What is Term Length?

Term length is the period over which you repay a loan. It directly affects your monthly payment amount, total interest paid, and overall loan cost. Business loan terms typically range from a few months to 25 years depending on the loan type and purpose.

How Term Length Affects Payments

Longer terms mean lower monthly payments but more total interest. Shorter terms mean higher payments but less total interest. The right choice depends on your cash flow and business priorities.

Example Comparison

On a $200,000 loan at 8% interest:

The 20-year term has payments less than half of the 5-year term, but you pay nearly five times more in total interest.

Typical Term Lengths by Loan Type

Different financing products have different standard terms:

• Working capital loans: 1-5 years
• Equipment loans: 3-10 years (often matched to equipment life)
• SBA 7(a) loans: Up to 10 years (working capital), 25 years (real estate)
• SBA 504 loans: 10, 20, or 25 years
• Merchant cash advances: 3-18 months
• Lines of credit: Typically 1-2 year terms, renewable

Choosing the Right Term

Consider these factors when selecting your loan term:

• Cash flow: Can you afford higher payments for a shorter term?
• Asset life: Will you still be using the financed asset throughout the term?
• Interest rates: Are rates high now? A shorter term reduces long-term rate exposure
• Growth plans: Will you want flexibility to refinance or expand?
• Total cost: How much extra interest are you willing to pay for lower payments?

Prepayment Flexibility

Taking a longer term for lower payments does not lock you in if you can prepay without penalty. You could take a 10-year term for payment flexibility, then pay it off in 5 years if your business grows faster than expected.

Check prepayment terms before assuming this strategy works. Some loans have prepayment penalties that reduce the benefit of early payoff.