Securing funding is a crucial step for many businesses, and understanding business loan terms is essential before taking on debt. One important factor to consider is the loan term, which refers to the length of time you have to repay the borrowed money. 

While there’s an “average” business loan term, it’s important to remember this is a broad range that can vary significantly based on the type of loan you’re applying for and the circumstances surrounding your business and its finances. 

Let’s explore average business loan terms for different loan types, along with the key factors that can influence the specific terms you’re offered.

Average Business Loan Terms by Loan Type

The world of business loans offers a variety of options, each catering to different financing needs. The type of loan you choose will significantly impact the average term you can expect.

A. Short-Term Loans (1-3 years)

These loans are ideal for covering short-term financial needs within your business cycle. They often come with faster approval times and less stringent requirements compared to long-term loans. Here are some common examples:

  • Lines of Credit: Offering flexible access to funds up to a set limit, lines of credit function similarly to a credit card. Repayment is typically required on a monthly basis, with interest charged only on the amount used. Average terms for lines of credit can range from 6 to 18 months.
  • Invoice Factoring: This financing option allows you to sell your outstanding invoices to a factoring company at a discount. You receive immediate cash, while the factoring company collects payment from your customers. Invoice factoring terms are usually short, typically lasting up to one year.

B. Mid-Term Loans (3-10 years)

Mid-term loans provide a good balance between repayment flexibility and access to larger sums of money. They’re suitable for financing equipment purchases, business expansions, or covering operational costs over a longer period. Here’s a breakdown of some popular mid-term loan options:

  • Term Loans: Offered by banks and online lenders, term loans provide a lump sum of cash repaid in fixed monthly installments over a set term. The average term length for term loans can vary from 3 to 5 years for smaller loans to up to 10 years for larger ones.
  • SBA Loans: Backed by the Small Business Administration (SBA), these government-guaranteed loans offer attractive interest rates and longer repayment terms. Popular SBA loan programs for mid-term financing include the 7(a) Loan Program, typically lasting 7 to 10 years depending on the use of funds.

C. Long-Term Loans (10+ years)

Long-term loans are best suited for significant capital expenditures, such as real estate purchases or major infrastructure upgrades. These loans come with the longest repayment terms but also typically involve the most stringent qualification requirements and potentially higher interest rates. Here are a couple of examples of long-term loan options:

  • SBA 504 Loans: Designed specifically to finance the purchase of major fixed assets, SBA 504 loans offer longer repayment terms compared to other SBA options. The average term for an SBA 504 loan can stretch from 10 to 25 years.
  • Commercial Mortgages: If your business requires real estate purchases, commercial mortgages provide long-term financing with repayment terms ranging from 15 to 25 years or even longer.

Factors Affecting Business Loan Terms

While there are benchmark average terms for different loan types, it’s important to understand that several factors can influence the specific terms you’re offered by a lender. Here are some key variables that play a role:

  • Loan Type: As covered, the type of loan you choose inherently impacts the repayment term. Short-term loans naturally have shorter terms, while long-term loans cater to larger financing needs with extended repayment periods.
  • Creditworthiness of the Borrower: Your business credit score is a significant factor lenders consider when determining loan terms. A strong credit history signifies lower risk for the lender, often translating into longer repayment terms and potentially lower interest rates. Conversely, a weaker credit score might lead to shorter loan terms and potentially higher interest rates to offset the increased risk for the lender.
  • Loan Amount: The amount of money you borrow can also influence the term. Larger loan sums typically come with longer repayment periods to allow for manageable monthly payments. However, this doesn’t always hold true, and lenders may require stricter qualifications or higher interest rates for larger loans.
  • Lender: Different lenders have varying risk tolerances and loan offerings. Banks might offer more traditional loan structures with established terms, while online lenders may have more flexible options with shorter or longer terms depending on their specific programs.

By understanding these factors and how they interact, you can better anticipate the type of terms you might be offered and be prepared to negotiate effectively with potential lenders.

Apply for a Business Loan Today

Understanding business loan terms is crucial for making informed financial decisions for your business. While “average” terms exist for various loan types, it’s important to remember these are just a starting point. The specific terms you’re offered will depend on several factors, including your chosen loan type, creditworthiness, loan amount, and the lender itself.

North One is committed to helping small business owners get the right loan at the right rate, for the right term. Account holders can apply for a business line of credit or business term loan in as little as two minutes, with decisions made in as little as 24 hours! Apply today with no impact on your credit score and see what type of business loan term you qualify for:

Frequently Asked Questions (FAQs)

Still have questions about business loan rates? Here are some of the most commonly asked questions about interest rates for business loans (and their answers). 

What is the typical term on a business loan?

The typical term depends on the loan type, but generally ranges from short-term (under 3 years) for lines of credit to long-term (10+ years) for SBA 504 loans used for real estate.

What is the average length of an SBA loan?

SBA loans offer a variety of repayment terms depending on the program. Most SBA loans fall under the mid-term category (3-10 years), with the 7(a) loan program averaging 7-10 years and the 504 loan program stretching from 10 to 25 years.