Navigating business financing can be overwhelming, especially with options like term loans, SBA loans, and lines of credit. This guide breaks down each option under U.S. lending standards, helping you make an informed choice tailored to your business goals.

What is a Term Loan?

A term loan provides a lump sum of capital repaid over a fixed period (1–25 years) with fixed or variable interest rates. Ideal for one-time investments like equipment purchases or expansion, term loans are categorized as:

  • Short-term loans: <1 year (e.g., emergency expenses).
  • Medium-term loans: 1–5 years (e.g., inventory financing).
  • Long-term loans: 5+ years (e.g., commercial real estate).

Pros: Predictable payments, competitive rates, structured timelines.
Cons: Collateral often required, prepayment penalties may apply.

Types of Business Loans: How They Compare to Term Loans

1. Business Line of Credit

A revolving credit line allowing withdrawals up to a limit. Interest accrues only on the borrowed amount.

  • Best For: Managing cash flow gaps or unexpected costs.
  • Term Loan Comparison: Less suited for large investments but offers unmatched flexibility.
  • Interest Rates: Typically higher than term loans (7–25% APR).

2. SBA Loans

Government-backed loans offering low rates (e.g., SBA 7(a) loans cap at 11.5% APR) and extended terms (up to 25 years).

  • Best For: Established businesses with strong credit (FICO 680+).
  • Term Loan Comparison: Longer approval times (30–90 days) but superior terms.

3. Merchant Cash Advance (MCA)

Upfront cash in exchange for a percentage of daily credit card sales.

  • Best For: Urgent needs with poor credit.
  • Term Loan Comparison: Higher costs (factor rates up to 1.5) and daily repayments risk cash flow.

4. Equipment Financing

Secured loan using equipment as collateral.

  • Best For: Machinery/technology purchases.
  • Term Loan Comparison: Similar structure but limited to asset use.

Key Factors to Compare Loan Options

Use this checklist to align loans with your needs:

Factor Term Loans Line of Credit SBA Loans
Loan Amount Up to $5M Up to $500K Up to $5M
Interest Rates 6–30% APR 10–25% APR 6–13% APR
Repayment Term 1–25 years 6 months–5 years 5–25 years
Funding Speed 1–14 days 1–7 days 30–90 days
Credit Score Minimum 600+ 620+ 680+

Term Loan Interest Rates: What to Expect in 2024

Rates vary by lender, creditworthiness, and loan term:

  • Short-term: 8–25% APR
  • Long-term: 6–12% APR
    Tip: Credit unions and online lenders often offer more competitive rates than traditional banks.

Term Loan vs. Line of Credit: When to Choose Which

      1. Choose a Term Loan If:

  • You need a large, upfront sum.
  • Your project has predictable costs (e.g., renovation)

     2. Choose a Line of Credit If:

  • Expenses are recurring or unpredictable (e.g., seasonal inventory).

Best Loan Options for Small Businesses

1. Term Loans: Bank of America (low rates), On Deck (fast funding).

2. SBA Loans: Wells Fargo, CDC Small Business Finance.

3. Lines of Credit: Bluevine (no monthly fees), Kabbage.

 

FAQs: Addressing Top User Queries

Q: Can startups qualify for term loans?

A: Challenging but possible with strong revenue or collateral. Consider SBA microloans (<$50K) as an alternative.

Q: How does a term loan affect my credit score?

A: Initial hard inquiry may dip your score, but consistent repayments improve it.

Q: Are there unsecured term loans?

A: Yes, but expect higher rates (15–30% APR) and shorter terms.

Q: What’s the average SBA loan approval time?

A: 60–90 days; work with an SBA Preferred Lender for faster processing.

 

Conclusion: Matching Your Needs to the Right Loan

Term loans excel for long-term investments, while lines of credit or MCAs suit short-term gaps. For low-cost, government-backed options, prioritize SBA loans if eligible.

Need Personalized Guidance? The Accredited Group specializes in aligning U.S. businesses with optimal financing. Contact us today for a free consultation.