Thirty-eight percent of small employer firms applied for a loan, line of credit or cash advance in the past 12 months, according to the Federal Reserve’s Small Business Credit Survey.
Those loans add up, with the U.S. Small Business Administration guaranteeing about $45 billion in 7(a) and 504 loans to 85,000 small businesses in fiscal 2025, the agency’s highest totals ever.
Make no mistake, business term loans are the bedrock foundation of small business financing. A business term loan is a fixed sum of cash that a business borrows from a bank or lender and repays with interest over a specified period. To get a business term loan, a company usually completes and submits an application to the lender, including financial documents, and may need to offer collateral in some cases.
From there, the lender conducts a credit check and vets the business’s ability to repay the loan. If approved, an online lender can fund a term loan in as little as 24 to 48 hours; bank and SBA term loans usually take weeks.
Like any financing product, a business loan offers both opportunity and risk for U.S. companies. Weigh these financing factors, good or bad, before taking out a business term loan.
When a Term Loan Is the Right Tool
A term loan is the right tool when you know exactly what you’re spending the money on and the benefit will play out over a defined period. “For example, equipment, a fit-out, an acquisition, or refinancing more expensive debt would all be good candidates for a term loan,” Andrea Reynolds, co-founder at Swoop, an online funding platform, told SBG Funding.
If the expense is a one-off with a clear return horizon, business leaders will likely want the discipline of fixed repayments matched to that clear end goal, not a revolving facility that can drift. “A line of credit is better suited to fluctuating working capital needs, such as smoothing out seasonal gaps or covering short-term timing mismatches between invoicing and payment,” Reynolds noted.
Reynolds’s rule of thumb for founders is this: “If you can point to what the money buys and roughly when it pays off, that’s a term loan,” she said. “If you can’t say exactly when you’ll repay it because the need is ongoing, that’s a line of credit.”
With a business term loan, you borrow a specific amount for a specific purpose and pay it back on a schedule you can plan around.
“Put it this way,” Dr. Lynda Barnes, owner of Chayil Capital Solutions, a business loan broker with a network of more than 50 lending partners, told SBG. “If a business owner comes to me needing $150,000 for a delivery truck fleet, that’s a term loan conversation. If they’re not sure how much they’ll need month to month, that’s a line of credit conversation.”
For a side-by-side look at the two, see term loan vs. line of credit, and for the other options, types of business loans.
Pros of a Business Term Loan
Business decision makers may wonder how fixed payments, longer repayment periods, and potentially lower borrowing costs can help a business plan and manage cash flow. The key, financial experts say, is in predictability.
“Predictability is everything,” Josh Katz, CPA and founder of Universal Tax Professionals, told SBG. “With a fixed monthly payment, you’ll know exactly how much to expect, and you won’t have to worry about your rate jumping or your credit line being frozen. Longer terms also reduce monthly payments and free up cash for day-to-day operations, five or ten years.”
Cons of a Business Term Loan
Business owners and CEOs also may wonder when fixed payments, personal guarantees, collateral requirements, or taking on too much debt create more problems than the financing solves.
“It’s all about cash flow risk,” Katz said. “That fixed payment will not stop if business slows, and you can’t stop it like you can with a line of credit.”
In addition, term loans may include prepayment penalties, meaning paying off the loan early will trigger a penalty. “That can be a significant problem for businesses that grow faster than anticipated,” Katz added.
Business leaders should also know that fixed payments are a strength until revenue dips. “Then they become a fixed obligation regardless of how trading is going, which is where I see businesses get into trouble,” Reynolds noted.
Personal guarantees are another area to look at closely. “If the loan is secured against personal assets or requires a guarantee, a downturn in the business can have consequences well beyond the company itself,” Reynolds said. “Collateral requirements can also tie up assets you might need for other purposes. And simply borrowing more than the business can service is an absolute no-no, because it’s too easy to focus on what a loan enables and underestimate the ongoing repayment burden once you’re several months in. The financing should solve a problem, not create a new, harder one.”
Business Term Loan Pros and Cons at a Glance
| Pro | Con | |
|---|---|---|
| Payments | Fixed, so you know exactly what’s due and can plan cash flow | Due every period, even when revenue slows |
| Term | Longer terms lower each payment and free up cash | You’re committed for the full term |
| Cost | Often cheaper than revolving financing for a one-time need | Some loans charge a prepayment penalty if you pay off early |
| Security | A fixed rate won’t jump and the money can’t be frozen | May require collateral or a personal guarantee |
| Purpose | Matches one amount to one purpose with a clear payoff | Borrowing more than the business can service creates a new problem |
Signs You Need a Term Loan, Not Just More Cash
Business owners seeking guidance on business term loans should look for a direct link between the loan and a measurable return.
“Needing equipment that lets you take on more orders, refinancing high-interest debt into a lower fixed rate, expanding into a second location you already have demand for- that’s a need,” Barnes said. “Wanting cash on hand just in case, without a specific plan for it, is usually a sign the business needs a line of credit or better cash flow management, not a term loan.”
The businesses Barnes sees succeeding with term loans can usually tell her, almost to the dollar, what the loan is going to produce for them, “whether that’s added revenue, reduced interest costs, or time saved that translates into money,” she said.
How Much to Borrow and Whether You Can Afford It
The loan amount issue starts with cash flow, and not the amount a business leader hopes to get in a loan.
“I always want to see at least the last six to twelve months of bank statements before we talk numbers, because that tells the real story better than a profit and loss sheet can,” Barnes said.
From there, CEOs and founders should examine their debt service coverage ratio (DSCR) to see whether company cash flow covers your existing debt payments plus the new one with room to spare. DSCR is your operating cash flow divided by your total debt payments for the same period.
“A debt service coverage ratio under 1.0 means you can’t cover your obligations from operations alone, and even 1.25 is cutting it close for most lenders and most owners’ comfort,” Barnes noted.
Businesses looking for a loan should layer in a realistic, not optimistic, projection of what the loan will return, and be honest about how stable your revenue actually is month to month. “If your revenue swings a lot, size the loan and the term conservatively so a slow month doesn’t turn into a missed payment,” Barnes added.
Compare Your Options with SBG Funding
SBG Funding’s Small Business Term Loan offers $5,000 to $10 million, repaid in fixed weekly or monthly payments over 6 to 48 months, with no prepayment penalty and no collateral required. Funds can arrive in as little as 24 hours.
SBG Funding is a direct provider of revenue-based financing and a marketplace offering a broad range of funding solutions through an extensive network of lenders. One application shows you what you qualify for across those options, and applying doesn’t involve a hard credit pull.
Get Started Today:
- Fill out our online application.
- Speak with a funding specialist to compare your offers.
- Submit your documents and receive funding quickly.
Typical Requirements:
- Four months of bank statements
- Minimum FICO score of 500, six months in business, and $150,000 in annual revenue
FAQs
It depends on what the money is for. A term loan fits a one-time purchase or project with a clear payoff, such as equipment, a buildout or refinancing. A line of credit fits needs that come and go, such as seasonal gaps or waiting on invoices. See [term loan vs. line of credit](https://sbgfunding.com/resources/term-loan-vs-line-of-credit/) for a full comparison.
Some do, so ask before you sign. A prepayment penalty is a fee for paying the balance off early, which can hurt a business that grows faster than planned. SBG Funding’s [Small Business Term Loan](https://sbgfunding.com/business-financing/small-business-term-loan/) has no prepayment penalty.
It varies by lender. Banks and SBA lenders usually look for stronger credit, while lenders that weigh bank deposits and revenue work with lower scores. SBG Funding works with scores from 500.
