Your Guide to Understanding Traditional Term Business Loans

Sometimes the only way to help your small business grow is to invest in it. You may have outgrown your space and need to find a new facility. You may need to purchase additional equipment to move the business forward. Or you just might need a cash infusion to fund all the items on your “to do” list. You take a look at the bottom line and you see that the cash flow just isn’t there to keep up with your wishes and your dreams. But there are financing options for small business owners out there. They include the traditional term business loan that might be just the financial assistance you need.

What is a Traditional Term Business Loan?

A traditional term business loan is probably what you think of when you think of businesses borrowing money. A lender provides a set amount of money and the borrower pays it back over time with interest and other fees. The term of the loan could be anything from one to 25 years. Interest rates on term business loans can be either fixed or variable. The approval process for a traditional term business loan can be rigorous and may require some collateral. This type of loan will have a maturity date but there is generally not any penalty for paying it off early.

The advantages of a traditional term business loan include flexible terms, a monthly repayment schedule and the ability to fund long-term projects. Financial advisors believe that term loans are best for established small businesses with a proven track record and a good credit history. Term loans are best for funding things like construction, major capital improvements, to provide working capital or to purchase another existing business.

Traditional term business loans work just like consumer loans for houses or cars. You borrow a fixed amount of money and pay it off according to a schedule. The terms and the interest rate of these loans are tied to your credit score.

The term of any loan is the amount of time between when you borrowed the money and when you will pay it back. The terms of the loan spell out if you will pay it off in the short, intermediate or long-term.

Three types of traditional term business loans and what they are used for

What is a Short-Term Business Loan?

Short-term business loans are often a financial solution for small businesses without a credit history. Often these loans have to be paid off within a year but the terms could be as long as 18 months. Because of their shorter duration, short-term business loans aren’t as risky for the lender which makes it easier for businesses to qualify. The approval process can also be quicker, too. But lenders often charge higher interest rates and large loan origination fees for short-term loans. And since the payments are spread out over a short amount of time they can often be fairly large for the borrower.

Sometimes business owners use short-term loans to get over a financial roadblock. The business owner might need to get past a cash flow interruption. Maybe new inventory has to be purchased or the business is in the midst of a seasonal slump. The borrower enters into a short-term loan with the confidence that the business will generate enough money to cover the payments for the brief life of the loan.

Taking out a short-term business loan and repaying it on time is also a way for a small business to prove that it is credit-worthy.

“You borrow when you don’t need money to give you operating capital,” says Carl Gould, an entrepreneur who owns 7 Stage Advisors consulting firm. “It will help you build business credit and good relationships with banks who will think of you as a good credit risk.”

What is an Intermediate-Term Business Loan?

Intermediate-term business loans are generally written with a repayment schedule of one to three years. The payments are usually due each month. Intermediate-term loans are the most common loans given to businesses. Business owners use intermediate-term loans to refinance debt, open a new location, hire new employees or purchase new equipment. Often that equipment will only last as long as the loan is in effect. The business assets are used as collateral for this type of loan.

What is a Long-Term Business Loan?

A long-term business loan is a loan that you pay back in three to 25 years. Five and ten-year terms are the most common.  Payments may be due monthly or quarterly. The company’s assets are used as collateral on the loan. The interest on a long-term loan is generally less than a short-term loan. And since the payments are stretched out over a period of time, long-term loans have lower monthly payments than other loans. The longer loan is less likely to have restrictions on how the money can be spent. Long-term loans are a good source of funding for projects that may stretch out over time. But they come with restrictions on how they can be spent. Often they can’t be used for paying off other debts, issuing dividends or paying director salaries.

What Does It Mean If the Loan has a Balloon Payment?

Sometimes traditional term business loans have a set payment amount that is in effect through the term of the loan. But then at the very end, the payment gets much larger, or “balloons”. It is more common in commercial loans than in personal ones. During the life of the loan, only a portion of the principal is repaid or the payments only cover the interest. Then at the end of the loan the remainder, or the balloon payment, is due. The balloon payment at the end is commonly twice the amount of the rest of the payments. Both short-term and intermediate-term loans can end with balloon payments. These types of loans are best for businesses that are expecting a windfall of cash down the line to cover the balloon expense.

What is an SBA Loan?

The SBA, or U.S. Small Business Association, works with lenders to provide funding for small businesses. The SBA itself doesn’t actually provide small business cash loans, it just works to pair lenders with entrepreneurs. The SBA guarantees these kinds of loans and reduces the risk for the lender.

The application process for an SBA loan is fairly rigorous. But the return is that these loans are offered with very competitive rates and fees. The down payment on the loan might be low and the lender might not require any collateral. Sometimes the SBA also provides small businesses with additional support and resources for growing the business.

SBA loans range from very small to very large amounts of money. Some business owners use these loans to provide working capital to get them through seasonal requirements or to help them refinance business debt. Other small business owners use SBA loans to purchase fixed assets like furniture, equipment or real estate.

