Business term loans. Fixed payment, fixed term, no surprises.
The traditional small business loan structure: lump sum up front, fixed monthly payment, fixed term. Competitive rates starting at 8% APR for qualified borrowers, with flexible terms. Funds in 1–3 days online or 2–6 weeks at a bank.
A business term loan is the financing structure most people picture when they imagine "getting a business loan." Lump sum delivered up front. Fixed monthly payment. Fixed term, usually one to five years. The lender amortizes principal and interest across the term so the payment is the same every month. It's a hundred-year-old structure, and for most established businesses with predictable cash flow, it's still the right answer.
When term loans win, lose, or are the only sensible choice
Real businesses we've worked with, names changed. Each shows when a term loan is the right structural fit, the wrong fit, and the situation where it's the only option that makes sense.
$240K equipment purchase, 8 years in business, 720 FICO
A regional dental practice needed to replace two aging CBCT scanners. Quote came in at $238K plus install. Owner had run the practice for 8 years, FICO 723, last two years' tax returns showed $1.4M revenue and 18% net margin. They considered an MCA (could have funded in 48 hours) and an SBA 7(a) (lowest rate, longest underwriting).
The math made the term loan obvious. A 5-year term loan at 11.5% APR meant a $5,250 monthly payment they could absorb easily. Total interest over 5 years: ~$77K. Same deal as an MCA at 1.32 factor would have cost ~$76K of factor cost over a 9-month payback — same dollars, but with cash-flow whiplash. SBA would have been ~$2K cheaper but added 60 days of underwriting they didn't need.
Verdict: term loan was the right choice. Predictable monthly payment, clean financing, no operational disruption.
$80K working capital gap, restaurant, 3 years in business, 640 FICO
A two-location restaurant operator needed $80K to bridge a slow December and February. Three years in business, FICO 640, $2.1M revenue, thin margins. Took a 3-year term loan at 24% APR for $80K. Monthly payment $3,124 for 36 months — $112K total payback.
The problem: by month 8, summer revenue was strong but the fixed monthly payment didn't flex with cash flow. By month 11, they hit a slow week and missed two payments. Default fees added $1,800. They eventually paid it off but the term loan was the wrong structure for cyclical revenue.
Verdict: should have been a line of credit (draw down only what's needed, only for the slow months), not a term loan with rigid amortization.
$400K acquisition, manufacturing rollup, 690 FICO, 6 years in business
A specialty manufacturing operator wanted to acquire a smaller competitor for $385K asset purchase + $35K transition costs. SBA 7(a) was the obvious cheapest option (~10.5% APR), but the seller wanted to close in 30 days — SBA underwriting takes 60-90.
The non-SBA term loan at 13.75% APR funded in 8 business days. Monthly payment $9,150 over 60 months. Total interest: ~$169K. SBA would have saved them $50K in interest, but losing the deal would have cost the entire acquisition opportunity. The 5-year term loan was the only structure that combined the speed they needed with the multi-year amortization the deal required.
Verdict: term loan was the only product that combined speed + size + amortization. Higher rate than SBA was the cost of moving fast.
How term loans work
The mechanics are simple. The lender approves an amount. Funds wire to your business account. The loan amortizes over the agreed term using a standard amortization formula: each monthly payment includes both principal and interest, with the interest portion higher early in the term and the principal portion higher later. By the end of the term, the loan is fully paid off.
Fixed-rate vs variable-rate. Most term loans under $250K offer fixed rates — the rate is set at funding and never changes. Loans above $250K, particularly bank-originated, more often use variable rates tied to WSJ Prime (currently 6.75% as of May 2026) plus a spread. A "Prime + 5%" rate today would be 11.75%. If Prime rises to 7.25%, your rate rises to 12.25%. Variable rates start lower but expose you to rate risk over the loan's life.
Secured vs unsecured. Loans under roughly $250K are typically unsecured but require a personal guarantee — meaning if the business defaults, the lender can pursue your personal assets. Loans above $250K typically require collateral (a UCC blanket lien on business assets) plus the personal guarantee. Real-estate-secured term loans are a subset that price 200–400 basis points cheaper because the collateral is liquid.
Origination fees. Online lenders typically charge 1–6% of the loan amount as an origination fee, deducted from the funds at closing. A $100K loan with a 4% origination fee delivers $96K to your account but you owe interest on the full $100K. Banks rarely charge origination fees but make up for it with longer underwriting and tighter approval criteria. SBA loans cap origination at 2–3.5% (regulated).
