The length of a business loan all depends on three main factors. The type of loan you’ve chosen, the amount of money you’re borrowing, and the lender that you are borrowing from.
Even if you opt for a short term loan or a long term loan, these three factors will still determine the actual term size.
Normally a business loan will be a type of long term loan. This is because they tend to have a low monthly payment, which is great for when you are keeping an eye on your cash flow.
Unlike personal loans, you wouldn’t be using “pay day” loans to finance your business, otherwise, you’ll get stuck in a debt loop that you can’t get out of. That being said, short term loans don’t have to be quick grabs.
Short term loans have to be paid back rather quickly, which is great if you know that a big payout is coming soon, but if you can’t afford the large monthly sums, then you should steer clear.
When it comes down to it, there are around 7 different types of loans, each with its own typical term expectancy. Have a look at the guide below to see which loan suits you best, and how long the loan typically takes to pay off.
Business Lines of Credit: 6 Months - 12 Months on Average
A business line of credit is a loan that kind of acts like a bar tab. There is a set amount of money that you can borrow up to, and you have instant access to that money.
You don’t have to spend it all at once, and you are expected to spend small amounts of money when you are using it. Usually, business lines of credit are used for day to day costs.
If you manage to pay some of the loan back before the end of the term, you can then use that amount again later.
You only have to pay the whole amount back at the end of the term, although it is advised that you know how long it will take you to pay it back so that you’re not late.
Because of this “use it when you want it” mentality, business lines of credit don’t tend to have long terms.
Equipment Loans: 1 Year - 5 Years on Average
You might want an equipment loan to buy a fryer for your restaurant, or a van for your moving company.
Equipment loans are the type of loan which helps you buy expensive equipment that your company needs. Because of this, the loan doesn’t normally last longer than the expected lifetime for the equipment itself.
On average, that life span is 1 to 5 years, and that translates to the loan being 1 to 5 years long too.
Bankers could offer you these types of loans, but they are also common with the manufactory as well!
Invoice Financing: 1 Month - 3 Months on Average
Invoice financing, or invoice factoring, is a short term loan to help you cover your bills, wages, and expenses whilst you are waiting for your customers to pay you.
For example, if you have a mortgage on a home you are renting it out, then you might have an invoice loan to cover you for the cross over period where you are waiting for the tenant to pay you, but the mortgage broker needs the payment too.
These types of loans only last for 3 months or less, and this is because both you and the lender know that your money is coming soon. It just might not come in time for your other payments.
Microloans: 1 Year - 6 Years on Average
Microloans or Microlendings are never valued higher than $50,000. As you can tell from the name, they are expected to be a small loan. Because of this, they are usually given to people and not businesses.
Microloans are often given to people who have bad credit ratings, this means that the loans are seen as risky. This is why microloans (also known as payday loans), have ridiculously high interest rates.
Microloans will normally get the borrower in a lot of trouble if they are not careful, so they aren’t recommended unless you have no other choice.
SBA Loans: 5 Years - 25 Years on Average
SBA loans, also known as Small Business Administration loans, are partially guaranteed by the US government. This makes the loan less risky for the lender as the government will bail out part of the loan if you don’t pay the repayments.
It is also less expensive for the borrower as the loan will have a maximum interest rate that the lender can’t push past. This means your monthly payments cannot get more expensive than the cap.
Because the government wants your business to do well, they tend to have longer terms to give you the time you need to pay back the loan.
This big gap between 5 and 25 years is because SBA loans can be split up into types: SBA 7(a) loans and SBA 504 loans.
The 7(a) is very competitive meaning it will have low interest rates and is meant to be used to buy equipment and build up your capital.
On average they have a term of 5 -10 years.
The SBA 504, however, has fixed interest rates, meaning they cannot be changed even if inflation rises or falls. This is a great loan for borrowers who want to know exactly how much they need to repay each month.
These types of loans are usually used to buy a large amount of development. Because of this SBA 504 loans tend to have a term of 10, 20, or 25 years.
Short Term Loans - 3 Months to 18 Months
Short term loans have short terms, that's clear, but that doesn’t mean they are smaller loans.
You can borrow $500,000 with a short term loan and get the funds quickly too! The reason for them being so quick is because of that short term time.
The pay off for the lender is when it comes to interest rates. Short term loans have extremely high interest rates and they expect frequent payments.
You might be requested for weekly or even daily payments, towards lowering your loan.
You should only be using a short term loan if you know you can pay it off quickly, otherwise, you should opt for the more manageable loan terms.
Term Loans: 1 Year - 10 Years
In this instant, term loans are referring to medium term loans and long term loans. Short term loans would normally fit into this category too, but for this list they are separate. That is because of their massively different contacts.
Medium term loans and long term loans are more similar in their contracts and their length is less to do with interest rates and more to do with the amount of money that is being borrowed.
Medium term loans often need to be repaid after 1- 5 years. Whereas long term loans have an average term of 7 to 10 years. You can get medium and long term loans through banks and credit unions, and they tend to be a safe loan option.
If you really want to know the true average of business loan terms, then we just add this all together.
Using the figure above I can estimate that the average loan term for a business is 3 or 4 years. You have to remember, however, that each loan is different, and so is each lender.
To really know how long your loan’s term should be, ask a couple of lenders and see what they average out to be.
Keep in mind that the interest rate and the loan amount will make these terms vary! But if you choose a reputable lender and keep on top of your payments, then you should be in safe hands.