The borrower doesn’t necessarily have to have a fantastic credit score to qualify for an SBA loan. These lenders will be interested in how the company makes money, where it operates and the character of the borrower. In order to qualify for an SBA loan, the business must meet the administration’s definition of small. It must be a for-profit company operating in the United States. And the business owner must be contributing equity or time into the venture. The borrower must also have a good credit history.

SBA 7(a) loans can be used for many different types of business expenses including:

  • Startup costs – Getting a new venture off the ground can be very expensive. SBA loans can be used for everything from hiring new employees to advertising the business.
  • Buying an existing business -If you have demonstrated that you have experience in the industry and a solid business plan, an SBA lender can provide the funding to buy an existing business.
  • Working capital – Business owners use SBA loans to do things like pay employees or buy more inventory to keep the venture moving forward.
  • Purchase equipment – These loans can cover the cost of a big, infrequent purchase like machinery, furniture and work vehicles.
  • Acquiring land or real estate – SBA loans can also be used on the physical space your business occupies. That could be a mortgage on the building, moving to a new facility or adding another location.
  • Repairing existing capital – The small business might need to upgrade technology and buy new computers or repair vehicles in the company-owned fleet.
  • Refinancing debt – This is taking out a loan to refinance and restructure other types of debt.

The new head of the SBA, Jovita Carranza, is vowing to increase access to SBA loans during her tenure.

Is an Equipment Loan Different from a Traditional Term Business Loan?

Traditional term business loans and equipment loans are often the same thing. They are used specifically for buying new equipment for your business as well as making other investments in it. Because these loans are often tied to physical purchases, the interest rate can be lower because the purchase itself is natural collateral. The fixed payment schedule that comes with these loans helps with budgeting and cash flow in a small business.

Is a Business Loan a Good Idea for My Business?

Financial advisors would generally not recommend taking out a loan just for the sake of taking out a loan. But your endeavor may be at the point where small business loan shopping is a good idea. You might need a new space for your business if you are working out of something that is too small or the location doesn’t work anymore. You might need a cash infusion to purchase new equipment to keep up with the workload or technology. Your business might be seasonal and need money to make it through the slower times. Or you might want to take out a small business loan to establish credit for the future.

Borrowing money just to meet monthly expenses is not a good idea. But borrowing money to fuel future growth and expansion might be good for your business. It’s important to examine the reasons behind needing the loan. Are you falling behind on meeting your regular expenses? Is your business not producing enough income? Has your original business plan changed? Are you setting your goals and expectations too high? If the answer to any of those questions is yes, a loan might not solve these problems.

A business loan is only a good idea if the business will generate enough income to repay it.

Qualifying for Traditional Term Business Loans

Lenders take into consideration what is known as “The Five Cs” when it comes to considering an application for a business loan.

  • The first C is Character. How has the loan applicant handled other credit obligations both personally and professionally?
  • The second C is Credit Capacity. The lender will do a complete financial analysis to determine if the borrower has the capacity to repay the loan.
  • The third C is Collateral. A lender wants the borrower to have something that backs up the value of the loan.
  • The fourth C is Capital. The lender will want to know if the borrower owns something else that they can sell for cash to repay the loan.
  • And the fifth C is Comfort or Confidence in the Business Plan. A lender will take an in-depth look at the proposed income and expenses of a company before investing in it.

How Do I Apply for a Traditional Term Business Loan?

It takes a little homework to apply for a business loan. You should gather all of your information ahead of time and examine your business closely to see if there is anything you can do to make it look better. Your potential lender is going to want a lot of information from you. Some of it is personal stuff like the information that is on your resume. The lender will want to know things like your level of education and your work experience.

They will also want a look at your personal financial information. They will check your credit score and the scores of anyone else who is a principal in your business. And they will want a financial statement from the business along with a cash flow projection. They will want to see the company’s debt-to-income ratio. Sometimes a lender will want to know more about your business plan or even better understand your industry. As a small business owner, you are the expert about your business. Be prepared to explain all about it from top to bottom.


A traditional term business loan can be the influx of cash a small business needs to fuel growth. These loans are typically used to fund large projects. Maybe it’s time to move the business to a new location. Maybe it’s time to consolidate and pay down debt. Or maybe you have to buy new equipment to keep up with the demands of the marketplace. Taking out a traditional term business loan is the most common way business owners fund big financial needs. These loans can be difficult for new business owners to qualify for. Lenders generally award them to established businesses with a solid financial track record. But if you qualify you will receive the money in one lump sum. And you will know the repayment schedule and on what date you will fully repay the loan.

Short-term loans are paid back quickly but come with higher interest rates. Intermediate-term loans are the most common loans for small business owners. They are repaid in a few years. Long-term loans can last as long as 25 years but often come with restrictions on how to spend the money. The SBA is one resource that connects small businesses with lenders.  Taking out loans and faithfully repaying them is a way to build a good credit score for your business. Taking out a loan that your business can’t afford can mean financial disaster.