Loan types
The business term loan, priced out on $250,000
Fixed amount, fixed payment, fixed end date. Here is what $250,000 actually costs over three, five, and ten years, and what decides which rate you get.
A term loan is the plainest product in business finance. You get one lump sum, you pay it back in equal installments, and on a known date it is gone. Everything interesting about a term loan happens in two places: the rate you are offered and the length of the term. Most owners only look at the payment, which is exactly the wrong number to fixate on.
The structure is simple enough to describe in one line. A lender advances the full amount at closing, charges interest on the declining balance, and collects a level payment on a fixed schedule until the balance reaches zero. That process is called amortization, and it is the reason your first payment is mostly interest and your last payment is almost entirely principal. If you want the mechanics in detail, read how amortization works.
What $250,000 actually costs
Take $250,000 on a five year term at 12 percent. The payment is $5,561 a month. Across 60 payments you send back $333,667, so the money costs $83,667. Now stretch the same $250,000 to ten years at a better rate, 11 percent. The payment falls to $3,444, which feels far easier every month, and the total cost climbs to $163,250. A lower rate and a longer term nearly doubled the bill.
Run it the other direction and it flips again. $250,000 at 18 percent over 36 months costs $9,038 a month and $75,372 in total interest. The worst rate on the page produced the lowest total cost, because you rented the money for a third as long. This is the single most useful thing to understand about term debt: rate and term are two separate levers, and the term lever is usually the stronger one.
Two very different products share this name
When a bank says term loan and an online funder says term loan, they are describing loans that behave almost nothing alike. The paperwork, the timeline, the pricing, and the collateral position are all different. Knowing which lane your file belongs in saves weeks.
| Bank or credit union | Online or specialty funder | |
|---|---|---|
| Typical amount | $100,000 to $5,000,000 | $25,000 to $500,000 |
| Typical term | 3 to 10 years | 6 months to 5 years |
| Typical pricing | Roughly 8 to 14 percent APR | Roughly 15 to 45 percent APR |
| Payment frequency | Monthly | Monthly, weekly, sometimes daily |
| Time to funding | 3 to 8 weeks | 1 to 10 business days |
| Documents | Two years of returns, financials, debt schedule | Application and 3 to 6 months of statements |
| Collateral | Usually a blanket lien plus specific assets | Usually a blanket lien only |
Neither one is the honest answer for everybody. If you have two profitable years, filed returns, and eight weeks, bank pricing is worth the wait and nothing else comes close. If you need the money inside two weeks, a bank cannot help you at any price, and the comparison is between an online term loan and the faster products above it. That trade is laid out in speed against cost.
What decides the rate you are quoted
Pricing on a term loan is not a mystery and it is not personal. Underwriters run the same short list on every file, and each item either buys you basis points or costs you them.
- Debt service coverage. The ratio of your cash flow to your total loan payments. Most lenders want at least 1.25, meaning $1.25 of cash flow for every $1.00 of debt payment. Below 1.15 the file usually needs a longer term or a smaller amount. See how DSCR is calculated.
- Time in business. Two years is the line where pricing improves sharply. Under one year you are generally out of the bank lane entirely.
- Personal credit of the owners. Anyone with 20 percent or more usually signs, and their score is priced in. The gap between a 700 and a 620 file can be 10 points of rate or more.
- Existing debt. Every open position shows in your statements and on your debt schedule. Three small daily payment balances can disqualify a file that the revenue would otherwise support.
- Collateral. Real estate or titled equipment behind the loan buys you a longer term and a lower rate. An unsecured file pays for the privilege.
When a term loan is the wrong tool
Term debt is built for a one time need with a payback you can point to. It is a poor fit for a recurring need, because you end up borrowing a lump sum, spending it down, and borrowing again at a new closing cost every time.
- 01Your need repeats every quarter
Seasonal inventory, payroll swings, and receivable gaps come back. A revolving facility you draw and repay is cheaper across a year than four term loans. Start with a line of credit.
- 02The asset has its own financing
If the money is buying a machine or a truck, the machine is better collateral than your whole balance sheet. Equipment paper is usually a point or three cheaper and does not tie up a blanket lien.
- 03You are covering a monthly loss
A term loan converts a loss into a loss plus a payment. Nothing about the structure fixes the underlying number.
Where it sits against everything else
A term loan is the middle of the market. It is slower and cheaper than the advance products, faster and costlier than an SBA loan, and it competes directly with a line of credit for most working capital needs.
The comparison that actually matters for most owners is a term loan against a line of credit, because both are available to the same file. A term loan wins when the need is one time and large. A line wins when the need repeats. That is the whole test, and it is worked out with numbers in term loan against line of credit.
The fine print worth reading twice
- Origination and packaging fees. A 3 percent origination on $250,000 is $7,500, and it is often deducted from the wire. You sign for $250,000 and receive $242,500 while paying interest on the full amount.
- Personal guarantee scope. Almost every business term loan under $1,000,000 carries one. Ask whether it is unlimited or capped, and whether a spouse is required to sign.
- Blanket UCC filings. A blanket lien covers all business assets and will block or complicate any second facility. See what a UCC filing does.
- Covenants. Bank paper often carries financial covenants such as a minimum DSCR tested annually. Breaching one is technically a default even when every payment was on time.
- Payment frequency. A weekly payment quoted next to a monthly payment is not comparable. Convert everything to an annual total before you choose.
What Exp Capital does with this
Exp Capital Solutions is a broker. We do not lend, we do not approve files, and we do not set anybody's rate. What we do is take one packaged file and put it in front of the funding partners whose credit box actually matches it, then bring the offers back with the amount, the rate, the term, the total of payments, and the fees laid out on one page so they can be compared honestly. If your file prices better as a line of credit, as equipment financing, or as an SBA 7(a) loan, we will say so, even though those pay us less and take longer to close.