Business term loans: a lump sum, a fixed schedule, a clear price

A business term loan gives you a lump sum that you repay in fixed installments of interest and principal over a set term. You know the payment, the end date and the total cost before you sign, which makes it the easiest product to plan around and to compare. It suits a defined need with a clear payback, and it rewards a business that can show steady profits.

How it works

A term loan has four moving parts:

1. Principal, the amount you borrow.
2. Interest rate, quoted annually. It may be fixed or move with a benchmark.
3. Term, how long you have to repay.
4. Payment frequency, usually monthly from banks and often weekly or daily from online lenders.

Each payment covers that period's interest plus a slice of principal. Early payments are mostly interest; later ones are mostly principal. That is called amortization.

How the cost works

The worked example: $100,000 at 18% APR over 24 months, repaid monthly, means $4,992.41 a month, $119,817.84 in total and $19,817.84 of interest.

Change the term and the trade-off is plain:

Doubling the term from 12 to 24 months roughly halves the payment and roughly doubles the interest. Neither is wrong; the right one is the shortest term whose payment you can still make in a slow month.

Frequency matters a little too. The same loan over 24 months repaid weekly is 104 payments of $1,146.62 and $119,248.80 in total, slightly less interest because the balance falls sooner. But weekly debits take cash out before month-end receipts arrive, so check the timing against your cash flow.

The 18% is an example, not a quote. Run your own figures through the loan payment calculator.

Fees change the real rate

Many term loans carry an origination fee taken from the loan amount. If you borrow $100,000 and a fee is deducted, you receive less but repay on the full $100,000, so the APR on what you actually received is higher than the headline rate. Ask for the amount you will receive, the total of all payments and the number of payments, then use the offer checker to see the real APR.

In California, providers must disclose the total funds provided, the total dollar cost, the term and the payment amounts on commercial loans of $500,000 or less, and the prepayment policy too. Ask for the same figures in any state.

Prepayment

Read how early repayment works. Three common versions:

• Simple interest, no penalty. Repay early and you save the interest you haven't yet been charged.
• Prepayment penalty. A fee for paying early, often a percentage of what you repay.
• Fixed total cost. Some short-term loans charge the full interest whenever you repay. These behave like an advance; early repayment saves nothing.

Who it suits

• A defined, one-off need: an expansion, a second location, a large stock order, refinancing a dearer product.
• A business with steady profits that can carry a fixed payment.
• Owners who want a known end date.

Who it doesn't suit

• Unpredictable, recurring gaps. A line of credit costs less when you don't need all the money all the time.
• A single piece of equipment, where equipment financing is usually cheaper because the asset secures it.
• A business whose revenue swings hard, which may struggle with a fixed payment in the dips.

What lenders look at

• Profitability and cash flow, from tax returns, financial statements and bank statements.
• Debt service coverage, meaning how comfortably your cash flow covers all loan payments including the new one.
• Time in business.
• Personal and business credit.
• Collateral and guarantees. Many lenders file a general lien on business assets and ask owners for a personal guarantee.
• Existing debt, including advances. A running daily-debit advance can block a cheaper loan until it is cleared or refinanced.

Questions to ask before you sign

• How much will land in my account after fees?
• What is the total of all payments, and how many are there?
• Is the rate fixed or variable, and if variable, tied to what?
• Is there a prepayment penalty, or is the full interest due whatever I repay early?
• What collateral and guarantees are you asking for, exactly?
• What counts as a default, and what happens then?

Write the answers down next to each other for every offer you get. The cheapest offer is often obvious once the numbers are side by side.

Red flags

• A quoted "rate" that is really a flat fee on the original amount. Ask for the APR.
• Origination or "processing" fees that appear only in the contract.
• Total-cost-of-interest clauses that cancel any saving from early repayment, sold as a normal loan.
• A personal guarantee that also pledges your home, without that being explained.
• A loan that mostly refinances an existing advance and leaves you little new cash.

Sterling's take: the number to compare is the APR on what lands in your account. Everything else is presentation.

How it compares

If you can wait and have the paperwork, compare with an SBA loan through your bank. Ask Sterling and our funding partner don't arrange those.