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How do small business loan repayment terms work?
Small business loan repayment terms describe the amount of time borrowers have to repay their loan. The loan term determines how many monthly payments are needed to repay the loan and the amount you’ll have to pay each month.
Small business loan repayment terms vary based on the type of loan, the lender, and the credit worthiness of the borrower.
Of course, the loan term isn’t the only factor to consider. Other aspects of a loan agreement that affect a borrower’s repayment schedule include:
A loan agreement typically refers to the borrower (the individual that took out the loan) and the servicer (the financial institution responsible for the financing process). The servicer is the institution that issues the initial funds and collects payments on the loan.
Servicer
Servicers can be traditional lenders, like banks or credit unions, or they can be alternative lenders or online lenders.
Interest rates
Almost all financing options include an interest rate in the small business loan repayment terms. The interest rate is the cost of the loan. That is, the amount you have to repay on top of the money you borrowed. Interest rates can be fixed, where they stay the same for the whole loan term, or they can be variable, where they fluctuate based on the market rate.
Your interest rate will be based on your credit score, the lender’s policies, and the amount you borrowed. Small business owners with a good credit history are more likely to get lower interest rates than borrowers that have a bad credit score.
Annual percentage rate (APR)
Annual percentage rate, or APR, is the amount borrowers actually pay for the loan over the course of a year. APR is slightly higher than the interest rate because APR includes all fees and costs, including broker fees, closing costs, processing fees, underwriting fees, and document fees.
Prepayment penalty
Some loan agreements include a prepayment penalty, which is a fee charged if you pay off your debt before the end of the small business loan repayment term. Some prepayment penalties also apply if you make extra payments, even if the loan isn’t being paid off in full.
Most prepayment penalties are a percentage of the loan amount and decrease over the term of the loan. If there is a prepayment penalty on a small business loan, it will be included in the loan documents.
Types of business financing options
One of the things that contributes to small business loan repayment terms is the type of financing you use. There are several business financing options available for small business owners.
Choosing the right loan for your business depends on how you will use the money, the amount you need, and the lender you choose. Many small business owners work with alternative lenders, like Biz2Credit, over traditional lenders because they offer more loan programs and can typically offer better repayment terms than traditional banks.
Term loans
A business term loan is a type of business financing where the borrower receives a lump sum of cash upfront and pays the loan back with monthly payments. The lender sets the repayment terms based on your creditworthiness and the amount of the loan.
Term loans can be used for large purchases like buildings, equipment, and vehicles. They are also used for business owners in need of working capital, inventory, payroll funding, or everyday operating expenses.
Advantages of a term loan include a predictable repayment schedule and lower interest rates than other financing options.
Typical repayment terms for small business term loans:
As stated earlier, one of the factors that contribute to the repayment terms of the loan is the loan program or type of business financing secured. There are many different loan options for small business owners. Choosing the right loan for your business needs depends on the purpose of the funds, the amount of money needed, and the lender chosen. Many small business owners choose to work with alternative lenders, like Biz2Credit, over traditional lenders because they offer more loan programs and can typically offer more favorable repayment terms than traditional banks.
Repayment term – 3-36 months for short-term and medium-term loans; up to 10 years for long-term loans (some companies will benefit from longer repayment term)
Loan amount – Up to $500,000
Interest rate – Start at 7.99%, depending on creditworthiness
Funding time – as little as 72 hours
MCA
A merchant cash advance (MCA) isn’t a loan— it’s a financing option you receive a cash advance in exchange for future credit card or debit card sales. The repayment terms for a merchant cash advance are more flexible than most business loan programs because payments are tied directly to your incoming business revenues instead of the way a loan’s amortization schedule requires consistent payments.
So if your business sees a decline in revenue, you may benefit from longer repayment time compared to with a loan. However, it’s also important to note that MCA financing will usually require payments be made more frequently than traditional monthly loan payments. MCA payments are often daily, weekly, or bi-monthly, so that it is easier to track against real revenues generated by the business.
MCAs can be a great financing tool for any small business that does substantial credit card sales or debit card business, like retail stores and restaurants. The financing costs of a merchant cash advance are calculated using a factor rate, not an interest rate. Cash advances offer more flexible eligibility requirements so they are a good fit for entrepreneurs with a poor credit history or no collateral.
Typical repayment terms for merchant cash advances:
Repayment term – no fixed repayment term (tracks business revenues)
Financing amount – Up to $500,000 or greater
Factor rate – Start at 1.1
Funding time – as little as one business day
Invoice Factoring and Invoice Financing
Invoice financing and invoice factoring are types of business lending that use the business’s accounts receivables as collateral for a cash advance. Sometimes people use these terms interchangeably, but invoice factoring and invoice financing are actually different funding programs.
Invoice factoring works when a business sells its unpaid invoices to a factoring company, which then collects on the invoice. With invoice financing, the unpaid invoices still act as collateral, but the burden of collection falls on the business. Similar to a merchant cash advance, invoice factoring and financing are expensive means of securing capital, so they are best for borrowers that have exhausted other cost-effective options.
Typical repayment terms for invoice financing and invoice factoring:
Repayment term – not predetermined, usually 30 to 90 days
Loan amount – Up to 100% of the unpaid invoice balances
Financing fees – Processing fee of 3-5%, plus a factoring fee of 1 – 2%
Funding time – 24 – 72 hours
Government-backed financing
Some loan programs offer a guarantee from the government, which reduces the risk for the lender and improves a borrower’s odds of getting approved and having a lower interest rate and down payment.
SBA loans
SBA loans are a type of business financing where the loan amount is partially backed by the U.S. Small Business Administration. SBA loans can be used for startups, operating expenses, franchise financing, large purchases, expansion, and debt refinancing.
