What is a Term Loan?
Learn what a business term loan is, understand how fixed repayment schedules work, and see when a term loan makes more sense than other financing options.
A term loan is a lump sum of money you borrow and repay over a set period (the "term") with regular payments. It is the most traditional form of business financing — you receive the full amount upfront, then make fixed monthly or weekly payments until the loan is paid off.
How Term Loans Work
When you receive a term loan, you get the full principal amount (minus any origination fees). You then make regular payments that include both principal and interest. The payment amount is typically fixed, though the split between principal and interest changes over time (amortization).
- Principal: The amount you borrow
- Interest rate: The cost of borrowing, expressed as an annual percentage
- Term: The length of time you have to repay (typically 1-10 years)
- Payment frequency: Monthly, weekly, or daily depending on lender
Short-Term vs. Long-Term
Term loans fall into two broad categories:
| Feature | Short-Term Loan | Long-Term Loan |
|---|---|---|
| Term length | 3-18 months | 2-10+ years |
| Typical rates | 10%-50%+ APR | 6%-20% APR |
| Approval speed | Fast (days) | Slower (weeks) |
| Credit requirements | More flexible | More stringent |
| Best for | Urgent needs, working capital | Major investments, equipment |
Fixed vs. Variable Rates
Term loans can have fixed or variable interest rates:
- Fixed rate: Your rate and payment stay the same for the entire term, making budgeting predictable
- Variable rate: Your rate adjusts with a benchmark (like prime rate), so payments can increase or decrease
Rate Environment
Fixed rates provide certainty but may start higher than variable rates. Variable rates can save money if rates fall but create risk if rates rise.
When to Use a Term Loan
Term loans work best when:
- You need a specific amount for a defined purpose
- You want predictable, fixed payments
- You are making a one-time investment (equipment, renovation, expansion)
- You prefer to pay off debt completely rather than maintain revolving credit
Term Loan vs. Line of Credit
The key difference: A term loan gives you money once, while a line of credit lets you draw funds repeatedly as needed.
Use a term loan for specific, one-time needs. Use a line of credit for ongoing or unpredictable funding needs.
Many businesses maintain both — a term loan for major investments and a line of credit for working capital flexibility.
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Related Articles
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Read more →What is APR? (Annual Percentage Rate Explained)
A clear explanation of Annual Percentage Rate, how it differs from simple interest rates, and why it matters when comparing business loan offers.
Read more →What is a Business Line of Credit?
Learn what a business line of credit is, how it works, and when revolving credit makes more sense than a traditional term loan.
Read more →What is Collateral? (Business Loan Context)
Understanding collateral requirements for business loans, what assets qualify, and how collateral affects your loan terms and approval.
Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
Third-Party Lenders: All loan products are offered by independent third-party lenders. Liminal Lending Co. is an Independent Sales Organization (ISO) and receives compensation from lenders for successful referrals. Terms and conditions of any loan are between you and the lender.
Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.