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What Is Small Business Term Loans? Pros And Cons Of Small Business Term Loans

What Is Small Business Term Loans? Pros And Cons Of Small Business Term Loans

small business term loans

Small business pursuers often need loans at the start of their venture. A lump sum of money is not easy to come by unless you have an asset you can sell. Loans are the last resort for many in such cases.

Small business term loans are a type of loan for many small businesses as working capital. If you have a small business and want to take a loan, this article is for you.

This article is a detailed guide to small business term loans.

What Is A Small Business Term Loans?

Small business term loans mean – a bank or a lender pays a lump sum of money to a business startup, and the business has to repay that money within a limited period. The startup business requiring the loan has to repay the money weekly, quarterly, or monthly basis.

Such loans usually meet all the needs a small business may have for gathering a startup capital. However, depending on the loan period, the interest rates may vary.

Term Loans Key Takeaways:
  • The bank gives the business a lump sum of money.

  • The business has to repay the money within a pre-scheduled date.

  •  A business may repay the money in weekly, monthly, or quarterly installments. Since the money is repaid in installments, the loan is also called an installment loan.

  • The interest rate for the loan may vary based on the period of the loan.

Types Of Small Business Term Loans

Types Of Small Business Term Loans

Small businesses looking for working capital must know the different terms of the loans before taking them. There are three different terms for these loans. For instance –

1. Short Term Loans

Short-term loans usually have a term of 1 year or less. The online lenders lend these loans. They can be very flexible about the qualifications. These loans are very fast to fund, and they are usually expensive.

2. Medium-Term Loans 

Banks, credit unions, and online lenders offer medium-term loans. These loans have a repayment tenure of around five years. These loans are slower to fund than short-term loans, and they are much more affordable.

3. Long term Loans

The long term loans require lots of qualifications of the borrowers, and they are slower to fund. The repayment tenure of these loans is more than 5 years. The period may reach up to 25 years. Traditional lenders like banks and credit unions offer these loans if they have very minimal interest rates.

Read Also: What Is Small Business Line Of Credit? Pros And Cons Of Small Business Line Of Credit

Small Business Term Loans Criteria

When you need to apply for a term loan, you have to meet the criteria set by the lender/ the banks. Here are some of the criteria

  • credit scores
  • Time in the business
  • Collaterals
  • P&L or the statement by the bank to prove your revenue.

How Does Small Business Term Loans Work?

How Does Small Business Term Loans Work

Just as I mentioned above, a small business term loan by a lender gives a business huge funding in return for timely payment. The payment schedule varies based on the business type and payment term.

These loans are available from banks, credit unions, and several online lenders. Credit unions and banks usually offer ideal rates and terms. But they also require the top qualifications. The amount of funding available from the lenders is higher, but they are more expensive and often offer smaller terms. Bank loans are slow to fund, but online lenders may offer more flexibility and faster funding.

Pros And Cons Of Small Business Term Loans

pros & cons of small business loan

There are pros and cons to these types of loans. Before taking these loans, you must check their pros and cons. These will help you with more accurate decision-making.


  • Borrowers have a set payment structure, period, and terms. This structure helps the borrowers to make their financial plans.
  • A vast range of businesses can benefit from these loans.
  • Online lenders fund you quickly if you need instant funding.
  • The long term loans help to fund larger investments.
  • Long-term loans charge minimum interest and are affordable.


Frequently Asked Questions (FAQs):

Here are some popularly asked questions about small business term loans. For more queries, you can follow the questions and their answers below:

1. What Are The 3 Types Of Term Loans?

There are three types of small business loans. Here are the types –

1. The long term small business loans
2. Medium-term small business loans
3. Short term small business loans

2. What Is The Average Term For A Business Loan?

If a business takes a short-term loan, the term may be around one year to 18 months. If a business takes a medium-term small business loan, then repayment tenure is around 5 years. When the loan is a long-term loan, the repayment period may be within 25 years.

3. Are Interest Rates Higher For Long-Term Loans?

Small business owners with a tight budget can benefit from small-term business loans. The repayment terms are every month, and the interest rates for long-term small business loans are the lowest. However, if you are looking for large funding, these loans are the best options yet. 

4. What Is The Interest Rate On Term Loans?

Different aspects determine the rate of a loan. For example, during the approval of a loan, the lender (bank) judges the principal amount, repayment capacity of the borrower, and type of loan to fix the interest rate. Usually, the interest rate ranges from 12% to 20%.

Bottom Line

As a small business taking small business term loans is a good idea. Small business owners can better plan their financial period with these loans. These loans offer more flexibility when it comes to borrowers’ qualifications. If you take a long-term loan for expensive equipment funding, the low-interest rates will help you.

I hope that you got the information you were looking for regarding term loans for small businesses. If there is any further question, you can let us know in the comment.

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