The length of a business loan often changes based on the usage of the funds. It should be tailored to the borrower whenever possible to make sure that their cash flow can cover payments over the term without defaulting. The longer the term length, the lower the monthly payment is on most loans, which frees up cash flow.
A retail shop taking a small business loan in the form of inventory financing to stock up on in-demand items should be able to sell off the inventory quickly, making it possible to pay back the financing promptly.
Meanwhile, a farmer may need to take out an agriculture business loan in the form of equipment financing to purchase the machinery necessary to grow crops, harvest them, sell them, and then wait for accounts receivable to clear. If the total cost of the equipment or machinery takes multiple seasons to recoup, having a loan with a longer payback period reduces the monthly costs and usually the interest rate as well, making it better for this particular situation than a short-term financing solution.
Below, you’ll find some of the most popular types of business loans with their average term lengths and the reasons why. Please keep in mind that every lender is different, so while one may offer short-term business loans for 2 years, a different lender may require a 3-year minimum if you want the same interest rate. In the breakdown below, we also share a bit of information about what each business loan is used for, so you can decide which one may be right for your situation.
|
Type of Business Loan |
Best Used For |
Larger or Smaller Loan Amounts |
Average Length |
|
Business bridge loan |
Immediate purchases, timely opportunities, short-term financing gaps while you wait for long-term financing to come in |
Smaller amounts, as they are used for immediate and timely purchases |
6 months to one year |
|
Equipment financing |
Purchasing or leasing equipment, vehicles, and machinery |
Both small and large amounts ranging between $50,000 and $500,000 depending on the type of equipment, the lender, and the amount needed |
2 to 7 years depending on the type of equipment, machinery, or vehicle |
|
Inventory financing |
Restocking inventory, stocking up on inventory before a busy season, replacing inventory that got damaged |
Both small and large amounts ranging between $5,000 and $500,000 depending on the type of inventory and the lender |
3 months to 1 year |
|
SBA 7(a) |
Any medium- to long-term investment in a small business including operations and growth opportunities |
Small to large business loans, all the way up to $5,000,000 |
On average, 5 – 10 years, with the exception for real estate purchases, which can be extended to up to 25 years |
|
SBA microloan |
Replacing or buying small equipment like computers and software systems, managing day-to-day operations, launching small expansions, and upgrading an existing business |
Small loan sizes up to $50,000 |
3 months to 7 years |
|
Working capital loan |
Covering any operational, day-to-day, or recurring monthly expenses like payroll, equipment maintenance, utilities, hiring and training staff, etc. |
Small business loans meant to cover short-term costs, offering small and large amounts ranging between $5,000 and $500,000 depending on the use case and the lender
|
6 months to 2 years |
Business Bridge Loans
Typical length: 6 months – 1 year
Typical range: $250,000 – $5,000,000
What it’s used for:
Business bridge loans tend to be short-term, with some being paid back as quickly as 6 months as they’re for immediate and time-sensitive needs. When the amount is above $500,000, it could be called a commercial bridge loan. The most common uses include a deposit on a large real estate purchase, a bid on a business acquisition, or coverage for any gap in cash flow that needs to be “bridged” quickly. Business owners usually use business bridge loans when they have a larger loan already approved and waiting to be funded, which will cover the full cost of their investment. So, the goal is usually to pay bridge loans back quickly or over a short term.
Equipment Financing
Typical length: 2 – 7 years
Typical range: $50,000 – $500,000
What it’s used for:
Equipment financing is paid back over a period long enough for the equipment to drive enough revenue to cover the cost, plus interest. So, terms can range from 2 to 7 years. It is used to purchase or lease new and used equipment, machinery, and vehicles, and the equipment itself may be used as collateral, making it easier for the borrower to get approved. It is not for repairs or upgrades, only for purchasing and leasing.
Inventory Financing
Typical length: 3 months to 1 year
Typical range: $5,000 to $500,000
What it’s used for:
Inventory financing is used to stock, replace, or chase inventory for a business and is normally paid back in less than a year. It is most commonly used to stock up before a busy season, like the holidays for a retailer or a gift shop in a tourist town, or to chase inventory when demand is higher than expected and product availability is scarce. In situations where a natural disaster or a power outage occurs and ruins perishables, and an emergency business loan is not needed, inventory loans can also be used to replace and restock.
SBA 7(a)
Typical length: 5 years to 25 years
Typical range: $50,000 – $5,000,000
What it’s used for:
SBA 7(a) loans are some of the most flexible types of small business loans as they can be used for renovating a lobby, purchasing a competitor, advertising, hiring staff, and just about any other business purpose. While most lenders will require the payment period to be between 5 and 10 years, the term can be extended to 25 years for some real estate purchases. The SBA has restrictions on paying the loan off early, also known as making curtailment payments, and you may be required to cover a prepayment penalty charge if you want to clear the debt.
SBA Microloan
Typical length: 3 months to 7 years
Typical range: $5,000 to $50,000
What it’s used for:
SBA microloans are flexible financing that can be used for almost any small purchase up to $50,000. Because the amount borrowed is lower, the payback period can sometimes be shorter than the SBA 7(a). There is a maximum payback period of 7 years set by the SBA for these loans.
The smaller amount borrowed makes it easier to pay back, but make sure to pay attention to term requirements or prepayment penalties before signing the agreement.
Working Capital Loan
Typical length: 6 months to 2 years
Typical range: $30,000 – $500,000
What it’s used for:
Working capital loans are short-term business loans that are used to cover day-to-day and operational expenses when there is a gap in cash flow. The gap could be having funds tied up in a recent investment or large purchase, a delay in accounts receivable, or a short-term slump in sales.
If machinery needs repairs, working capital loans are the financing solution instead of equipment financing, and the same goes for upgrading software, covering payroll, and paying monthly expenses like utilities and rent. The shorter payback period is common because the cash flow gaps the loan is designed to cover are usually short term as well.
The length of the business loan will depend on multiple factors, including any government requirements, the use of the financing, and how long the borrowing company needs to extend the term in order for their cash flow to be able to cover payments. If you have any questions about financing for your company, click here and fill out our no-risk and no-commitment financing inquiry form. A Funding Specialist will look at your information and come back with a financing solution that meets your business needs.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
