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Home / Guides / Small business term loans: what you will pay and when to borrow

Small business term loans: what you will pay and when to borrow

Janover Capital editorial team · Checked November 9, 2026

Short answer

A term loan is a lump sum repaid in scheduled payments over a set term. It fits one-time purchases that pay back over years, not seasonal gaps. An SBA 7(a) working capital loan can run up to 10 years (SOP 50 10 8.1, App. 17, Para. A.1).

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How a term loan works

A term loan pays you one lump sum, which you repay in scheduled payments until the maturity date. SBA says most 7(a) term loans are repaid with monthly payments of principal and interest. With a fixed rate the payments stay level. With a variable rate they can change when rates change (SBA, 7(a) loans).

Term length and payment move in opposite directions. A longer term lowers the payment and raises the total interest. The next section puts numbers on that.

Lenders also test whether your cash flow covers the payments. That test is called debt service coverageCash available for loan payments, divided by those payments. Above 1 means the cash covers them. Full definition: the cash available for debt payments divided by the payments due.

What a term loan costs: one loan, two terms

Suppose you borrow $100,000 and assume 10% a year with monthly payments. This is an illustration, not a quote.

  • 5-year term. Payment: $2,124.70 a month. Total paid: $2,124.70 × 60 = $127,482. Interest: $127,482 − $100,000 = $27,482.
  • 10-year term. Payment: $1,321.51 a month. Total paid: $1,321.51 × 120 = about $158,581. Interest: $158,581 − $100,000 = $58,581.

The longer term cuts the payment by $803 a month. It adds $31,099 of interest.

Now test the 5-year payment against your cash flow. Annual payments are $2,124.70 × 12 = $25,496. Suppose your business produces $36,000 a year in cash before debt payments. Coverage is $36,000 ÷ $25,496 = 1.41. At $60,000 a year, coverage is 2.35. A thin ratio leaves no room for a bad month.

Extra payments. Add $200 a month to the 5-year loan and it is repaid in 54 months, six months early. Total interest falls to about $24,349, a saving of about $3,133. That works only if the lender charges no prepayment fee, so ask before you sign.

How SBA terms change the math

SBA sets maximum terms by use of proceeds. It also requires the shortest appropriate term based on the use of proceeds and the borrower's ability to repay (SOP 50 10 8.1, App. 17, Para. A).

  • Working capital: up to 10 years.
  • Equipment: up to 10 years, or up to 15 years if the IRS asset class useful life supports it.
  • Real estate: up to 25 years, plus any reasonable construction or renovation period.

Other SBA rules on a 7(a) loan affect your cost.

  • Rate cap. The variable rate cannot exceed Prime plus 3.0 to 6.5 percentage points, depending on loan size (13 CFR 120.214(d)).
  • No balloon. SBA does not allow balloon payments (App. 18, Para. A.1).
  • Lender fees. A 7(a) lender may not charge commitment, origination, broker, referral and similar fees, points, prepayment fees and renewal fees (Sec. A, Ch. 4, Para. C.4). SBA's separate recoupment fee reaches only long maturities (13 CFR 120.223).
  • Packaging fee. SBA caps a percentage-based fee: no more than 5% on loans of $150,000 or less and 3% on larger loans, up to $30,000. It also may not exceed what the lender charges on similar non-SBA loans. A lender may charge a flat fee of up to $2,500 without documenting the work (Sec. A, Ch. 4, Para. C.2). Ask for the amount in writing.
  • Coverage. A Standard 7(a) loan needs coverage of at least 1.15:1. A 7(a) Small loan needs 1.10:1 (Sec. B, Ch. 1, Para. C; Sec. B, Ch. 2, Para. C.2).
  • Upfront fee. SBA's guaranty fee covers approvals October 1, 2026 through September 30, 2027. It is 2% of the guaranteed portion on loans of $150,000 or less and 3% of the guaranteed portion from $150,001 to $700,000. The fee is 0% for loans of $700,000 or less to manufacturers (NAICS 31-33), listed food supply chain businesses and businesses in rural areas. The lender may pass the fee to you (Information Notice 5000-881797, pp. 1-2; Sec. A, Ch. 4, Para. C.1.a).

