In This Article
What Is a Business Term Loan?
A business term loan is the most straightforward form of business financing: you borrow a fixed amount, receive it as a lump sum, and repay it over a set period (the "term") with regular payments that include principal and interest. Terms range from 1 to 25 years depending on the lender and purpose. Unlike revolving credit, once you repay a term loan, the funds are gone — you'd need to apply for a new loan if you need more capital.
Short-Term vs. Long-Term Loans
Short-term loans (3-18 months) are offered by online lenders and alternative financing companies. They're fast to get but expensive — APRs of 15-80%. Monthly or weekly payments. Best for urgent, one-time needs. Medium-term loans (1-5 years) bridge the gap, offered by both banks and online lenders at 7-30% APR. Long-term loans (5-25 years) come from banks and SBA programs at 5-13% APR but require excellent credit and extensive documentation.
Real-World Example
A landscaping company needs $150,000 to buy three commercial mowers. They qualify for a 5-year bank term loan at 8.5% APR. Monthly payment: $3,076. Total interest paid: $34,560. Total cost: $184,560. Compare this to a 12-month online lender at 25% APR — the monthly payment jumps to $14,188 and total cost is $170,250. Even though the short-term loan costs less in total interest, the monthly payment burden is nearly 5x higher, straining cash flow.
Term Loans vs. Lines of Credit
A term loan is best when you know exactly how much you need and what it's for — like buying equipment or funding a specific project. A line of credit is better for ongoing, unpredictable needs like managing cash flow gaps. Term loans typically have lower interest rates than lines of credit because the lender knows the exact amount and timeline. However, you pay interest on the full amount from day one, whereas a LOC only charges interest on what you draw.
Pros & Cons
Pros
- Predictable fixed payments for easy budgeting
- Lower rates than revolving credit products
- Available in large amounts ($500K-$5M+)
- Builds business credit history
- Fixed rates protect against rate increases
Cons
- Less flexible than a line of credit
- Full interest from day one on entire amount
- Prepayment penalties on some loans
- Requires reapplication for additional funds
- Longer approval process for bank loans
Key Terms to Know
Best For
- One-time large purchases (equipment, vehicles, renovation)
- Businesses wanting predictable monthly payments
- Established companies with strong financials
- Borrowers who prefer fixed rates and fixed timelines