What Is a Business Term Loan? A Guide for Small Business Owners
When you’re building a business, access to capital can be the key to unlocking growth, but it’s not always within immediate reach. To avoid disrupting cash flow during critical growth periods, many business owners turn to financing solutions that allow them to scale without derailing operations or giving up equity.
One of the most reliable and straightforward of these solutions is a business term loan. But what exactly is a business term loan? And how can business owners use one strategically to fuel sustainable growth?
In this guide, we’ll break down the ins and outs of term loans—from how they work and when to use them, to the common pitfalls to avoid. You’ll also learn how to leverage Backd’s Business Term Loan* product to help your business reach its next milestone, without compromising on control or cash flow.
Understanding Business Term Loans
What is a Business Term Loan?
A business term loan is a type of business financing in which a company borrows a lump sum of money and repays it over a fixed period, typically through regular payments that include both the original loan amount (known as the principal) and interest.
The repayment terms are clearly defined and agreed upon upfront, often ranging from one to ten years, though some term loans can extend as long as 25 years in specific cases. Term loans can be either:
Secured (backed by collateral such as equipment or property), or
Unsecured (not tied to specific assets, but often based on the borrower’s creditworthiness and financials).
A key factor to consider when evaluating business loan options is whether the loan features a fixed or variable interest rate. Both options impact the total cost of capital and the predictability of repayments.
Fixed Interest Rate
A fixed interest rate is exactly what the name implies: it will stay the same for the entire duration of the loan. This means:
Predictable Payments: Business owners’ monthly (or weekly) repayment amount won’t change over time.
Increased Stability: Business owners are protected in the case that interest rates rise in the broader market.
Easier Budgeting: Fixed rates make it easier for business owners to plan around cash flow and avoid unwanted surprises later on down the road.
Fixed rates are a popular choice for business owners who value consistency and want to avoid potential fluctuations in borrowing costs.
Variable Interest Rate
A variable interest rate will be subject to change over time, dependent on the current market conditions. These rates are usually tied to a benchmark rate like the prime rate or SOFR, which may be adjusted at regular intervals (ex., monthly or quarterly). This means:
Potential Savings: If market rates fall, then business owners could see a reduction in interest rates for their payments.
Increased Risk: On the flip side, if market rates rise, then business owners could face significant increases in rates, resulting in more expensive capital..
Less Predictability: More volatility and change can make it extremely difficult to plan long-term cash flow for repayment amounts.
Variable rates can be extremely attractive in a low-rate environment, but they carry a significantly higher amount of risk, especially for term loans with a longer term.
How do Business Term Loans work?
Once business owners have built a plan and decided that a term loan is the right fit for the business, there are a few key steps to follow. Here’s a play-by-play of how the process typically works:
Step 1: Application and Approval
To secure a business term loan, an application will need to be submitted through a lender, either a traditional bank or an alternative provider like Backd. The lender will review the business’s financial profile, which may include:
Time in business
Monthly revenue
Credit score
Bank statements and tax returns
If approved, the business will receive a loan offer outlining the approved amount, interest rate, repayment schedule, and total cost of capital.
Step 2: Receiving the Funds
Once the offer has been accepted, the funds are deposited directly into the business bank account as a lump sum. With online lenders, this can happen as quickly as 24 to 72 hours.
Step 3: Repayment Schedule
Repayments begin shortly after disbursement and continue throughout the loan term. Each payment includes:
A portion of the principal (the original loan amount), and
A portion of the interest (the cost of borrowing).
Some lenders may also include additional fees—such as origination fees or prepayment penalties—so it’s important to carefully review the contract and ask questions before signing.
Step 4: End of the Term
Once the loan is fully paid off, including interest and any applicable fees, the loan is considered complete. At this point, many business owners choose to reapply for additional funding to support their next phase of growth.
Key Features of Business Term Loans
Like any financial tool or product, it is crucial to understand the core features that define a term loan. These features can include:
Lump-Sum Funding
Business Term loans usually provide a one-time, upfront lump sum that businesses can use for a variety of purposes. This can include, but is not limited to, purchasing equipment, hiring staff, or fueling expansion.
It’s worth noting that while most traditional term loans are structured as a lump-sum disbursement, this may not always be the case. In some instances, especially with larger loans or specific use cases (like construction or project-based financing), lenders may offer draw schedules, which see funds released in stages based on milestones or invoices.
Fixed Repayment Schedule
When taking out a term loan, repayments are made on a predetermined schedule– typically weekly or monthly— through the term. Each payment includes both the principal and the interest.
Defined Loan Term
Loan terms are fixed, usually ranging from 1 to 10 years, though some may extend longer depending on the lender and the use case.
