What Is a Term Loan?
Let me explain what a term loan is directly to you. It's financing with fixed or variable interest rates that gives you, the borrower, a lump sum of cash right upfront, which you then repay over a specified period.
As a borrower, you get this lump sum in exchange for agreeing to specific borrowing terms. These loans are typically for established small businesses with solid financial statements. You agree to a repayment schedule with either a fixed or floating interest rate, and sometimes they require substantial down payments to lower the payment amounts and overall cost.
Key Takeaways
You receive a lump sum upfront in exchange for those borrowing terms. You agree to pay back a fixed amount over a set schedule with fixed or floating rates. Small businesses often use them for fixed assets like equipment or new buildings. You might prefer them for their flexibility and lower rates. Short and intermediate-term ones could involve balloon payments, while long-term options have fixed payments.
Understanding Term Loans
If you're running a small business, you might need cash for equipment, a new building, or other fixed assets to keep things moving. Some businesses even use them for monthly operations. Banks often have specific programs for this.
You apply just like for any credit—approach your lender with statements showing your creditworthiness. If approved, you get the lump sum and make payments monthly or quarterly over time.
These loans have fixed or variable rates and a maturity date. If it's for an asset, that asset's life can affect the schedule. You need collateral, and approval is rigorous to avoid defaults. Lenders might ask for down payments.
You choose term loans for the simple application, upfront cash, specified payments, and lower rates. It frees up your cash flow for other uses.
Fast Fact
Variable-rate term loans base themselves on benchmarks like the U.S. prime rate or LIBOR.
Types of Term Loans
Term loans vary by lifespan. Short-term ones are for firms not qualifying for credit lines, running under a year or up to 18 months. Intermediate-term loans go one to three years, paid monthly from cash flow. Long-term loans span three to 25 years, use assets as collateral, require payments from profits, and limit other commitments like debts or salaries. They might set aside profits for repayment.
Short and intermediate ones can be balloon loans, where the final payment is much larger.
Important Note
The principal isn't due until maturity, but most operate on a schedule with specific payments at intervals.
Example of a Term Loan
Take an SBA 7(a) guaranteed loan—it encourages long-term financing. They also offer short-term loans and credit lines for working capital.
Maturities depend on repayment ability, loan purpose, and asset life—up to 25 years for real estate, 10 for working capital or others. You repay with monthly principal and interest.
Fixed-rate SBA loans have constant payments; variable ones fluctuate. Lenders might allow interest-only during startup. No balloon payments usually. Prepayment fees apply for loans 15 years or longer. Assets secure the loan until recovery equals the amount.
Why Do Businesses Get Term Loans?
You get them for equipment, real estate, or working capital, repaid over one to 25 years. Small businesses use the cash for fixed assets or monthly operations. Banks have programs to assist.
What Are the Types of Term Loans?
As I mentioned, short-term for those without credit lines, under a year or up to 18 months. Intermediate: one to three years, monthly from cash flow. Long-term: three to 25 years, collateralized, payments from profits.
What Are the Common Attributes of Term Loans?
They have fixed or variable rates, monthly or quarterly schedules, and set maturity. Asset life impacts schedule if used for purchase. Require collateral and strict approval to reduce risks. No penalties for early payoff usually.
Other articles for you
Dissenters' rights allow shareholders who disagree with a corporate merger to receive fair value cash payment for their shares instead of participating in the deal.
A wellbore is a drilled hole used primarily for extracting oil, gas, or other resources from the earth.
This guide explains how to research and potentially cash in old stock certificates by identifying key details and contacting relevant parties.
Market cycles describe recurring patterns in financial markets with four phases that influence asset performance and investment decisions.
This text explains the concept of taxation, its history in the US, purposes, and various types.
The Price-to-Sales (P/S) ratio evaluates a company's stock value by comparing its market price to revenue, helping identify undervalued investments.
Accidental Death and Dismemberment (AD&D) insurance provides benefits for accidental death or loss of limbs, often as a rider to life insurance policies.
Financial risk management identifies, measures, and addresses investment risks to balance potential rewards and downsides.
A board of governors is a group appointed to oversee institutions, with the Federal Reserve's being the most prominent example in finance.
The guaranteed minimum accumulation benefit is a variable annuity rider that ensures a minimum value after a set period, protecting against market drops.