interest rate is the percentage you’ll pay to borrow the money. It can be:

• Fixed: The rate stays the same for the duration of the loan.
• Variable: The rate can go up and down over time depending on the market.

Your rate depends on your creditworthiness, the loan type, and current market benchmarks.

Even a small difference in rate can significantly affect the amount you’ll repay, especially if you’re borrowing money long-term.

Term Length 

This is the amount of time you’re given to fully repay the loan.

• Shorter terms mean higher monthly payments and lower interest rates over time.
• Longer terms lower the amount you owe each month but increase the total cost of the loan.

Repayment Schedule

A repayment schedule is a plan that shows how much you need to pay, how often, and for how long you’ll need to fully pay off your loan.

Most small business loans follow a monthly repayment schedule, but some may require weekly or biweekly payments. These payments typically include both principal and interest.

Amortization

Amortization shows how your loan balance goes down with each payment by breaking it into two parts:

• The amount that goes toward paying down the principal
• The amount that goes toward the interest on the principal

Early payments cover more interest than principal, while later payments shift that balance.

Fees and Costs

Fees and costs are extra charges you may pay for things like starting and servicing the loan, making late payments, or paying it off early.

These affect the total amount you’re borrowing, along with the principal and interest rate.

Covenants

Covenants are rules set by the lender that show what you must do or avoid doing, until you repay the loan.

These can include things like keeping a certain amount of cash in your account, providing regular financial updates, or limiting how much new debt you take on.

If you break these covenants, the bank may charge penalties or treat it as failing to meet the loan terms.

Covenants can be:

• Positive: Including actions you agree to take, for example, maintaining business insurance, submitting regular financial statements, keeping a minimum balance in your account, or meeting certain revenue targets.
• Negative: Referring to things you agree not to do, like selling key assets without approval, making large capital expenses outside your normal business operations, or changing your business structure or ownership without notice.

Typical Business Loan Lengths

Business loans can have different repayment timelines, depending on the loan type and amount, your creditworthiness, and the lender’s policies.

Short-Term Loans

These loans are typically used for managing cash flow, covering temporary expenses, or stocking up on inventory. They’re quicker to repay but usually come with higher monthly payments.

Short-term loans can be a good fit if you expect a fast return on the money you’re borrowing. These must be typically repaid within six to 24 months.

Medium-Term Loans

Medium-term loans allow you to make equipment purchases, office upgrades, or general business expansion.

With a loan length between two and five years, they give you a more manageable schedule and room to grow your business.

Long-Term Loans

Typically used for major investments like real estate, large-scale development, or buying a business, these can stretch over a longer period of five to 25 years.

Long-term loans come with lower monthly payments, but you’ll pay more in interest over time.

They also generally require evidence of strong financial performance and collateral to secure the loan.

Key Requirements for Business Loan Approval

Not sure what it takes to get approved for a business loan? While each lender may have different requirements, most will look for the following:

Strong Credit History

Lenders want to see your personal and business credit scores to ensure that you’ve handled debt responsibly in the past. A higher credit score can:

• Improve your chances of approval
• Help you qualify for better terms

It’s not uncommon if candidates can’t meet all of the required loan criteria. Credit scores don’t always tell the full story, if you have good revenue and a clear plan to use funding.

In this case, you can explore alternative financial products like portfolio mortgage loans, SBA loans, or revenue-based financing.

If you’re unsure which option is best for your situation, speak directly with a banker.

Established Business Financials

You’ll typically need to show your business generates enough revenue, so that you can make regular loan payments.

To prove this, you can use financial documents like tax returns, profit and loss statements, and bank records.

Time in Business

If your company has been operating for at least one to two years, this will give you an advantage in the eyes of lenders.

Why? Because surviving the first year in business and having a stable track record serves as a sign that you can repay your loan, reducing the lender’s risk.

Although applying for a business loan as a new business may be challenging, you may still qualify for specific products like SBA loans. Another option to meet the requirements is to provide additional documents and guarantees.

Clear Loan Purpose

Another requirement for approval is to explain how you plan to use the loan, whether it’s for buying equipment, expanding operations, or managing cash flow.

Having this information will help lenders understand your growth vision and evaluate the risk before taking the final decision.

Collateral and Guarantees

Collateral refers to assets, such as property or equipment, that lenders can claim if the loan isn’t repaid.

If a loan is backed by assets, it’s known as a secured loan. Unsecured loans don’t require collateral, but they often come with higher rates or shorter repayment periods.

Need a Business Loan? Capixa Can Help

If you’re managing a company within the construction, healthcare, restaurant, or real estate sectors, you might need a loan to expand your operations.

At Capixa, we specialize in helping businesses like yours access funding solutions that can help you grow.

Trusted by various industries, our investment capital funding company provides custom loan solutions, friendly service, and an efficient approach to get the best loan for your small business.

To qualify, your business needs to be open for at least a year, earn at least $360,000 a year, and have a business checking account.

Tell us a bit about your business, and one of our funding experts will follow up with tailored options.

Small Business Loan Terms: FAQs

What does “business loan term” mean in business lending?

The loan term refers to how long you have to repay your loan in full. The length can range from a few months to several years, depending on the type of loan and your business needs.

How do I choose the right loan term for my business?

Think about how you’ll use the money and how quickly you’ll get returns. Shorter terms mean quicker payoffs with less interest overall, though your monthly bills will be steeper. Longer terms ease the monthly load but raise the total cost.

Do all loans require collateral?

No. Loans that require collateral are called secured loans. You will not need collateral for unsecured loans, but they may come with higher interest rates or shorter repayment timeframe.