A conventional lender sets its own terms, coverage ratio and fees. Ask for them in writing.

When a term loan fits

  • A purchase that pays back over years. Equipment, a build-out or a second location. Match the term to the asset's useful life.
  • A one-time growth step. A hire, a launch or inventory with a payoff you can measure.
  • Refinancing costlier debt. SBA lets a 7(a) loan refinance some business debt, such as debt above SBA's maximum rate or business credit card debt (App. 14, Para. A.1).
  • Steady revenue. Fixed payments are easy to budget when sales do not swing.

When a term loan is a bad idea

  • Seasonal or uneven sales. A level payment comes due in your slowest month. A line of credit fits that pattern better.
  • Operating losses. A term loan adds a fixed payment to a business that already loses money.
  • A term longer than the asset. A 10-year payment on a machine you replace in five years leaves you paying for equipment you no longer use.
  • Thin coverage. If your ratio clears the lender's minimum only on your best forecast, one bad quarter can break it.
  • A variable rate without a cushion. Test the payment at a rate 2 percentage points higher. On the 10-year loan above, 12% instead of 10% lifts the payment from $1,321.51 to $1,434.71, or $113 more a month.
  • Cost you have not measured. Federal Truth in Lending disclosure standards do not apply to small business credit (Federal Reserve Board, 2025). Ask for the total dollars you will pay, fees included.

Questions to ask a lender

In the Federal Reserve Banks' 2026 survey, 60% of online-lender borrowers said their actual cost came in above what they expected. At small banks the share was 37%, and at large banks 32%. The survey is a convenience sample, but the gap is worth acting on.

  • What is the APR, and which fees does it include?
  • Is the rate fixed or variable, and what is the formula?
  • Is there a prepayment fee?
  • What collateral do you take, and who must guarantee the loan? Of firms with debt in the survey, 59% used a personal guarantee.
  • What total dollars will I repay over the full term?

Sources

  1. Federal Reserve Banks, 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey (published March 2026)
  2. Federal Reserve Board, Small Business Credit: How Entrepreneurs Finance the American Dream, Consumer & Community Context (March 2025)
  3. SBA, 7(a) loans (sba.gov, read November 9, 2026)
  4. SOP 50 10 8.1, App. 17, Para. A.1 (p. 390)
  5. SOP 50 10 8.1, App. 17, Para. A (p. 390); 13 CFR § 120.212(a)
  6. SOP 50 10 8.1, App. 17, Para. A.2 (p. 390)
  7. SOP 50 10 8.1, App. 17, Para. A.3 (p. 390); 13 CFR § 120.212(c)
  8. 13 CFR § 120.214(d)
  9. SOP 50 10 8.1, App. 18, Para. A.1 (p. 395); 13 CFR § 120.214(e)
  10. SOP 50 10 8.1, Sec. A, Ch. 4, Para. C.4 (Para. C begins p. 62)
  11. SOP 50 10 8.1, Sec. B, Ch. 1, Para. C (p. 118)
  12. SOP 50 10 8.1, Sec. B, Ch. 2, Para. C.2 (Para. C begins p. 127)
  13. SBA Information Notice 5000-881797, p. 1 (Sept. 3, 2026)
  14. SBA Information Notice 5000-881797, p. 2
  15. SOP 50 10 8.1, Sec. A, Ch. 4, Para. C.1.a, Upfront Fee (Para. C begins p. 62)
  16. SOP 50 10 8.1, Sec. A, Ch. 4, Para. C.2, Packaging Fees (Para. C begins p. 62)
  17. SOP 50 10 8.1, Sec. A, Ch. 4, Para. C.3, Subsidy Recoupment Fee (p. 70)
  18. SOP 50 10 8.1, App. 14, Para. A.1, Debt Refinancing, General Requirements (p. 355)

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