Business Term Loans: The Complete Guide to Getting a Lump Sum for Your Business

A business term loan is one of the most straightforward financing options available: you borrow a lump sum of money and repay it over a set period with interest. Unlike lines of credit or invoice financing, term loans give you immediate access to capital that you repay on a predictable schedule.

Term loans remain the backbone of business financing because they offer certainty. You know exactly how much you owe, what your payments will be, and when the loan will be paid off. This predictability makes them ideal for major investments where you need substantial capital upfront.

How Business Term Loans Work

When you receive a term loan, the lender deposits the full loan amount into your business account. You then make regular payments (usually monthly) that include both principal and interest. Most term loans use amortization, meaning your payment stays the same but the proportion going to principal versus interest shifts over time.

For example, if you borrow $100,000 at 8% over 5 years, your monthly payment would be approximately $2,028. In your first payment, about $667 goes to interest and $1,361 to principal. By your final payment, only $13 goes to interest while $2,015 pays down principal.

Short-Term vs. Long-Term Loans

Term loans generally fall into two categories based on repayment period, and the distinction matters more than you might think.

• Short-term loans (3-18 months): Higher payments, faster payoff, often daily or weekly payment schedules. Best for quick capital needs, seasonal inventory, or bridge financing. Rates typically range from 15-80% APR depending on the lender.
• Medium-term loans (1-5 years): Monthly payments, moderate rates. Good for equipment, expansion, or working capital. Rates typically range from 7-30% APR.
• Long-term loans (5-25 years): Lower monthly payments, substantial total interest paid. Best for real estate, major equipment, or acquisitions. Rates typically range from 5-13% APR.

Typical Rates by Lender Type

Where you borrow matters enormously. The same business might qualify for vastly different rates depending on the lender type.

Qualification Requirements

Every lender evaluates risk differently, but most consider these core factors:

• Credit score: Personal credit (and business credit if established) helps lenders assess repayment likelihood. Banks typically want 680+, while online lenders may accept 500+.
• Time in business: Most traditional lenders require 2+ years. Online lenders often accept 6-12 months. SBA microloans work for startups.
• Annual revenue: Lenders want to see you generate enough income to cover loan payments. Debt service coverage ratio (DSCR) of 1.25x or higher is standard.
• Collateral: Secured loans offer better rates. Real estate, equipment, inventory, and accounts receivable can all serve as collateral.
• Industry: Some industries (restaurants, construction, cannabis) face higher scrutiny due to failure rates or legal concerns.

Common Use Cases for Term Loans

Term loans work best when you need a specific amount for a defined purpose:

• Equipment purchases: Machines, vehicles, technology systems
• Real estate acquisition: Commercial property, land
• Business expansion: New locations, market entry
• Acquisitions: Buying another business or franchise
• Debt consolidation: Combining multiple high-rate debts
• Major renovations: Facility improvements, remodeling
• Working capital: Inventory buildup, hiring, marketing campaigns

Bank vs. SBA vs. Online Lender: Which Is Right for You?

Choosing the right lender depends on your qualifications, timeline, and how much you're willing to pay for convenience.

The Bottom Line

Business term loans provide predictable, lump-sum financing that works well for major investments and planned expenses. The key is matching your qualifications and needs to the right lender type. A business with excellent credit and time to wait should pursue bank financing. A business needing speed or facing qualification challenges may find online lenders worthwhile despite higher costs.

Before applying anywhere, know your numbers: credit score, annual revenue, time in business, and how much you can afford to pay monthly. This preparation helps you target the right lenders and negotiate from a position of knowledge.