What is a Term Loan?

A term loan is a lending instrument that involves a regular payment schedule over an established time period with an interest rate that floats. That maturity rate on this type of loan is generally 10 years. Term loans are commonly used by businesses to pay for operational and/or equipment expenses.

Term loan instruments for business are standard financing tools. This type of loan is favored by many because it can provide a fair amount of capital quickly and not put a large burden on a company during the repayment process. There is a danger involved with the variable interest rate, which can under the right circumstances add a great deal to the overall bottom line.

Shopping for a Term Loan

Applying for a business loan demands careful comparison shopping. To get the best possible term loan, company officers should seek out:

  • The best interest rate - Shop by rates and look for fixed-rate instruments when possible.
     
  • Simple interest - A term loan that has a simple interest design is the best because it will allow for early repayment without penalty if the business so chooses.
     
  • A realistic term - Paying back a large sum of money in a 5-year term loan might not prove realistic for some businesses. Pay attention to the term and weigh the burden the repayment will place on the business down the road.