Amortization, in plain English
An amortizing loan front-loads interest. On a $100,000 5-year loan at 12% APR, the first month's payment of ~$2,225 includes ~$1,000 of interest and ~$1,225 of principal. By month 30 (the halfway point), the interest portion has dropped to ~$580 and the principal portion has risen to ~$1,645. By the final month, you're paying almost entirely principal. This is normal and identical to how mortgages work.
The implication: prepaying a term loan early in the term saves more interest than prepaying late. Most online term loans don't let you capture this saving (they require "guaranteed interest" or use a "lockbox" structure where total payback is fixed). SBA loans and bank loans typically allow real prepayment with proportional interest savings.
Rates, fees, and true cost (May 2026)
The 8–30% APR range covers a wide spread because term loan pricing is heavily credit-dependent. The table below shows current market ranges by credit tier, based on publicly available lender disclosures and industry-standard market data.
Rate by credit tier (current market)
| Tier | FICO | Years in business | Typical APR | Origination fee |
|---|---|---|---|---|
| Prime (Bank) | 720+ | 3+ years | 8–13% | 0–1% |
| SBA-eligible | 680+ | 2+ years | 9.75–13.25% | 2–3.5% |
| Strong online | 680+ | 2+ years | 11–18% | 1–3% |
| Mid-tier online | 650–719 | 2+ years | 14–22% | 2–5% |
| Sub-prime | 600–649 | 1+ year | 20–30% | 3–6% |
| Specialty / rebuilt credit | 580–599 | 6+ months | 28–40% | 5–8% |
Source: industry rate ranges based on publicly reported market data and SBA program guidance
Example: $200K loan at competitive 13.5% APR over 4 years
Below is an example calculation using industry-standard rates to illustrate how APR plays out in practice.
| Component | Detail | Amount |
|---|---|---|
| Loan amount | Approved principal | $200,000 |
| Origination fee | 2.5% deducted at closing | $5,000 |
| Net to your account | What actually wires | $195,000 |
| Monthly payment | 48-month amortization | $5,432 |
| Total payments over term | 48 × monthly | $260,756 |
| Total interest | Total payments − loan | $60,756 |
| Total cost | Interest + origination | $65,756 |
| True effective APR | Including origination | ~14.4% |
The 13.5% stated APR becomes a 14.4% true APR once the 2.5% origination fee is amortized into the cost. This is why "stated APR" comparisons across lenders can mislead — always compute true APR including fees before signing.
The fee landscape
- Origination fee (1–6% of loan): the most common term loan fee, deducted from the funded amount at closing.
- Underwriting / processing fee ($395–$1,500 flat): occasionally charged on top of origination, more common with bank loans.
- Late payment fee ($25–$50 per missed payment, or 5% of payment): triggered on missed or late ACH debits.
- Prepayment penalty (varies widely): SBA 7(a) loans charge a graduated penalty (5%/3%/1%) on the prepaid amount in years 1, 2, and 3 of loans with terms over 15 years. Online term loans often have "guaranteed interest" structures that prevent meaningful prepayment savings.
- Documentation / closing fee ($150–$750): some bank and SBA loans charge separate closing costs.
Who qualifies
Term loan qualification splits cleanly into hard criteria (the lender's automated decline thresholds) and soft factors (variables that move your offer better or worse within the approval band).
Approval thresholds
- Minimum FICO 600 (online) / 680 (bank)
- Time in business 1 yr (online) / 2–3 yr (bank)
- Annual revenue $100K+ (online) / $500K+ (bank)
- No active bankruptcy 2–7 yr lookback
- No outstanding tax liens or active payment plan
- Business bank account 3+ months history
- U.S. registered entity LLC, Corp, Sole Prop
- Personal guarantee from majority owner(s)
What moves your rate
- Higher FICO Better rate
- More years in business Better rate
- Higher revenue / NSF-free banking Better rate
- Industry strength varies, ±100 bps
- Existing lender relationship Better rate
- Collateral (real estate, equipment) Better rate
- Lower debt-to-revenue ratio Better rate
- Profitable last 2 yrs Better rate
The single biggest lever is credit score. The gap between a 670 FICO and a 720 FICO can meaningfully improve your rate — a meaningful difference in total interest paid. If your credit is in the high 600s and you can wait 60 days, working with a credit specialist to push the score above 700 often pays for itself many times over.
Strengths and weaknesses
- Predictable payment. Same dollar amount every month for the life of the loan. No factor-rate gymnastics, no daily holdback, no quarterly true-ups.
- Cheapest unsecured non-SBA option. When you qualify at the prime tier (8–13% APR), you're getting financing at rates competitive with credit cards before promo periods.
- Builds business credit. On-time term loan payments report to D&B and Experian Business, building a tradeline for future cheaper financing.
- Flexible use of funds. Most term loans don't restrict use, so you can deploy across multiple needs (working capital + equipment + marketing + a hire).