Interest Rate Options
As previously mentioned, term loans will come with either:
Fixed Rates: Remains consistent through the life of the loan, making budgeting easier.
Variable rates: Can fluctuate based on market conditions, potentially lowering or raising repayment amounts over time.
Secured or Unsecured
Like many business financing products, term loans can either be:
Secured: In which they require collateral, such as property, vehicles, or equipment that the lender can seize in the case of a default.
Unsecured: In which they do not require collateral, but may offer higher rates or a stricter credit box for qualification.
Personal Guarantees
Some lenders may require a personal guarantee– a legal promise that the business owner will personally repay the loan if the business cannot. This puts the borrower’s personal assets on the line and increases the lender’s confidence in repayment. It’s worth noting that both secured and unsecured lenders may still need a personal guarantee.
If business owners are signing a personal guarantee, it is crucial that they make sure they fully understand the risk and it could mean for their personal finances.
Qualification Requirements
To determine eligibility, lenders will typically review:
Time in business
Monthly or annual revenue
Credit score (both personal and business, if applicable)
Financial records such as bank statements and tax returns
Prepayment Terms
Some term loans allow early repayment without penalties; however, some lenders may build their term loans with prepayment fees. The reason for this is to account for interest revenue loss as well as upfront cost recovery incurred during underwriting and origination. It is always crucial to review the terms closely to understand potential extra costs and factor that into the overall cost of capital.
Types of Term Loans for Small Businesses
While the basic structure of a term loan, a lump sum repaid over a set period, stays consistent, there are several variations depending on the borrower’s needs and the lender’s offering. Below is a rundown of some of the most common types of term loans.
Short-Term Loans
These loans typically have a term length of less than 12-18 months and are best used for covering temporary cash flow gaps, emergencies, or short-term projects that will have a relatively quick return on investment in order to help with repayment. Short-term loans offer a quick funding source and are usually easier to qualify for, with less interest paid total due to the shorter term length. However, the interest rates can be higher, and the payment schedule may be more frequent due to the brief time frame.
Medium-Term Loans
Medium-term loans will typically have a term length of 1 to 5 years and are best utilized for equipment purchases, marketing investments, or growth projects that have a clear and definitive ROI. They are usually accompanied by lower monthly payments compared to short-term loans, as well as more manageable terms. With this comes the tradeoff that they are harder to qualify for, are often secured, and can feature a higher total interest over time.
Long-Term Loans
Long-term loans can vary anywhere between a term length of 5 to 10 years; however, sometimes they can extend out even longer. They are best utilized for major capital investments, such as facility upgrades, real estate, or mergers and acquisitions. Again, they come with lower monthly payment terms due to the extended terms, with the trade-off being that they are more difficult to qualify for and, again, are often secured with higher total interest over time.
Equipment Financing
While equipment financing may not immediately scream “term-loan,” it technically does constitute falling into the category, even though it is only specifically used to purchase business equipment. In this instance, the equipment itself often serves as the collateral, and the term length will usually align with the expected life span of the equipment.
SBA Loans (Small Business Administration)
SBA Loans are government-backed term loans that are offered through approved lenders (not directly through the SBA). Popular variations of SBA loans include the SBA 7(a) for general use and the SBA 504 for asset purchases. SBA loans are particularly attractive to small business owners due to their lower interest rates and extended terms, but this comes with the trade-off of a slower approval process and much stricter requirements.
Balloon Loans
Balloon loans are a term loan with a twist. With a balloon loan, instead of paying down the full loan balance gradually over time, the borrower makes smaller payments through the loan term, usually covering just the interest or a small portion of the principal. Then, at the end of the term, a large “balloon” payment is due to pay off the remaining balance all at once. This works best for businesses that are expecting a cash windfall or sale, but it can be extremely risky if cash flow projections don’t go to plan.
Interest-Only Term Loans
With an interest-only term loan, borrowers pay interest only for a set period (for example, the first 6-12 months), then begin to make amortized payments. This can be extremely useful when cash flow is tight early on, but is expected to improve at a later date.
Benefits of Term Loans for Small Businesses
Access to Lump-Sum Capital
Business term loans provide an upfront capital injection of capital, which can be used to cover expenses like purchasing inventory or equipment, expanding operations to a new location, hiring staff or launching a new marketing campaign. This structure gives SMBs immediate buying power to seize growth opportunities or to solve pressing challenges.
Predictable Repayment Schedule
One of the biggest advantages of business term loans is that they are consistent. Borrowers make regular, scheduled payments over a defined period of time, making it easier to budget and forecast, manage cash flow, and avoid surprises. Fixed interest rates make this even more predictable.
