How long are typical repayment terms for different types of small business loans?

When you apply for financing for your small business, it’s normal to feel lost in all the terms and figures. One crucial figure is the loan term - that is, how long you have to repay the loan, and how often you have to make payments. This varies a lot from one type of financing to the next.

It’s helpful to know what range of repayment options you’re likely to see. Here’s how long you typically have to repay some of the most common financing options:

Type of SBA Loan

SBA loans are one of the most popular lending sources among small businesses, so it’s useful to know how long you have to pay them back. One important factor is the category of SBA loan.

With SBA 7(a) loans, the term length largely depends on what you’re using the money for. SBA 7(a) loans used for equipment, working capital or inventory must be repaid within 10 years. Those used for real estate may be repaid over 25 years.

Through the SBA microloan program, you can borrow up to $50,000. Typical repayment terms average 40 months (just over three years), and can extend up to 72 months, which is six years.

With SBA 504 loans, terms are usually 10 or 20 years. These are the loan source you use for paying for fixed assets that are designed to create jobs and promote business growth.

A business line of credit is a different type of product, one that works very differently from the long-term loans you use for large capital expenses. Rather than a lump sum, which is what you typically receive from a standard loan, a line of credit allows you to withdraw money at your convenience (up to the limit on your line of credit). The time required to repay a line of credit depends on how much you draw.

Many commercial lines of credit work in draw phases and repayment phases. As with a credit card, you pay interest on whatever unpaid balance is remaining at the end of each billing period. Draw phases are typically from one to two years. Repayments vary but are often made weekly or monthly. Check your cash flow thoroughly before taking a line of credit.

When the draw period ends, you may either return to a draw phase (with the lender’s approval) or start paying down the outstanding balance.

Invoice financing is a useful alternative to traditional loans when the timing of your cash flow doesn’t allow you to make ends meet. In short, you borrow against unpaid invoices and repay the money as the invoices are paid.

When using invoices as collateral, you may get a lump sum worth 50% to 80% of the invoice value. Each month you pay a fee plus any interest until the customer pays off the invoice, then you pay the balance.

Equipment financing is like a normal term loan, except that it’s designed to pay for specific assets like machinery, cars, medical equipment or software. Soft costs, like equipment delivery fees, are sometimes included too.

With an equipment loan, you typically have from three to ten years to repay it, depending on the lender. Once it’s paid off you own the equipment outright.

Revenue-based financing is another name for a business cash advance, which is money advanced against expected future revenue.

Rather than interest, the cost of a cash advance is called a factor rate. Usually from 1.1 to 1.5. Let’s say you take a $20,000 advance with a factor rate of 1.5. You pay a total of $30,000 back.

Cash advances work by the lender taking a percentage of your daily or weekly income (it’s often 10% to 20%). You may have 3 to 18 months to pay the loan back. The percentage you pay is your holdback rate.

Whatever type of financing you choose, the maturity date of a loan is simply when the loan is due to be fully paid off. It determines your final payment date.

A prepayment penalty is a fee some lenders charge you for paying off the loan before the loan term is up.