Some advantages of SBA loans are lower interest rates, lower down payments, and longer repayment terms. There are several SBA loan programs, but some of the most common are listed below.
SBA 7(a) Loan – SBA 7(a) loans are the most common SBA loan program for small business owners and approve borrowers for loans up to $5 million. The eligibility requirements include three years of business income tax returns, a real estate schedule, and two years of personal tax returns for business owners.
SBA 504 loan – 504 loans are good for entrepreneurs looking for long-term, fixed-rate financing to purchase or maintain major fixed assets. The SBA works with Certified Development Companies (CDCs) to approve these loans for for-profit U.S. companies with an average net income of less than $5 million. 504 loan funds can be approved for up to $5 million for a single project or up to $16.5 million for certain energy projects.
SBA Microloans – Microloans provide certain small business owners and nonprofit childcare businesses with loans up to $50,000 to cover startup costs or expansion costs. The Microloans are issued through pre-approved lenders that ultimately determine the interest rates and repayment terms. The maximum term for an SBA Microloan is six years.
Typical repayment terms for SBA loans:
Repayment term – 3 – 25 years, depending on the program
Loan amount – Up to $5 million, depending on the program
Interest rates – Base rate (usually Prime rate), plus 2.25% to 4.75% for 7(a) loans
Funding time – 30 – 90 days
Revolving credit options
Revolving credit is a type of financing where the borrower is approved for a maximum credit line and then can withdraw funds and make payments repeatedly within the credit limit and repayment terms.
Business credit card
Business credit cards can be a great financing tool for small business owners. They work like personal credit cards but using business credit cards will not affect an individual’s personal credit report. Advantages of a business credit card include the opportunity to build better credit history and keep business expenses separate from personal finances.
Typical repayment terms for business credit cards:
Repayment term – Open-ended, and reviewed annually
Loan amount – Maximum credit line
Interest rates – Varies depending on credit score, typically starting at 15%
Funding time – Upon approval
Business lines of credit
A business line of credit allows you to be approved for a predetermined credit amount, then draw on that credit line similar to how you might use a credit card. Business lines of credit are a popular financing tool for entrepreneurs that are interested in growing an established business credit score because they are easier to get than traditional business loans.
Repayment of a line of credit can be tricky, especially if you use it often. This is because each time you use your line of credit (known as a ‘draw’) you are starting a new financing transaction. These each have their own terms and conditions, including repayment rules. If you are thinking about using a line of credit for financing, make sure you read the repayment rules carefully. It’s also important to understand that lines of credit can be callable in some cases, which means the line servicer would have the right to demand full repayment of all outstanding draws from that line.
Typical repayment terms for business lines of credit:
Repayment term – up to five years
Amount – up to $250,000
Interest rates – 10 – 99%, depending on creditworthiness
Funding time – 1 – 3 business days
What are good repayment terms?
It’s impossible to classify repayment terms as either good or bad because their value depends on your business’s unique circumstances. Repayment periods are dependent on the type of loan, the lender, the use of the funds, the borrower’s credit history, the business’s annual revenues, and the amount of the loan.
When shopping for the best small business financing option, repayment terms are one of the most important factors to consider because they affect how long you will be paying on the debt.
Borrowers that have better credit scores have more negotiating power when it comes to repayment terms, but any individual can ask for better small business loan terms during the application process.
Shorter repayment terms may benefit your small business if:
You own a startup company or are a new business owner and expect annual revenues to significantly increase in the next 12 – 24 months.
You’re interested in using short-term business loans to improve your business credit score.
Your business needs a one-time influx of cash to purchase inventory in bulk or launch a new marketing campaign.
If your loan agreement has a high interest rate, paying the loan off early will save you money.
You own a startup company or are a new business owner and expect annual revenues to significantly increase in the next 12 – 24 months.
You’re interested in using short-term business loans to improve your business credit score.
Your business needs a one-time influx of cash to purchase inventory in bulk or launch a new marketing campaign.
If your loan agreement has a high interest rate, paying the loan off early will save you money.
Longer repayment terms may benefit your small business if:
Cash flow is a concern, and your business would benefit from a smaller monthly payment.
The loan was used to make a large purchase, like with equipment financing or commercial real estate loans.
You plan to refinance the loan in the future when market conditions or the business has established more credit history.
Conclusion
Repayment terms tell a borrower how many payments will be required to pay off their debt, so it is important to understand what typical loan terms look like before applying for financing. Loan terms depend on the type of loan, the lender, the amount of loan, and the borrower’s creditworthiness.
The best business loan for your business is one that has repayment terms that fit your business’s short-term and long-term financial goals. To explore different financing options and find the right repayment terms, reach out to Biz2Credit today. Marie Bibum worked with the experts at Biz2Credit to get approved for a small business loan that helped her keep operations going at her Washington D.C. pharmacy.
What is the average repayment period on a small business loan? That average terms for a small business loan are 3-36 months for short to medium term loans, and up to 10 years for longer loans. How are small business loans repaid? Small business term loans are repaid through monthly payments that last for the life of the loan. How much is the monthly payment for a $100k business loan? The payment amount will vary depending on the interest rate you receive and the length of the term. A high interest rate and a short-term loan will have higher monthly payment amounts than a longer term or a lower interest rate. What happens if I can’t pay back my small business loan? If you can’t pay back your small business loan, the lender may seize any collateral that was used to secure the loan or may take legal action. Regardless, it will damage your business’s credit and reputation. Do you have to pay back SBA loans? Yes! SBA loans are backed by the Small Business Administration up to a certain percentage of the loan amount to encourage banks to issue these loans, but business owners are still required to pay the loan back fully with interest.
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