What is a Term Loan?

A Term Loan is the most common type of loan and likely what most people think of when they think of business loans.

Term loans are most suited to established small businesses with sound financial statements, good owner credit, and the ability to make a substantial down payment to minimize both the monthly loan payment and the total cost of the loan.

With a Term Loan, a business borrows a predetermined amount of money with a set interest rate, which may be fixed or variable, and then re-pays the loan over an agreed-upon amount of time in a specified interval and payment amount.

Term loans are classified into two types:

• Intermediate or Medium Term Loans - Medium Term Loans typically have a term of less than three years and are usually repaid in monthly installments. If the loan is being used to purchase a business asset, repayment is often tied directly to the useful life of the asset being financed. If the funds will be used to finance the purchase of business equipment, Equipment Leasing is another option to consider.
  
  
• Long Term Loans - Long Term Loans typically have a term of three to ten years, and sometimes longer. Long Term Loans will almost always require collateral and a personal guarantee from the owner, and lenders may possibly request a blanket lien on the business. These loans usually limit the amount of additional financial commitments the business may assume including other debts. Even dividends and principal salaries may be restricted and the lender will sometimes require a certain amount of profit be allocated to repay the debt.

Because of the application, collateral, and credit score requirements associated with traditional Term Loans, many businesses prefer Revenue Based Loans where the risks are reduced since no collateral or personal guarantee are required. Also, since less paperwork is required and owner credit score does not prevent approval of a Revenue Based Loan, it makes qualification much quicker and easier.

There are typically few restrictions on use of funds for a Term Loan, however, they're typically used to fund larger purchases and best used to create more revenue for the business such as for marketing and business expansion. However funds can also be used for things like purchasing new supplies & equipment and emergency needs such as the ability to meet payroll, pay taxes, or make rent.