How long-term business loans work
Long-term business loans are lump sums of capital paid back over a set period of time — typically from three to 10 years. Some loans, like SBA loans, have even longer terms of up to 25 years. Long-term loans are usually repaid on a monthly basis, with fixed, equal payments over the course of the term. Generally, this type of financing follows an amortization schedule, where you pay more toward interest at the beginning of the loan and more toward the principal at the end.
Long-term small-business loans can make sense for purchasing equipment or real estate, renovating or expanding your business, hiring new employees, refinancing existing debt and more.
Types of long-term business loans
SBA loans
These government-backed small-business loans typically have some of the lowest rates and the longest repayment terms in the market. You work with U.S. Small Business Administration-approved banks and other lenders to qualify for these long-term business loans of up to $5 million. The typical repayment period is 10 years for SBA loans for working capital and equipment, and up to 25 years for large assets such as land and facilities. How to qualify: SBA loan requirements typically include being in business for at least two years and having strong annual revenue. Generally, you'll also need a good personal credit score of 690 or higher (although some SBA lenders may have lower score requirements). In some cases, you may need to provide collateral. The SBA also offers microloans, which are distributed through nonprofit community institutions. These institutions often focus on working with underserved business owners, such as minority business owners and women business owners. SBA Microloans have terms up to six years and are typically easier to qualify for than other types of SBA loans — but they are only available in amounts up to $50,000, which may not be ideal for funding larger projects. Bank loans
Traditional lenders provide long-term business loans with repayment terms from five to seven years. Banks offer low interest rates, averaging from 2.54% to 7.02% APR, according to a 2021 report from the Federal Reserve Bank of Kansas City; your exact rate will depend on your qualifications. Aside from big banks, you can also apply for a long-term bank loan at your community bank or credit union.
How to qualify: You typically need to be an established business with strong annual revenue and a good personal credit score (likely in the 700s or higher) to get a long-term business loan with a competitive rate. Banks also may require collateral.
Alternative business loans
If you don't qualify for an SBA loan or bank loan — or you want funding faster — consider long-term loans from alternative lenders, such as Funding Circle or Credibility Capital. Both online lenders offer repayment terms of up to five years. How to qualify: Online lenders have less stringent requirements than banks. You may not need to meet a minimum annual revenue to qualify, and credit score requirements may not be as high. Some online lenders will require a personal guarantee, but won’t require that you put up physical collateral on the loan.
Long-term business loans vs. short-term business loans
Long-term business loans typically have repayment terms ranging from three to 10 years, whereas short-term business loans usually have repayment terms of one year or less.
Business loans with terms from one to three years are sometimes referred to as medium-term loans — however, there is no set industry standard for this terminology. In some cases, short-term loans encompass loans with terms up to three years.
The chart below highlights some of the important differences between long-term and short-term loans.
| Long-term business loans | Short-term business loans |
|---|
Term length | Typically three to 10 years; up to 25 years in some cases. | Typically one year or less; in some cases up to three years. |
Repayment schedule | Usually monthly repayment. | Usually weekly or daily repayment. |
Borrower requirements | Typically need strong annual revenue, multiple years in business and good personal credit to qualify. | Startups and business owners with bad credit may still be able to qualify. |
Funding speed | Varies based on lender; bank and SBA loans are slow to fund, but online lenders can offer capital in a few days. | Some online lenders can provide funds in as little as 24 hours. |
Best for | Purchasing equipment or real estate, renovating your business, expanding to a new location, hiring employees, refinancing existing debt. | Working capital, emergency expenses, making payroll, bridging cash flow gaps, purchasing inventory, taking advantage of a new opportunity. |
In addition, short-term business loans generally have higher APRs compared to long-term business loans — although the interest rate you receive will vary based on the lender and your business’s qualifications.
Cost of long-term loans vs. short-term loans
With a long-term business loan, you’ll have smaller monthly payments spread out over a longer period of time. With short-term business loans, you’ll usually have larger payments that you need to make more quickly — especially if your repayment schedule is daily or weekly.
Here’s an example of how the repayment costs break down:
Let’s say you have a $100,000 term loan with an APR of 10% and a term of 10 years. With this loan, you’d make monthly payments of roughly $1,322, for a total repayment of $158,581, which includes $58,581 in total interest.
The same loan paid over a two-year term, on the other hand, would require weekly payments of $1,062 ($4,248 per month), for a total repayment of $110,429, which includes $10,429 in total interest.
Although you’d be paying less in total interest on the short-term loan, the amount you’d pay each month would be more than three times higher than with the long-term loan.
Compare more small-business loans
Compare loan options with NerdWallet’s list of small-business loans that are best for business owners. All of our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.