what is a term loan 
a term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms term loans are normally meant for established small businesses with sound financial statements in exchange for a specified amount of cash the borrower agrees to a certain repayment schedule with a fixed or floating interest rate term loans may require substantial down payments to reduce the payment amounts and the total cost of the loan understanding term loansterm loans are commonly granted to small businesses that need cash to purchase equipment a new building for their production processes or any other fixed assets to keep their businesses going some businesses borrow the cash they need to operate on a month to month basis many banks have established term loan programs specifically to help companies in this way business owners apply for term loans the same way they would any other credit facility by approaching their lender they must provide statements and other financial evidence demonstrating their creditworthiness 1 approved borrowers get a lump sum of cash and are required to make payments over a certain period of time usually on a monthly or quarterly repayment schedule term loans carry a fixed or variable interest rate and a set maturity date if the proceeds are used to finance the purchase of an asset the useful life of that asset can impact the repayment schedule the loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments as noted above some lenders may require down payments before they advance the loan borrowers often choose term loans for several reasons including taking out a term loan also frees up cash from a company s cash flow in order to use it elsewhere variable rate term loans are based on a benchmark rate like the u s prime rate or the london interbank offered rate libor types of term loansterm loans come in several varieties usually reflecting the lifespan of the loan these include both short and intermediate term loans may also be balloon loans and come with balloon payments this means the final installment swells or balloons into a much larger amount than any of the previous ones while the principal of a term loan is not technically due until maturity most term loans operate on a specified schedule requiring a specific payment size at certain intervals example of a term loana small business administration sba loan officially known as a 7 a guaranteed loan encourages long term financing short term loans and revolving credit lines are also available to help with a company s immediate and cyclical working capital needs 1maturities for long term loans vary according to the ability to repay the purpose of the loan and the useful life of the financed asset maximum maturity dates are generally 25 years for real estate up to 10 years for working capital and 10 years for most other loans the borrower repays the loan with monthly principal and interest payments 3as with any loan an sba fixed rate loan payment remains the same because the interest rate is constant conversely a variable rate loan s payment amount can vary since the interest rate fluctuates a lender may establish an sba loan with interest only payments during a company s startup or expansion phase as a result the business has time to generate income before making full loan payments most sba loans do not allow balloon payments the sba charges the borrower a prepayment fee only if the loan has a maturity of 15 years or longer business and personal assets secure every loan until the recovery value equals the loan amount or until the borrower has pledged all assets as reasonably available 4