A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate. For example, many banks have term-loan programs that can offer small businesses the cash they need to operate from month to month. Often, a small business uses the cash from a term loan to purchase fixed assets such as equipment for its production process.
A term loan is for equipment, real estate or working capital paid off between one and 25 years. The loan carries a fixed or variable interest rate, monthly or quarterly repayment schedule and a set maturity date. The loan requires collateral and a rigorous approval process to reduce the risk of default. A term loan is appropriate for an established small business with sound financial statements and a substantial down payment to minimize payment amounts and total loan cost.
Based on the loan tenor, term loans are broadly classified into short-term and long-term loans. Short-term loans are for a short tenor (4-5 years). On the other hand, long-term loans are a long tenor (10-15 years). Based on the needs of your business, you can either opt for a short-term or a long-term loan.