How long can you take to repay a business term loan?
Summary
Up to ten years for most purposes, and up to 25 years when the loan pays for real estate or equipment that will last longer than ten years. Those are the SBA 7(a) ceilings, extensions included. 504 loans come in fixed 10, 20, and 25 year terms, and microloans, which go up to $50,000, stop at seven years. A loan without an SBA guarantee has whatever term the lender writes into the note.
The rules behind the term
The ceiling is not the default. SBA's 7(a) terms say the term should be "the shortest appropriate term, depending upon the borrower's ability to repay," so a lender that sees the cash flow to repay sooner is expected to write a shorter term. Working capital sits under the ten-year limit; real estate and long-lived equipment are the only uses that reach 25. When a loan pays for equipment installation or leasehold improvements, the lender can add up to 12 more months so that repayment starts once the work is done.
504 loans are built for big fixed assets: buildings, land, and machinery with at least ten years of useful life left. They carry fixed rates and cannot be used for working capital or inventory, which is why a 504 term is always ten years or more.
How the payments work
Most 7(a) term loans are repaid in monthly installments of principal and interest out of the business's cash flow. Stretching the term lowers each payment and lengthens the time you pay interest, so at the same rate a longer loan costs more in total. The cost tool shows both numbers side by side for a real offer.
Not every term loan pays itself off by the end. Some agreements keep monthly payments small and leave a large balance due on the final date. The CFPB, writing about mortgages, defines this balloon payment as a one-time payment at the end of the loan term that is generally more than twice the average monthly payment and often a large share of the original loan. On a business loan the term in the agreement then measures the time until that balance has to be refinanced or paid in cash, not the time it takes to clear the debt.
What stays pledged for the whole term
The term also fixes how long collateral and guarantees stay in force. Pledged collateral can be seized by the lender if the business defaults on the terms. A personal guarantee is a written promise from the owner to pay if the business does not, and it lasts as long as the loan does. An unsecured loan with a guarantee still reaches the owner, which the personal guarantee guide covers in detail.
Sources
- https://legacy.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility
- https://www.sba.gov/loans/7a-loans/
- https://www.sba.gov/loans/504-loans/
- https://www.sba.gov/loans/microloans/
- https://www.consumerfinance.gov/ask-cfpb/what-is-a-balloon-payment-when-is-one-allowed-en-104/
- https://www.sba.gov/sba-newsroom/2019/04/18/top-10-business-credit-terms-small-business-owners-should-know/