- No ongoing relationship maintenance. Once funded, you make payments and the relationship is largely transactional — unlike LOC or factoring relationships.
- Tax-deductible interest. Interest paid on business term loans is deductible as a business expense (consult your accountant).
- Rigid payment doesn't flex. If revenue drops, the payment doesn't. Cyclical or seasonal businesses often suffer here vs. a percentage-based product like MCA or RBF.
- Personal guarantee required. Almost universal. Default puts personal assets at risk — a real consequence, not a paperwork formality.
- Underwriting can be slow. Bank term loans take 2–6 weeks. SBA 30–90 days. If you need money this week, term loans aren't the right tool.
- Origination fees obscure true cost. A "12% APR" loan with a 4% origination fee actually costs ~13.5% effective APR. Comparison shopping requires computing true APR yourself.
- Prepayment may not save money. Online term loans frequently use "guaranteed interest" structures that don't pass interest savings to early payers. Read prepayment clauses carefully.
- Front-loaded interest. Standard amortization means more of your early payments go to interest. Prepaying late in the term doesn't save much.
When term loans are right and wrong
Best fits
- One-time large purchases — equipment, vehicles, real estate, business acquisitions, leasehold improvements. The amortization matches the asset's useful life.
- Refinancing higher-cost debt — consolidating MCAs, credit card debt, or expensive working capital lines into a single fixed-payment instrument. Often saves 30–50% on monthly debt service.
- Predictable revenue businesses — subscriptions, recurring contracts, healthcare, professional services. Fixed payment matches predictable cash inflow.
- Building business credit — first formal financing for a 2–3 year-old business that wants a tradeline reporting to business credit bureaus.
- Mid-six-figure capital needs — the sweet spot is roughly $50K–$500K. Below that, credit cards or LOCs work better. Above that, SBA or commercial term loans are usually a better fit.
- Tax-strategy plays — financing equipment in a high-revenue year to capture Section 179 depreciation while preserving cash.
Worst fits
- Cyclical / seasonal cash flow — restaurants, landscaping, retail with strong seasonal swings. Fixed payments hammer slow seasons. LOC or RBF flex better.
- Speculative use cases — "I'll borrow $200K and try a new product line." If the product flops, the term loan still demands payment for 4 more years. Use equity or smaller test capital.
- Sub-600 FICO — rates above 30% APR rarely make economic sense unless the use case has clear >50% IRR. Better to fix credit first.
- Pre-revenue startups — term loans require revenue history. New businesses should look at startup-specific products, business credit cards, or SBA Microloans.
- Need within 48 hours — even fastest online term loans take 1–3 days. Genuine emergencies fit MCA or LOC if pre-approved.
- Working capital that comes and goes — if you'll borrow $50K, repay it, then need it again 4 months later, an LOC is structurally cheaper than serial term loans.
Application timeline and documents
The application timeline varies dramatically by lender type. Here's what to expect across the spectrum.
Application submitted
Online application: 8–15 minutes. Bank application: 30–90 minutes including initial document upload.
Soft-pull credit check + bank statement analysis
Lender pulls your credit (soft pull, no FICO impact for the application stage) and runs ML analysis on uploaded bank statements. Most "instant pre-qualifications" come from this step.
Pre-qualification offer
For online lenders: a conditional offer with rate range, amount, and term. For banks: a request for additional documentation (tax returns, P&L, balance sheet, debt schedule).
Underwriting + verification
Lender verifies revenue claims via bank statements, validates business registration, runs UCC search for existing liens. Hard credit pull happens here for final approval.
Final approval + commitment letter
For online lenders: typically 3–5 days. For bank loans: 7–14 days. SBA: 21–45 days. Final commitment letter has the actual rate, term, and conditions.
Closing + funding
Sign loan documents (electronic for online, in-person or notarized for bank/SBA). UCC filing if collateralized. Funds wire to your business account: same day for online, 1–3 days for bank, up to 30 days for SBA after final approval.
Documents you'll need
- Last 6 months of business bank statements. Lenders verify revenue claims and look for NSFs, overdrafts, and existing debt service.
- Last 2 years of business tax returns. Required for any loan over $50K from most lenders.
- Last 2 years of personal tax returns. Required for personal guarantee underwriting on essentially all term loans.
- Year-to-date P&L and balance sheet. Required for bank loans, often optional for online lenders under $250K.
- Debt schedule. List of all current business debt: lender, balance, monthly payment, interest rate, maturity date. Required for any loan over $100K.
- Business formation documents. Articles of incorporation, EIN letter, operating agreement (LLC) or bylaws (Corp).
- Photo ID for each majority owner (50%+ stake).
