What Is A Term Loan? - Comprehensive Guide To Term Loans

By Author: ravi ranjan
Total Articles: 1
Comment this article

A term loan is a fixed-repayment loan that has a specified maturity date. It is also known as a final loan, revolving credit facility, or term financing. It’s an unsecured loan offered by banks and other financial institutions for fixed repayment over a pre-specified period. A term loan is generally issued for the last tranche of an asset financing program or capital expenditure (CAPEX) cycle. It is used to fund new equipment or real estate purchases or for general operational expenses. A term loan can be repaid in one lump sum or in multiple installments with specific payment dates and amounts. However, the repayment period and frequency of payments are optional and determined by the borrower based on their unique circumstances and needs.

How to get a term loan?
The best way to get a term loan is to work with a lender who knows your business and your industry. Your term lender—whether it is a commercial bank, a specialized lender, or other financial institution will be able to help you find the best financing for your needs. If you are looking for a term ...
... loan and want to get pre-approved, make sure to provide as much information as possible to the lender. This includes your business's financial statements, cash flow, and credit score if you have one.

Benefits of a Term Loan
- A reduced cash outflow: The cash outflow required for a term loan is lower than what is required for a bank loan or an asset-backed loan because of its shorter repayment period. It also has lower interest rates since its repayment is fixed, unlike a revolving line of credit (LOC) or a home equity loan that have variable rates based on the financial institution’s prime rate.
- A lower risk of default: Term loans are unsecured loans, so they are a lower risk for lenders. They also have a lower interest rate because of this reduced risk.
- No prepayment penalties: Unlike a home equity loan or a LOC, there are no prepayment penalties if you need to pay off the loan early.
- Fixed interest rate: Compared to a revolving line of credit or an asset-backed loan, a term loan has a fixed interest rate.

Disadvantages of a Term Loan
- Higher interest rates: Unlike a revolving line of credit, a term loan has a higher interest rate because it is unsecured. This means that if you can’t repay the loan, there is no collateral to go after if you default.
- Higher monthly payment: A term loan has a higher monthly payment than a revolving line of credit. This is because a term loan has a fixed repayment period while a LOC has a variable repayment period.
- A longer repayment period: Term loans are usually repaid over a longer period than asset-backed loans or revolving lines of credit. This is because you do not have to repay this type of loan as soon as you have finished using the money.
- No line of credit: Unlike a revolving line of credit, where you can draw money as long as you repay it according to the agreement, a term loan has a fixed amount that you can borrow.

Repayment of Term Loan
Term loans are repaid in full at the end of the term with interest. There is no amortization schedule or principal reduction as with a mortgage. The interest on the term loan is typically calculated as a percentage of the total amount borrowed. The interest rate on a term loan is fixed in advance. You can make multiple payments each month, or you can pay the term loan in one lump sum. You can choose how and when you want to repay the loan, but you should make sure you work with your lender to set a repayment schedule that works for you.

Types of Term Loans
- Acquisition loan: This is a type of term loan used for the acquisition of a new business. It is often provided as a final closing of a syndicate or syndicated loan. - Acquisition bridge loan: This is a short-term, high-interest loan that is used to finance a pending transaction. It is an interim financing option that allows the borrower to purchase the asset with a loan and then pay off the loan once the transaction has closed.
- Acquisition financing: This is a long-term loan that provides funds for the acquisition of business assets. It is intended to bridge the gap between the time when a deal is finalized and the closing of the funding.
- Construction loan: This is a type of term loan used to fund the construction of a commercial real estate project.
- Construction bridge loan: This is a short-term, high-interest loan that is used to finance a pending transaction. It is an interim financing option that allows the borrower to construct the asset with a loan and then pay off the loan once the transaction has closed.
- Construction financing: This is a long-term loan that provides funds for the construction and purchase of real estate projects.
- Expansion loan: This is a type of term loan used to fund business expansion. It is intended to bridge the gap between the time when a deal is finalized and the closing of the funding.
- Expansion bridge loan: This is a short-term, high-interest loan that is used to finance a pending transaction. It is an interim financing option that allows the borrower to expand the business with a loan and then pay off the loan once the transaction has closed.
- Expansion financing: This is a long-term loan that provides funds for the expansion of business operations.
- Working capital loan: This is a type of term loan used to fund working capital or operating cash flow shortages. It is intended to bridge the gap between the time when a deal is finalized and the closing of the funding.