What are the general terms for small business loans? – Forbes Advisor

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Whether you want to grow your business or need help with short-term cash flow problems, small business loans can help your business grow and succeed. However, it’s important to understand the types of financing available and the associated terms for a small business loan before you apply.

Here’s an overview of standard business loan terms so you can decide which loan is best for you.

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There are many types of small business loans, each with their own terms. These are some of the most common types of small business financing, along with business loan terms you should be aware of:

Term loans

Term loans provide businesses with a set amount of money that borrowers must repay over a set period of time. This type of loan can be useful for companies that need a large amount of money upfront to cover expenses or otherwise invest in the business. Term loans typically have lower interest rates than credit cards or lines of credit and can give businesses some peace of mind knowing they have a certain amount of cash to work with.

  • Repayment terms: Short-term (from three to 24 months); medium term (up to five years); long term (up to 10 years)
  • Loan amounts: $5000 to $1M+
  • Interest rates: 6% to 36%
  • Funding time: 24 hours to several months
  • Qualification Requirements: Requirements vary by lender, but many financial institutions require a minimum credit score of 600, at least $8,000 in monthly income, and that you’ve been in business for six months or more.

SBA loans

Eligible businesses may qualify for loans from the US Small Business Administration (SBA). Borrowed funds can be used for a wide range of purposes, including working capital, debt refinancing, and the purchase of equipment, supplies, or inventory. Low interest rates and long repayment terms make SBA loans more competitive than other small business loans. Likewise, minimum qualification requirements may be more affordable than those imposed on other types of loans.

  • Repayment terms: Up to 25 years
  • Loan amounts: Up to $5 million
  • Interest rates: Prime plus 2.25% to 4.75% on 7(a) loans.
  • Funding time: 30 to 90 days, depending on the credit program
  • Qualification Requirements: Businesses must be profitably operating in the U.S., have reasonable equity capital to invest, and have already used alternative financing resources before applying for an SBA loan. Borrowers must also have a credit score of at least 640, although applicants with scores of 680 or higher are more likely to qualify.

Traditional bank loans

Traditional bank loans are usually offered through banks, credit unions or other lending institutions. These loans are usually used to finance the purchase, expansion or start-up of a business. Depending on the lender, these loans may have lower interest rates than other options. Still, it can be a challenge to qualify — especially for newer businesses.

  • Repayment terms: Three to 10 years
  • Loan amounts: $250,000 to $1 million
  • Interest rates: 3% to 22%
  • Funding time: Two weeks to several months
  • Qualification Requirements: Borrowers generally must have a minimum credit score of 640 or provide collateral, but these requirements vary by institution. Many banks also impose minimum income and time in business requirements.

Business lines of credit

A business line of credit is a type of business financing that allows a business to borrow money as needed. This type of loan is ideal for companies with unpredictable or cyclical costs, as it will allow them to borrow money when needed and then pay it back over time. Because business lines of credit are revolving, business owners can repay and access the funds repeatedly until the loan term is over.

  • Repayment terms: Six months to five years
  • Loan amounts: $1,000 to $250,000
  • Interest rates: 10% to 99%
  • Funding time: From a few days to two weeks
  • Qualification Requirements: Most lenders require borrowers to have a minimum personal credit score of 680, but some impose less stringent requirements. To qualify, a business must also meet minimum revenue requirements (from $10,000 per month to $250,000 per year) and minimum business requirements (often six months to two years).

Microcredits

Microloans are designed for small businesses and entrepreneurs who need small amounts of money to start or develop their business. These loans are offered by the SBA and other community lenders, ranging from $1,000 to $50,000.

SBA loans also offer borrowers more flexible repayment terms and lower interest rates than traditional bank loans or business lines of credit. This makes them an ideal option for small business owners who may not have access to conventional bank loans. However, borrowers cannot use microloans to purchase real estate or pay off existing debts.

  • Repayment terms: Up to six years for SBA microloans
  • Loan amounts: Up to $50,000
  • Interest rates: 6% to 9% for SBA microloans
  • Funding time: 30 to 90 days
  • Qualification Requirements: Businesses must meet general SBA eligibility requirements in addition to credit and credit requirements imposed by the mezzanine lender.

Invoice factoring

Invoice factoring allows business owners to borrow money against the value of their outstanding invoices. This type of loan is ideal for businesses with a large number of invoices due soon, as it allows them to borrow money quickly and easily. Invoice factoring can be a good option for businesses without established credit, as factoring companies typically make lending decisions based on the creditworthiness of business customers.

  • Repayment terms: 30 to 90 days
  • Loan amounts: Up to 100% of the amount of each invoice
  • Interest rates: 3% processing fee, plus a factoring fee of 1% to 2% of the invoice amount
  • Funding time: Only for 24 hours
  • Qualification Requirements: Invoice factoring companies review a business’s financial documents, including accounts receivable, bank statements, and unpaid invoices. These lenders also evaluate the creditworthiness of business customers to assess the level of risk.

Inventory financing

Inventory financing is a type of loan secured by the value of the purchased inventory. Businesses that expect to receive a large flow of orders are best suited for this type of financing, as it allows them to quickly and easily finance the purchase of additional inventory. However, repayment terms are shorter than with other business loans, and interest rates can be high.

  • Repayment terms: Up to a year
  • Loan amounts: 20% to 65% of inventory cost
  • Interest rates: 0% to 80%
  • Funding time: 24 hours to several months
  • Qualification Requirements: To qualify for inventory financing, businesses must sell products or materials and meet minimum time and business requirements (typically six months to one year). Many lenders also set inventory minimums and require businesses to have a well-organized inventory management system.

Equipment financing

Equipment financing allows business owners to borrow money to pay for equipment. The equipment secures the loan, so interest rates are lower than many types of financing. Similarly, the speed of financing can be fast and repayment terms are usually tied to the useful life of the equipment. Equipment financing, however, requires a down payment – usually between 5% and 20% of the purchase price.

  • Repayment terms: Useful life of the equipment (often two to seven years)
  • Loan amounts: Up to 100% of the cost of the equipment
  • Interest rates: 2% to 20%
  • Funding time: 24 hours to several weeks
  • Qualification Requirements: Business owners must have a credit score of at least 600 to qualify for equipment financing. Some lenders also impose operating history requirements.

Commercial cash advance

A merchant cash advance is a type of loan that allows businesses to borrow money against future sales of their business. Loans are often repaid through automatic debits from business credit card sales, making them ideal for companies with strong credit history and high sales volume.

  • Repayment terms: Three to 18 months
  • Loan amounts: Up to $500,000
  • Interest rates: Factor rate from 1.1 to 1.5
  • Funding time: Only for 24 hours
  • Qualification Requirements: In general, businesses must have at least $10,000 in monthly business deposits, but this number varies by lender. Lenders often look at at least three months of credit card processing statements, copies of tax returns from the last year or two, and recent business bank statements.

Summary of business loan terms

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