Term loan

A business loan for a set amount with a maturity of more than one year, repaid on a fixed schedule from the company's cash flow.

The Federal Reserve’s examination manual describes term business loans as loans with a maturity of more than one year, at a fixed or variable rate, meant to fund long-term assets such as plant and equipment, or to carry the leftover balance on a line of credit or long-term working capital. They are repaid from the business’s cash flow on a fixed amortization schedule.

That last point drives the underwriting. The manual says the analysis of a seasonal loan leans on the balance sheet, while a term loan is judged on both the balance sheet and the income statement, because it is repaid from excess cash flow over years. A lender will want several years of financial statements and tax returns and will compare the yearly payments with the cash the business produces.

Term loans usually come with a written loan agreement. The manual describes affirmative covenants, such as keeping insurance in force, and negative covenants, such as not falling below a minimum debt coverage ratio or selling assets. Because the credit is outstanding longer, term loans are often secured.

Go further

• Business lenders by state: Lenders holding business loan balances.
• Amortization and balloon calculator: Payment schedule for a loan you enter.
• Amortization and balloon calculator: Payment, balance at maturity and interest paid, for a loan that amortizes over longer than it runs.
• DSCR calculator: Cash flow over debt service. Type the cash flow and the loan terms, see the ratio and the cushion before it falls to 1.00x.
• SBA 7(a) payment calculator: Monthly payment with the FY2027 upfront guaranty fee, with the fee paid in cash or added to the loan.
• How bankers evaluate a commercial loan deal: A credit officer asks one question five ways: how will this loan be repaid, and what happens if it is not? Knowing the five tests lets you size a request before you send it.
• Global cash flow, explained step by step: A property can cover its loan while the people behind it cannot cover their other debts. Global cash flow is the test that looks at all of it at once.
• Equipment financing package checklist: Equipment is the simplest thing a business borrows for. There is a price, an invoice and a machine the lender can take back. The package is short, and the choices are about term, lien and who the lender is.

Related terms

• Line of credit: A commitment from a lender to advance money up to a set limit, which a business can draw, repay and draw again as its cash needs rise and fall.
• Working capital: The money a business has tied up in day-to-day operations, measured as current assets minus current liabilities; a working capital loan funds that gap.
• Equipment financing: A loan used to buy business equipment, secured by that equipment and repaid over a term tied to how long the equipment will be useful.
• Amortization: The schedule on which a loan's principal is paid down through regular payments. The amortization period sets the payment size and can be longer than the loan's term.
• Loan covenant: A promise in a loan agreement that the borrower will do certain things, or will not, for as long as the loan is outstanding, such as keeping a minimum debt service coverage ratio.
• Balloon payment: The lump sum of remaining principal due at the end of a loan's term when the regular payments did not pay the loan off in full.
• SBA 7(a) loan: SBA's main business loan program. A lender makes the loan and SBA guarantees part of it: up to 85 percent of $150,000 or less and 75 percent of more, on loans up to $5,000,000.

Plain definitions for orientation, not legal, tax or credit advice. A lender's own policy decides what it will do.