Term Loans 101: What is a term loan and does my business qualify?

Term Loans 101: What is a term loan and does my business qualify? — A term loan is a type of business financing where a company borrows a lump sum of money from a lender and agrees to repay it over a set period, typically with regular payments that include principal and interest. Term loans are often used for larger investments or projects, such as purchasing equipment, expanding operations, or funding other long-term initiatives.

Here are the key features of a term loan:

1. Loan Amount

The amount borrowed is typically predetermined based on the business’s needs and the lender’s evaluation of the company’s ability to repay.

2. Repayment Period

Term loans have a fixed repayment schedule, which can range from short-term (less than a year) to long-term (up to 25 years or more).

3. Interest Rates

The loan comes with either a fixed or variable interest rate:

• Fixed-rate loans have consistent payments throughout the term.
• Variable-rate loans may fluctuate based on market conditions.

4. Collateral Requirements

Many term loans are secured, meaning the business must provide collateral, such as equipment, inventory, or real estate, to guarantee repayment. Some loans may be unsecured, but they often come with higher interest rates.

5. Purpose

Term loans are often used for specific purposes, like:

• Purchasing machinery or equipment
• Expanding facilities
• Refinancing existing debt
• Funding growth opportunities

6. Advantages

• Predictable repayment schedule
• Can fund significant expenditures without depleting cash reserves
• May offer tax-deductible interest (consult a tax advisor)