Calculating Your Business Loan Repayment ScheduleJon Steiert
If your business is looking to expand its operations or start to scale, a long-term business loan is probably your best option. With the benefit of lengthy business loan repayment periods, these loans offer the most in terms of flexibility and ease of access.
On the other hand, short-term loans and microloans also have their share of benefits. Although they boast shorter repayment periods, they are usually offered at lower interest rates and more favorable terms. The question, then, is which loan type best suits your business’s unique needs.
To help you get a grasp on business loans and how to repay them on time, we put together this quick how-to guide to choosing the best business loan and how to schedule your repayments. And don’t worry, we’ll cover all your bases, so you won’t have to worry about missing a payment again.
Business Loans 101
When your business needs to secure funding, you need to weigh all your options. For most startups and entrepreneurs, seeking out a long-term loan is usually the best method which incurs the least amount of debt. However long-term loans leave you on the hook for as long as 25 years to pay back the principal. For this reason, you may want to consider other options.
There is no one-size-fits-all method for securing small business funding. Instead, the terms and conditions of the loan type will vary according to your business’s capacity and needs. Here are some of the main varieties of business loans available:
- SBA loans
- Term loans
- Equipment loans
- Business lines of credit
- Invoice factoring and financing
- Business credit cards
So how does a business loan work? The answer, however, depends on the type of loan or credit in question. Typically, though, business loans are issued by banks or credit unions that pay a lump sum payout which is then repaid with interest over an agreed-upon period.
If you do not have business credit or have bad credit, you can still get approved for a business loan. However, you will probably have to put up collateral or provide a personal guarantee on the loan. If your business defaults on the loan, then the collateral will be eaten by the lender or, if you do a personal guarantee, you will be on the hook to make repayments.
How Much Are You Allowed to Borrow?
Small business loan terms come in all shapes and sizes, with some reaching as high as a million dollars or possibly more depending on your existing capacity and credit history. If your business has the right credentials behind it, your business loan term length will be more flexible, and your credit limit will be higher.
However, even the most established businesses have restraints on the amount of money they can borrow. Below, we’ve listed the credit limits to some of the most popular business loan types:
- SBA Loan: $5 million
- SBA Microloan: $50,000
- Credit Union Loans: $500,000
- Bank Loans: $1+ million
The more qualified your business is regarding creditworthiness, the more it will be approved to borrow. For some funding amounts, it may be a better idea to consider a microloan or a business credit card. More capital-intensive initiatives, however, will be better suited for a bank loan or an SBA loan.
How to Quality for a Long-Term Business Loan
To qualify for a business loan with a favorable term length and credit limit, the applicant should have the following credentials:
- Fair credit score (550+)
- Predictable annual revenues ($100,000+)
- No less than 1 year of business history
For businesses that do not have a credit history, you may have to apply personally rather than through your business. However, applying for an entry-level business credit card can help establish business credit in as little as six months. Once you have a business credit history, you can apply for long-term funding with typical business loan terms.
Long-Term Business Loan Examples
If a long-term business loan meets your business’s needs, you need to exercise discretion before you make up your mind. When you weigh your funding options, you will find that there is no average length of business loans or standard SBA loan length—rather, all loans offer different terms, limits, and caps that have individual benefits and drawbacks.
Below, we’ve outlined some of the best long-term online business loans for companies that need funding for five years or more.
SmartBiz SBA 7(A) Loan
An SBA 7(A) loan offered through SmartBiz boasts a $350 thousand principal over a decade-long term length. Although this SBA loan term length is slightly higher than some competitors’, this allows for a more lenient monthly repayment schedule.
Since the annual percentage rate (APR) on this loan varies between 8.5 and 9.8 percent, it is reasonable to assume that a loan of $200 thousand over a 10-year term would require monthly repayments of approximately $2,500.
This option would be beneficial for those looking to finance an expansion of their business or to fund a major investment (i.e., real estate). This is because the lump sum cash payout is large while still having a reasonably low APR. However, strong financial fundamentals are necessary to apply for this SBA loan.
A Funding Circle loan can provide long-term financing for cash infusions of as high as $500 thousand with an average business loan term of approximately three years. When it comes to APR, you can expect to pay between 7.4 percent and 36 percent on your loan, which is the industry standard for accessible loans of this size.
A loan such as this would be beneficial for small businesses looking to expand their day-to-day operations or find a new way to refinance their existing debt. Best of all, there aren’t any repayment penalties for these loans, which is a saving grace if you happen to miss a payment or two.
Unfortunately, a strong business credit score is required to qualify for a Funding Circle loan (minimum 620), which can exclude some prospective applicants. The upside, however, is that no minimum annual revenue is required to qualify for this loan.
For an SBA loan with a term of five years or less, Lending Club offers attractive options for those in need of up to $300 thousand. The drawback, however, is that the APR can stretch as high as 36 percent, which can make your monthly SBA loan payment exorbitant.
Although Lending Club loans can be approved and deposited within a couple of weeks, 36 percent APR is simply too high for businesses that are just starting. If a small business needs working capital, it may be a better idea to search for short-to-medium-term financing where rates aren’t as high.
Business Loan Repayment Periods
Whenever we’re asked, “how long are small business loans,” or “how long are business loans,” our answer is inevitably the same old line: it depends. That is, it depends on the value of the loan and the term length that you’ve agreed upon with the creditor. Also, your scheduled repayment period will vary depending on the type of loan you’ve taken out.
To help you coordinate a loan repayment schedule, or to give you an idea of a repayment length for a prospective loan you’re considering, we overview each loan category below.
Long-Term Bank Loans
Generally, small business loans offered by banks are medium or long-term, meaning they range between five and ten-year repayment terms. Sadly, the drawback is that many small businesses that are only starting to build credit history will be denied at the door.
If, however, you find that you’re eligible for a long-term loan from a bank or credit union, you can expect repayment terms exceeding ten years if repaid in monthly installments.
A standard SBA loan can come with a repayment term up to 25 years. With interest rates as low as 5 percent, government-backed SBA loans are among the cheapest and most accessible business loans on the market. However, the term length will vary according to the type of SBA loan program you apply for: the SBA CDC/504 loan, a microloan, or an SBA 7(a) loan.
SBA 7(a) Loans
SBA 7(a) loans offer some of the most competitive rates for small businesses that need startup capital or help with debt refinancing. Typically, SBA 7(a) loans for working capital come with a seven-year repayment term, whereas real estate loans can have maturity terms of up to 25 years. In other words, SBA business loan repayment periods depend on what the funds are intended to be used for.
When it comes to microloans, which are valued at $50 thousand or less, you can expect to pay back the principal in six years or less. However, many small-value loans can be paid off in under a year.
In summary, your small business loan repayment schedule will depend on several factors: what the funds will be used for, where you’ve acquired the loan, and how much the loan is worth. Depending on your business’s needs, you can expect to repay your business loan over a period of five to 25 years.