Lower Cost of Capital (Compared to Short-Term Options)
For businesses that qualify, term loans usually come with lower interest rates, fewer fees, and longer repayment periods compared to shorter-term financing options like MCAs. This dramatically reduces the total cost of capital, allowing business owners to net more.
Flexible Use of Funds
Unlike some niche loan products, such as equipment or real estate financing, standard term loans are pretty versatile. Business owners can use them to cover working capital, renovations, technology upgrades, seasonal cash flow gaps, or just about anything business-related that they would likely need funding for.
Builds Business Credit
Over time, successfully repaying a term loan can boost business credit scores, which in turn will strengthen business owners’ credit profile for future financing and allow them to increase their borrowing limits over time. This can be particularly helpful for newer businesses that are seeking to build financial credibility.
No Equity Dilution
Unlike committing to a capital raise with investors, term loans should never require business owners to give up ownership or control of their organization. They retain 100% of the business and profits while still getting a funding solution that allows them to grow.
Where to Get a Business Term Loan
When it comes to applying for and accessing a term loan today, business owners have more options than ever before. Some of the common places to secure a term loan include:
Traditional Banks
Traditional banks are often best for established businesses with strong credit and detailed financials. Traditional banks will often offer lower interest rates, longer repayment terms, and try to establish a long-term lasting relationship. Unfortunately, this comes with a slower approval process (sometimes weeks or months), high documentation requirements, and may even require collateral or personal guarantees.
Credit Unions
Credit unions work well for local businesses or members of a specific industry or regional area. They can often offer competitive rates accompanied by personalized services, and may be more willing to have increased flexibility than big banks. However, credit unions are limited by geographic access and tend to have smaller lending limits.
Online Lenders and Fintech Platforms
Due to the rising need for funding in the SMB community, online and alternative lenders, like Backd, have stepped into the arena to help bridge gaps that traditional financing institutions face. Turning to alternative lenders works best for businesses that need fast funding or don't meet strict banking criteria. Applications are usually quick (Backd’s takes just minutes to complete), and funding offers can, in some instances, even be offered the same day. They offer more flexibility in regards to qualification criteria and a streamlined digital experience. This can come at the tradeoff of higher interest rates than traditional lenders, along with shorter terms, in some instances.
SBA Loans and Government Programs
Turning to the SBA for a term loan often works best for businesses that need larger loan amounts and can qualify for federal programs. These loans are partially guaranteed by the SBA and offer competitive terms for those who qualify. Unfortunately, they usually come with a lengthy approval process, significant amounts of paperwork and can include additional fees and conditions.
Is a Term Loan Right for Your Business?
While a business term loan is a powerful financial tool for leveraging growth opportunities, it isn’t a perfect fit for every business or situation. When determining if a term loan is the right option, business owners should weigh the following:
You Need a Large Upfront Sum
If a business is facing a one-time investment, like equipment, expansion, or a marketing push, a term loan provides immediate capital with a clear repayment plan.
You Can Comfortably Manage Regular Repayments
Business term loans come with fixed or scheduled payments, usually weekly or monthly. If the business’s cash flow is strong and consistent, then this structure would be the perfect match.
You Want to Avoid Diluting Equity
Unlike raising funds from investors, a term loan allows business owners to retain 100% ownership of their company while still fueling growth.
You’re Looking to Build Business Credit
Successfully managing a term loan can strengthen a business’s credit profile, making it easier to access larger or more favorable financing down the road.
A Term Loan Might Not Be Ideal If
The business’s revenue is highly seasonal or unpredictable
The business needs flexible access to capital over time (in which case, a line of credit might be better)
The business can’t qualify for competitive terms, and the cost of capital is too high
Ask Yourself:
Do I have a specific use for this capital?
Can I realistically repay this loan without hurting my cash flow?
Will the return on investment from this capital outweigh the cost?
Ready to Secure a Business Term Loan For Your Business?
Business term loans can be a powerful financial tool when used strategically, whether you're investing in new equipment, hiring staff, or expanding to a second location. The key is choosing a loan that aligns with your business goals and cash flow.
At Backd*, we specialize in helping growing businesses access flexible business term loans. With amounts up to $1.5 million, terms up to 24 months, and funding offers provided same day**, our term loan is designed to meet you where you are—so you can focus on building what’s next.
To qualify, your business should meet the following requirements:
1+ years in operation
$100K+ in monthly revenue
650+ personal credit score
Think a business term loan might be the right fit? Apply here to see what’s possible.
*Loans are originated by FinWise Bank, a Utah chartered bank, located in Murray, UT, Member FDIC. **Decisions and funding may take additional time and not be same-day. Additional information may be required. Time to receive funds varies based upon your financial institution's receiving schedule and operating hours.
