Business Term Loans: How They Work and How to Qualify

A business term loan gives you a lump sum up front that you repay, with interest, on a fixed schedule over a set period. It's the most traditional form of business financing and works well when you know exactly how much you need and what it's for.

How a term loan works

• You receive the full loan amount at once
• You repay in regular installments, usually monthly, sometimes weekly
• Each payment covers interest plus part of the principal
• The loan ends when the balance is paid off, on a date set at the start

Short-term vs. long-term business loans

• Short-term loans: often repaid within about 3 to 24 months. Easier to qualify for and quicker to process, but usually more expensive.
• Medium-term loans: roughly 2 to 5 years, a common fit for growth projects and equipment.
• Long-term loans, including SBA 7(a): can run 10 years or more, with lower payments but stricter requirements and more paperwork.

What business term loans are used for

• Buying equipment, vehicles or technology
• Expanding to a new location or renovating
• Hiring ahead of a large contract
• Refinancing more expensive debt
• Buying inventory in bulk

What lenders look at

• Time in business: many lenders look for at least one to two years
• Annual revenue and steady cash flow to cover the payment
• Personal and business credit history
• Existing debt and how much of your cash flow it already uses
• Collateral or a personal guarantee, depending on the lender and amount

What a term loan costs

Cost depends on the lender, your credit, the term and the amount. Look past the interest rate to the APR, which includes fees such as origination charges, and to the total you'll repay over the life of the loan. Ask whether there's a prepayment penalty if you pay the loan off early. Rates and terms vary by lender, and nothing is final until a lender reviews your application.

Term loan vs. line of credit vs. merchant cash advance

• Term loan: a fixed amount for a defined purpose, with predictable payments
• Line of credit: draw only what you need, when you need it, and pay interest on what you use; better for ongoing or uneven expenses
• Merchant cash advance: an advance against future sales, easier to qualify for but usually more expensive, with daily or weekly collections

How to prepare your application

• Recent business bank statements, often the last three to six months
• Business tax returns and financial statements, especially for larger amounts
• Your EIN and business formation documents
• A clear plan for how you'll use the funds

Use our business loan calculator to estimate payments before you apply. With GoSwiftFund, you can compare commercial loan and line of credit options with a soft inquiry that won't affect your credit score.