- Voided business check for ACH setup.
- Use of funds statement. Often required for SBA, sometimes optional for online lenders.
- Industry-specific docs — franchise agreement (franchises), liquor license (restaurants), DOT number (trucking), etc.
Common mistakes and red flags
- Comparing stated APR instead of true APR. A 12% APR with 4% origination is more expensive than a 13% APR with no origination, but the former looks cheaper at first glance. Always compute true APR including all fees.
- Stacking term loans. Taking a second term loan while the first is active is heavily penalized: lenders will see existing UCC liens and either decline or charge premium rates for second-position lien financing.
- Personal guarantee blindness. Borrowers often dismiss the personal guarantee as boilerplate. It isn't. If your business defaults, the lender can seize personal assets, garnish wages (where legal), and levy bank accounts. Sign with awareness, not casualness.
- Using term loans for working capital cycles. If you'll repay and re-borrow, a line of credit is structurally cheaper. Term loans charge interest on the full balance from day one even if you only need part of the funds at first.
- Missing the prepayment clause. "Guaranteed interest" or "minimum interest" clauses prevent meaningful prepayment savings. Read this clause before signing — it determines whether prepaying actually saves you money or not.
- Overborrowing to "have a buffer." Interest accrues on the full loan amount whether you use the funds or not. If you need $150K, borrow $150K, not $200K "to be safe."
- Ignoring the UCC filing. Most term loans over $50K file a UCC-1 lien against your business assets. This blocks you from financing those same assets elsewhere until the loan is satisfied. Plan accordingly.
- Not shopping the deal. Term loan rates vary by 300–500 basis points across lenders for the same borrower. Submitting one application across multiple lenders (broker channel) often surfaces materially better terms than going direct.
Current rate environment (May 2026)
Term loan pricing tracks broader interest rate conditions with a lag. Here's where we are in the cycle.
Federal Reserve and benchmark rates
- Fed Funds Rate: 3.50–3.75% as of the May 2026 FOMC meeting. Down from the 5.25–5.50% peak set in mid-2023.
- WSJ Prime Rate: 6.75%. Prime tracks Fed Funds + 3 percentage points by convention. Down from 8.50% peak.
- SBA 7(a) max rates: 9.75–13.25% range (Prime + spread varies by loan size and term).
- 10-year Treasury: ~4.10%, a benchmark that influences longer-term commercial real estate and SBA 504 pricing.
What this means for term loan pricing
The decline in benchmark rates from 2023 peaks has translated into real APR relief for prime-tier term loan borrowers. A 720+ FICO borrower in 2024 paid roughly 12–15% APR on a non-SBA term loan; the same borrower today pays 10–13% APR. SBA-eligible borrowers have seen similar 150–200 basis-point relief.
The relief is concentrated at the prime tier. Sub-prime term loan rates (FICO sub-650) remain in the 22–30%+ range largely unchanged from 2023, because credit-tier spreads have widened — lenders are pricing risk more aggressively in the lower tiers even as base rates have come down. The "spread compression" that should accompany falling rates hasn't fully materialized for marginal borrowers.
Watch points for the next 12 months
Two things shape where term loan rates go from here. First, the trajectory of Fed cuts — if the FOMC continues cutting through 2026, expect another 50–100 basis points of prime-tier APR relief by year-end. Second, credit performance — if delinquencies in small business term loans tick up (they began rising in late 2025), lenders will widen risk spreads at the mid and sub-prime tiers, partially offsetting any benchmark rate relief.
Term loan vs other products
How term loans stack up against the most common alternatives. Comparison assumes a 680 FICO borrower with $100K need over a 12-month horizon.
| Product | Cost | Speed | Flex | Best for |
|---|---|---|---|---|
| Term Loan | 13–18% APR | 1–3 days | Rigid monthly | One-time large purchases, predictable cash flow |
| SBA 7(a) | 9.75–13.25% APR | 30–90 days | Rigid monthly | Acquisitions, real estate, when time isn't critical |
| Line of Credit | 15–25% APR | 1–5 days | Draw as needed | Cyclical needs, recurring working capital |
| MCA | 1.20–1.40 factor (60–110% APR) | 24–72 hr | % of revenue | Speed-critical, sub-prime credit, short-term |
| Equipment Financing | 10–20% APR | 2–7 days | Equipment-secured | Specifically buying equipment vs. general capital |
| Revenue-Based | 1.3–1.6× multiple | 3–7 days | % of revenue | SaaS, subscription, eCommerce with clean revenue |
Detailed head-to-head: Term Loan vs LOC · MCA vs Bank Loan · MCA vs SBA · SBA 7(a) vs 504
Frequently asked questions
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