Term Loan

A term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms. Term loans are normally meant for established small businesses with sound financial statements. In exchange for a specified amount of cash, the borrower agrees to a certain repayment schedule with a fixed or floating interest rate. Term loans may require substantial down payments to reduce the payment amounts and the total cost of the loan.

Term loans are commonly granted to small businesses that need cash to purchase equipment, a new building for their production processes, or any other fixed assets to keep their businesses going. Some businesses borrow the cash they need to operate on a month-to-month basis. Many banks have established term loan programs specifically to help companies in this way.

Borrowers often choose term loans for several reasons, including:

  • Simple application process
  • Receiving an upfront lump sum of cash
  • Specified payments
  • Lower interest rates

FAQ

A term loan is usually meant for equipment, real estate, or working capital paid off between one and 25 years. A small business often uses the cash from a term loan to purchase fixed assets, such as equipment or a new building for its production process. Some businesses borrow the cash they need to operate from month to month. Many banks have established term-loan programs specifically to help companies in this way.

Term loans carry a fixed or variable interest rate, a monthly or quarterly repayment schedule, and a set maturity date. If the loan is used to finance an asset purchase, the useful life of that asset can impact the repayment schedule. The loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments. However, term loans generally carry no penalties if they are paid off ahead of schedule.

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Understanding Term Loans

Term loans are commonly granted to small businesses that need cash to purchase equipment, a new building for their production processes, or any other fixed assets to keep their businesses going. Some businesses borrow the cash they need to operate on a month-to-month basis. Many banks have established term loan programs specifically to help companies in this way.

Special Considerations

While the principal of a term loan is not technically due until maturity, most term loans operate on a specified schedule requiring a specific payment size at certain intervals.

A term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms.

Borrowers agree to pay their lenders a fixed amount over a certain repayment schedule with either a fixed or floating interest rate.

Term loans are commonly used by small businesses to purchase fixed assets, such as equipment or a new building.

Borrowers prefer term loans because they offer more flexibility and lower interest rates.

Short and intermediate-term loans may require balloon payments while long-term facilities come with fixed payments.