How a term loan works: one lump sum, fixed payments, interest on the balance
You borrow a set amount and pay it back over a set term. Most term loans amortize, like a car loan: early payments are mostly interest, later ones mostly principal. Rates are usually fixed, though some lenders use a variable rate.
| Kind | Term | What to expect |
|---|---|---|
| Short-term | 6 months to 2 years | Fast, often online; higher rates; often daily or weekly payments |
| Medium-term | 2 to 5 years | Online lenders, banks and credit unions; stricter approval |
| Long-term | 5+ years | Lowest rates; slowest and hardest to qualify for |
Common uses include equipment, inventory, renovation, hiring, working capital and refinancing more expensive debt.
True cost: on $50,000 over 2 years, interest runs from about $3,200 to $66,400
Published APRs are wide, so the same loan can cost very different amounts. Here is $50,000 paid monthly over 24 months at the bottom and top of the published range, with one point in between.
| APR | Monthly payment | Total interest | Total paid |
|---|---|---|---|
| 6% | $2,216.03 | $3,184.73 | $53,184.73 |
| 30% | $2,795.64 | $17,095.38 | $67,095.38 |
| 99% | $4,848.30 | $66,359.26 | $116,359.26 |
Fees such as origination or closing fees add to this. Ask for the APR, which includes them, and the total you will pay in dollars. Try other numbers in the loan payment calculator.
Pros and cons: predictable payments, but approval and fees vary widely
Pros
- Fixed payments make cash planning simple.
- Can be one of the most affordable kinds of business financing when you qualify for a bank rate.
- Many can be paid off early to save interest.
Cons
- Short-term online loans can carry high APRs and daily or weekly payments.
- Some lenders charge a prepayment penalty.
- Longer, cheaper loans are slower and harder to get.
When a term loan fits, and when it doesn't
It fits when
- A one-time cost with a clear payback, like equipment or a build-out.
- Refinancing a more expensive advance or loan into a fixed schedule.
- You want a payment that stays the same every month.
Look elsewhere when
- Costs that come and go; a line of credit charges interest only on what you draw.
- Unpaid customer invoices are the real problem; look at invoice factoring.
Red flags: a quote without an APR, a daily rate, and prepayment penalties
Watch out
A quote that shows a daily or monthly rate but no APR. Ask for the APR and total dollars in writing.
Fees taken out of the loan that the quote did not mention.
A prepayment penalty if you plan to pay early.
A contract that does not match the quote. Compare the two line by line before you sign.
State rules: some states require cost disclosures on business loans
Several states now require a written cost disclosure before a business loan deal is signed, and some, like New York and California, require an estimated APR. New York covers deals up to $2.5 million, California up to $500,000, Virginia sales-based deals up to $500,000, and Vermont adds rules on July 1, 2027. Some of these states also regulate brokers like Batch Capital.
New Jersey has no commercial financing disclosure law yet. Bill S1760 was introduced on Jan 13, 2026 and sits in committee. See our state disclosure law lookup and the New Jersey MCA law guide.
This is general information, not legal advice, as of Oct 20, 2026.
Alternatives to a term loan
- SBA loans: capped rates and terms up to 10 years, or 25 for real estate.
- Equipment financing: the equipment secures the loan.
- Line of credit: for costs that come and go.
- Merchant cash advance: faster and easier, but far more expensive.