What loan term should I choose?
Match the term to how long you genuinely need the money, not to the monthly payment you would like. Stretching a loan lowers what you pay each month and raises what you pay in total, because you are paying interest for longer.
The exception worth knowing
Crossing the twelve-month line changes the pricing basis. Terms up to twelve months are quoted per month and are dearer per pound; two years and over are quoted as an annual rate on the reducing balance.
So a twelve-month deal can cost more in total than the same amount over twenty-four months, even though it runs for half as long. It is the one place where borrowing for longer is genuinely cheaper. The table on the calculator shows it.
A rule that works
Borrow over the life of what you are funding. A VAT bill is a three to six month problem. Stock for a season is a season. Hiring someone who will take a year to pay for themselves is a two-year loan. Funding a six-week gap over five years means paying for it for four years and ten months after it stopped being a problem.
If the monthly payment is the constraint
That is worth saying out loud rather than solving quietly with a longer term. Sometimes the right answer is a smaller facility, or a revolving one you only pay for while you use it.
When the loan outlives its purpose
A loan that runs past the problem it solved is easy to forget and hard to shift. If the term runs on after the need has gone, you can find yourself borrowing for the next thing while still paying for the last one, and two sets of payments is where affordability starts to bite.
Short terms and the quiet months
A short term saves interest only if the payment is comfortable in the quiet months as well as the busy ones. A term too short for your cash flow can leave you short at the wrong moment, and borrowing again to cover it undoes the saving.
Early settlement changes the sums
If your lender charges little or nothing to settle early, a longer term commits you to less than it seems: you can take the lower payment for safety and clear it early if things go well. If settling early is expensive, choose the term you actually expect to need. Repaying a loan early.
Common questions
What is the shortest term a business loan can run for?
Six months is the shortest term on our calculator, and some facilities run shorter. Short terms suit short problems, such as a tax bill or stock that sells through quickly. They are priced per month, so compare them on the total cost in pounds rather than on the rate.
Can I change the term once the loan has started?
Shortening it is usually done by repaying early, where the agreement allows. Lengthening it means the lender agreeing to restructure, which most will only discuss if you are struggling, and which can show on your file. Choose the term as if you will keep it.
Is a longer term harder to get approved?
Sometimes. A lender on a longer term is exposed to the business for longer, so the longest terms tend to go to established companies with several years of accounts. A younger business is often offered a shorter term whatever it asks for.
Can I take a payment holiday on a business loan?
Only if the agreement offers one or the lender agrees, and interest usually keeps running while you pay nothing, so the loan costs more overall. Some lenders build a short holiday in at the start, which can suit a project that takes a few months to earn. Ask before you sign, not when you need it.
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