A business term loan is a lump-sum disbursement repaid in fixed installments over a set period, with interest accruing on the outstanding principal balance — the structure used by most SBA 7(a) loans, conventional bank business loans, and many alternative lenders. Term lengths range from 1 to 25 years depending on the loan purpose; interest may be fixed or variable; and the interest expense is generally deductible as an ordinary business expense under IRC Section 162.
A term loan has four defining characteristics: (1) a lump-sum disbursement at origination — the full approved amount is paid to the borrower at closing; (2) a fixed repayment period (the 'term') — typically expressed in months or years; (3) scheduled installment payments — usually monthly, combining principal reduction and interest; and (4) amortization — the loan balance declines with each payment over the term until it reaches zero at maturity. This distinguishes a term loan from a revolving line of credit (which can be drawn, repaid, and redrawn) and from a merchant cash advance (which is structured as the purchase of future receivables, not a loan, and prices on a factor rate rather than interest). Under FASB ASC 470, term loan principal maturing within one year is classified as a current liability; principal maturing beyond one year is long-term debt — a classification that affects leverage ratios lenders examine on future applications.
Term loan length should match the useful life of what the loan finances — a principle sometimes called asset-liability matching. Typical ranges by use case:
Business term loans carry either fixed or variable interest rates. Fixed rates lock the interest cost for the life of the loan — monthly payments do not change, making cash flow forecasting straightforward. Variable rates are typically tied to a reference index: SBA loans use the prime rate (published in the Federal Reserve H.15 release) plus a lender spread — for SBA 7(a) loans, the maximum allowable spread above prime is set by SBA SOP guidelines (typically 2.25–2.75% above prime for loans with maturities over 7 years). The Federal Reserve H.15 Selected Interest Rates is the authoritative source for current prime rate and benchmark rate data. Variable rates benefit borrowers in declining rate environments; fixed rates provide certainty in rising rate environments.
The SBA 7(a) loan program is the federal government's primary term lending vehicle for small businesses. Key mechanical features: maximum loan amount $5 million; SBA guarantees 85% of loans up to $150,000 and 75% of loans above $150,000 (to the participating lender, not to the borrower); maximum repayment term 10 years for working capital and equipment, 25 years for commercial real estate; no balloon payments allowed under SBA SOP; and the SBA guaranty fee (a percentage of the guaranteed portion) is paid by the lender but typically passed to the borrower at closing as a closing cost. The SBA guaranty is what enables participating lenders to extend credit to businesses that may not meet conventional bank collateral requirements.
Conventional bank term loans typically offer lower interest rates than SBA 7(a) loans but require stronger financial profiles: longer operating history (typically 3+ years of profitable financials), higher collateral coverage, and higher DSCR minimums. The Federal Reserve Small Business Credit Survey 2024 reports that large bank approval rates for term loans remain meaningfully lower than approval rates for non-bank and SBA-channel lenders, particularly for businesses under three years old. SBA 7(a) loans offer longer repayment terms, smaller required down payments (for real estate or business acquisition), and access for businesses that cannot meet conventional bank underwriting standards — at the cost of an SBA guaranty fee and a more documentation-intensive application process per SBA SOP 50 10. For most businesses under five years old or without real estate collateral, SBA 7(a) is the accessible path to institutional-rate term debt.
Interest paid on a business term loan is generally deductible as an ordinary and necessary business expense under Internal Revenue Code Section 162, provided the loan proceeds are used for a business purpose. This means the after-tax cost of term loan interest is the stated rate multiplied by (1 minus the business's effective tax rate). For a business paying a 25% effective rate on a 7% fixed-rate term loan, the after-tax interest cost is approximately 5.25%. FASB ASC 470 governs debt classification: term loans where the entire principal matures within one year are classified as current liabilities on the balance sheet; loans maturing beyond one year are classified as long-term liabilities. This classification affects financial ratios that lenders and underwriters examine in future credit decisions.
A manufacturing company borrows $200,000 via SBA 7(a) at prime + 2.75% (assume prime at 8.5% = 11.25% total rate) over 10 years. Monthly payment: approximately $2,755. Total interest over the full term at constant rate: approximately $130,600. SBA guaranty fee on a $200k loan (75% guaranteed = $150k guaranteed portion): typically 3% of the guaranteed portion = $4,500 paid at closing. After-tax interest cost at 25% effective rate: approximately $97,950 over the term. Compare to a 3-year alternative lender term loan at 22% APR for the same $200k: monthly payment approximately $7,630, total interest $74,680 — lower total interest but nearly triple the monthly payment, which may compress operating cash flow.