What Is a Business Term Loan and How Does It Work?
Business term loans can be among the least expensive forms of business financing and are good for making long-term investments in your business.
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A business term loan is a lump sum of money that’s repaid over a set period of time, plus interest. Term loans can be used for multiple purposes such as real estate, debt consolidation or working capital.
Because they typically come with fixed interest rates and set monthly payments, term loans can be one of the most affordable types of small business loans. They are offered through banks, credit unions, online lenders and other non-bank, alternative lenders.
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Business term loan basics
Is a term loan right for your business?
You can borrow large amounts of money to finance expansion or growth.
Long repayment terms can make big investments more affordable.
Repaying term loans on time may help you build business credit.
Loans from online lenders can be approved and funded quickly, usually within a few days to a week.
Qualification requirements for online lenders may be looser than those for traditional banks.
Less flexibility than business lines of credit, as payments begin immediately after funding.
Shorter term loans may carry high costs and frequent repayments, although this depends on the lender.
Collateral — an asset, such as equipment or real estate that the lender can sell if you can’t make payments — may be required.
Recurring repayments may constrict cash flow if you borrow too much or have inconsistent sales.
How do business term loans work?
Business term loans can range in size from $5,000 to $5 million, with annual percentage rates (APRs) falling anywhere from 6% to 99%. These loans often have fixed interest rates, but you may find some lenders charge a variable rate that changes based on the market. Additional fees, like closing and origination fees, may vary based on the lender and the type of term loan.
Like mortgages and car loans, small-business term loans usually follow an amortization schedule. This means most of your payment goes toward paying interest at the beginning of the loan, and more toward principal near the end. Term loans can often be repaid early to save on interest, although lenders may charge a prepayment penalty.
You can use a business term loan for a variety of purposes, including:
Purchasing equipment or inventory.
Renovating an existing location or expanding to a new location.
Buying commercial real estate.
Hiring new employees.
Working capital.
Refinancing existing debt.
Types of business term loans
Type of term loan | The good | The bad |
|---|---|---|
Short-term loans (1 to 2 years) |
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Medium-term loans (2 to 5 years) |
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Long-term loans (5+ years) |
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Best business term loans
| Product | Max loan amount | Min. credit score | Learn more |
|---|---|---|---|
 Fora Financial - Online term loan NerdWallet Rating Apply now with Fundera by NerdWallet | $1,500,000 | 570 | Apply now with Fundera by NerdWallet |
 SBA Express loan Apply now with Fundera by NerdWallet | $500,000 | 650 | Apply now with Fundera by NerdWallet |
 OnDeck - Online term loan NerdWallet Rating Apply now with Fundera by NerdWallet | $250,000 | 625 | Apply now with Fundera by NerdWallet |
SBA 7(a) loan Apply now with Fundera by NerdWallet | $5,000,000 | 650 | Apply now with Fundera by NerdWallet |
 National Funding - Online term loan NerdWallet Rating Apply now with Fundera by NerdWallet | $500,000 | 600 | Apply now with Fundera by NerdWallet |
 iBusiness Funding - Online term loan NerdWallet Rating Apply now with Fundera by NerdWallet | $500,000 | 660 | Apply now with Fundera by NerdWallet |
 Bank of America Business Advantage Unsecured Term Loan NerdWallet Rating | Undisclosed | 700 | |
 Accion Opportunity Fund Small Business Working Capital Loan NerdWallet Rating | $250,000 | 600 |
Minimum qualifications for a business term loan
How to apply for a business term loan
If you think a term loan is right for your financing needs, you can follow these steps to apply:
Evaluate your qualifications. Check your credit score, annual revenue and time in business. These are three of the key business loan requirements lenders will look at to determine whether you qualify for financing.
Compare lenders. Decide which type of lender is best for your needs. Online lenders may have more flexible qualifications and faster funding times, but the trade off is typically higher interest rates. Banks, credit unions and SBA lenders can offer more affordable rates, but their products can be harder to qualify for.
Prepare your documentation. Once you’ve decided which lender is right for you, prepare the documentation for your application. Commonly required documents include business financial statements, business and personal tax returns, business and personal bank statements, and business legal documents. (Some online lenders require only minimal documentation to apply.) As much as you can, keep up-to-date financial records and meet with your business accountant on a regular basis.
Complete and submit the application. Follow the lender’s instructions to complete the application and provide all necessary documents. Take advantage of any assistance the lender offers to guide you through the application process.
» Use our guide for more information on how to apply for a small-business loan.
Alternatives to business term loans
If you’re unsure whether a term loan is right for your business, or you’re having a hard time qualifying for one, consider these alternatives:
Business lines of credit. Instead of borrowing one lump sum of cash and paying it off over a set period, business lines of credit allow you to continue to borrow funds on an as-needed basis, up to a predetermined amount. Once you repay the initial amount borrowed, you can take more money out. This gives business owners a bit more flexibility, especially when covering short-term or unexpected needs.
Invoice factoring or invoice financing. If you run a business-to-business company and have cash tied up in unpaid invoices, you may be able to leverage those invoices for an advance of cash. While invoice financing allows you to use invoices as collateral for a business loan, invoice factoring involves selling your invoices to a factoring company at a discount. These tend to be best for business owners who need money quickly and can’t qualify for more traditional financing, like a term loan or line of credit.
Merchant cash advances. If you can’t qualify for other types of business financing and have consistent credit card sales, a merchant cash advance (MCA) may be an option. MCAs serve as an advance of money, which you repay using a percentage of future debit or credit card sales. NerdWallet recommends exhausting all other financing options before turning to MCAs, since they’re expensive and not federally regulated.
» MORE: Business loan vs. line of credit
NerdWallet’s review process evaluates and rates small-business loan products from traditional banks and online lenders. We collect over 30 data points on each lender using company websites and public documents. We may also go through a lender’s initial application flow and reach out to company representatives. NerdWallet writers and editors conduct a full fact check and update annually, but also make updates throughout the year as necessary.
Our star ratings award points to lenders that offer small-business friendly features, including:
Transparency of rates and terms.
Flexible payment options.
Fast funding times.
Accessible customer service.
Reporting of payments to business credit bureaus.
Responsible lending practices.
We weigh these factors based on our assessment of which are the most important to small-business owners and how meaningfully they impact borrowers’ experiences.
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