What is a business loan?
Reviewed by Turan Zeynal, Managing Partner, Outset Funding Partners ·
A business loan is a lump-sum advance a lender gives a business, repaid on a fixed schedule with interest over a set term. Unlike a merchant cash advance, it's a true loan — subject to state usury caps, reported to credit bureaus, and typically cheaper. It's also slower to approve and harder to qualify for.
Quick facts
- Typical amount
- $10,000 – $5,000,000
- Speed to fund
- 3 days – 6 weeks
- APR range
- 7% – 45%
- Minimum credit
- 600+ (online) / 680+ (bank)
- Time in business
- 2+ years typical
- Term length
- 1 – 25 years
- Collateral
- Often required
- Personal guarantee
- Almost always
The 60-second answer
A business loan is the traditional way US small businesses borrow money. You receive a lump sum up front, agree to a fixed monthly payment schedule, and repay principal plus interest over a defined term — usually 1 to 25 years depending on the product and lender.
Because it's a true loan (not a purchase of receivables like an MCA), a business loan is regulated as a loan: APR must be disclosed, state usury caps apply, and payment history reports to business credit bureaus. That protection is also why the underwriting is stricter — lenders look at time in business, personal credit, business credit, revenue, cash flow, and often ask for collateral and a personal guarantee.
How it works, step by step
- Application and documentsSubmit tax returns (2 years), bank statements (6–12 months), a P&L, a debt schedule, and a personal financial statement. Banks may also ask for a business plan.
- UnderwritingThe lender pulls credit, verifies revenue, and calculates your DSCR (debt service coverage ratio). Most banks want a DSCR of 1.25 or higher.
- Offer and term sheetYou receive an offer with amount, rate, term, monthly payment, collateral requirements, and any covenants (financial reporting, minimum liquidity, etc.).
- Closing and fundingYou sign the loan agreement and any collateral filings (UCC-1). Funds are wired to your business account — 3–7 days for online lenders, 2–6 weeks for banks, 45–90 days for SBA.
- RepaymentFixed monthly payments of principal and interest until the loan is paid off. Most business loans allow early payoff, some with a small prepayment penalty in the first 1–2 years.
What most owners get wrong about business loans
The single biggest reason healthy businesses get declined for a bank loan is not credit — it's debt service coverage. Lenders take your last twelve months of net operating income, add back non-cash items like depreciation, and divide it by your annual debt payments (existing plus the new loan). If that ratio is below 1.25, the answer is usually no, regardless of how strong your revenue looks on the top line. Owners who understand this run the DSCR math before they apply and, when it's tight, either request a smaller loan, a longer term, or wait one more quarter of profitability.
The second miss is treating "business loan" as one product. A three-year online term loan at 22% APR, a seven-year SBA 7(a) at Prime + 2.75%, and a fifteen-year SBA 504 for real estate are all "business loans" — but the cheapest one you'll actually qualify for depends almost entirely on your time in business, personal FICO, and whether the use of funds is a fixed asset or working capital. Ask any lender you talk to which specific product they're quoting and what the all-in APR is, not just the interest rate. Origination fees, closing costs, and guarantee fees on SBA loans can add 2–4% to the effective cost.
Pros and cons
- ✓Materially cheaper than MCAs — APRs from 7% at banks
- ✓Predictable fixed monthly payments
- ✓Reports to business credit and builds your credit profile
- ✓Long terms available (up to 25 years for SBA real estate)
- ✓Interest is tax-deductible
- ×Slower — days to weeks, not hours
- ×Tighter credit box (600+ minimum, 680+ for best rates)
- ×Usually requires 2+ years in business
- ×Collateral and personal guarantee almost always required
- ×Heavy documentation compared to an MCA
Who qualifies
- •US-based business, 2+ years in operation (12+ months for some online lenders)
- •$100,000+ in annual revenue (higher for larger loans)
- •600+ personal credit score (680+ for banks and SBA)
- •No active bankruptcies or tax liens
- •Positive cash flow with DSCR of 1.25+
- •Willing to sign a personal guarantee
Business loan vs alternatives
| Option | When to use | Watch out for |
|---|---|---|
| Business loan (bank) | You have 2+ years, good credit, and can wait | Slow and paperwork-heavy |
| SBA 7(a) loan | You want the lowest possible rate and longest term | 45–90 day process, heavy documentation |
| Online term loan | You want a real loan but faster than a bank | APRs 15–45% — more expensive than bank |
| MCA | You need cash in 1–3 days | Not a loan; materially more expensive |
Frequently asked questions
What's the difference between a business loan and an MCA?
A business loan is a true loan with an APR, fixed term, and monthly payments. An MCA is a purchase of future receivables repaid daily as a percentage of card sales. Loans are cheaper and slower; MCAs are faster and pricier.
Do I need to be profitable to get a business loan?
Not always. Most lenders want to see positive cash flow and a debt service coverage ratio (DSCR) of at least 1.25, but a young business can qualify with strong revenue growth and clean bank statements.
What credit score do I need for a business loan?
Online lenders start at around 600. Banks generally want 680+. SBA loans typically require 680+ personal FICO along with business credit history.
How much can I borrow?
It depends on revenue and cash flow. A common rule: 10–30% of your annual revenue, up to $5M for SBA 7(a) or $500K for most online term loans.
Is a personal guarantee always required?
For small business loans under $5M, almost always yes. Even the SBA requires a personal guarantee from any owner with 20% or more equity in the business.
Can I pay off a business loan early?
Usually yes. Some lenders charge a prepayment penalty in the first 1–2 years — always check the term sheet before signing.
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