Whether you are an established business borrowing for growth, a new business looking for seed funding, your main concern when borrowing money is probably, “Can I afford it?” The repayment period will be a major factor in determining your payment amount, and you may also be wondering how long you can get a business loan for.
What is the longest term for a business loan?
The longest terms for small business loans are often associated with SBA loans. The SBA Economic Injury Disaster Loan (EIDL), which many small business owners obtained during the COVID pandemic crisis, for example, has a very generous thirty-year repayment term.
In addition, there are other loans guaranteed by the US Small Business Administration that can last over a decade. SBA 7 (a) loans for real estate and equipment, for example, can have repayment terms of up to 25 years.
Commercial real estate loans available from lenders may have longer amortization periods; for example 20 years. But the balance will often be due within a shorter period of 5 to 10 years. Since the amortization period is longer than the repayment period, a lump sum payment (or lump sum payment) will generally be required for any unpaid balance at the end of the amortization period.
Small business credit cards also offer long term financing, but at a price. If you make the minimum payment on a credit card, you can often stretch payments for decades, but the high interest rate means you’ll be paying back multiple times the original amount borrowed. (Some business credit cards offer short-term financing at a low interest rate, usually in the form of a 0% introductory rate or a welcome offer.)
How long do banks give business loans?
Bank loans often require repayment within 1-3 years for short-term loans and 3-10 years for long-term loans, although the products and terms vary by lender.
The loan repayment schedule will depend on several factors, including:
- Type of loan
- Use of funds
- Qualifications of the borrower
- Lender policies
Traditional lenders like banks and credit unions often have specific lending policies and procedures. However, well-qualified borrowers, especially those with a well-established track record, may be able to negotiate more favorable terms.
It should also be noted that financial institutions often have fairly strict eligibility requirements, including good credit scores, at least two years in business, and solid income documented by bank statements and / or tax returns. (This can also apply to SBA loans, which are made by these lenders.)
How long do alternative lenders provide business loans?
Alternative lenders often provide short term loans. They often give loans quickly or consider loans to businesses that do not qualify for more traditional financing. The types of commercial loans offered by other lenders include cash advances to merchants (or cash advances to businesses), short-term loans for working capital and term loans, invoice factoring, financing of accounts receivable and commercial lines of credit. Alternative business finance may be available through online lenders, small business loan markets, or loan brokers.
These financing options generally have fairly short repayment periods: 6 to 18 months is common. But it may be possible to get long term loans with 2-5 year repayment periods from other lenders.
What is the maximum amount for an SME loan?
Most lenders are up front on the maximum amount they will lend to borrowers. Lenders will sometimes clearly state on their website, “loan amount up to $ 500,000” or “up to $ 1 million”, for example. And some loan programs have clear loan limits. The SBA’s microcredit program, for example, caps loan amounts at $ 50,000.
However, this does not mean that your business will be able to borrow any amount up to the maximum limit. The lender will determine your loan amount based on a number of factors, including:
- Company annual turnover / cash flow
- Credit history (business and / or personal credit)
- Time in business
- Collateral (for secured loans)
The stronger the credentials of the business, the more likely you are to qualify for a larger loan amount. In particular, lenders want to make sure you can afford the payments and will often base the loan amount on average monthly income or other financial data.
How to Choose the Right Business Loan Term
If you are looking for financing for small businesses, you can assume that a longer repayment term is better. The more time you have to repay the loan, the lower your monthly payments, which improves your cash flow.
But longer loan repayments also mean you’ll likely pay more interest over time, which can make it harder to earn a positive return on your investment for the money you’ve borrowed.
- How much should I borrow?
- Why am I borrowing?
- What type of return on investment can I expect from the loan?
Ideally, you want to match the type of small business loan to the needs of the business. When you are making a large investment in equipment that you will use for decades to come, long term business loans are a good idea. But if you are buying inventory to turn around quickly, a short-term loan is appropriate.
The risk of choosing a loan that is too short is that you won’t have time to earn enough income to pay it off. And the risk of choosing a loan that is too long term is that you will overpay over time and your business will pay off a loan long after the benefit of that financing ends. Choosing the right loan can help your business capitalize on borrowed capital successfully.
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