A term loan provides a fixed lump sum of capital, repaid over a defined period with a set payment schedule. It is the most straightforward financing structure in commercial lending — and also one of the most frequently misapplied.
How Term Loans Are Structured
Three defining components:
Principal — The amount borrowed. This should match the specific capital need, not a round number arrived at by guessing.
Term — The repayment period. Short-term runs 12–36 months. Medium-term runs 3–7 years. Long-term — typically SBA or real estate secured — runs 10–25 years. Longer terms mean lower monthly payments but higher total interest cost.
Rate — Fixed or variable, depending on the lender and program. SBA loans are typically variable, tied to the prime rate plus a spread. Alternative lenders often use factor rates rather than interest rates, which makes true cost comparison difficult.
When a Term Loan Is the Right Tool
Good fits:
- Equipment purchases with a known cost and useful life
- Leasehold improvements for a specific location
- Business acquisitions where the purchase price is fixed
- Working capital for a defined project or contract
- Inventory purchases tied to confirmed purchase orders
Less appropriate:
- Ongoing operational expenses with no clear repayment source
- Speculative investments without defined cash flow impact
- Bridging a cash flow shortfall caused by structural business problems
What Lenders Evaluate
DSCR — Net operating income divided by total annual debt service. Most lenders require 1.25 or higher.
Time in business — Conventional lenders typically require two years with documented tax returns.
Revenue — Lenders set minimums, often $150,000–$250,000 annually. Revenue trend matters as much as absolute level.
Personal credit — Personal guarantees are standard. Most conventional lenders screen at 680+.
Collateral — Secured loans use specific assets as collateral. Unsecured loans rely more on cash flow and credit quality.
SBA vs. Conventional Bank Term Loans
Conventional bank term loans offer lower rates for well-qualified borrowers and faster processing — but require stronger credit, more collateral, and shorter terms.
SBA 7(a) term loans extend to borrowers who don't fully meet conventional criteria, offer longer repayment terms (up to 10 years for working capital, 25 years for real estate), and require lower equity injection. The tradeoff is documentation volume and processing time.
Lines of Credit vs. Term Loans
Term loans disburse a fixed amount upfront, repaid on a defined schedule. Best for specific, one-time capital needs.
Lines of credit provide revolving access up to a set limit. Best for ongoing working capital needs and seasonal cash flow management.
Many businesses benefit from both — a term loan for a specific acquisition, a line of credit for ongoing working capital flexibility.
How SGF Approaches Term Loan Financing
SGF works with businesses to structure term loan requests that match the actual capital need, select the right program and lender, and prepare documentation that moves through underwriting efficiently.
Learn more about business term loans and lines of credit or contact SGF to discuss your financing need.
Starting Gate Financial is a commercial financing firm based in Richardson, TX. We do not quote rates or guarantee approvals. All financing decisions are subject to lender underwriting criteria.