A term loan provides a lump sum cash amount to the borrowers in exchange for specific lending terms. Term loans are generally meant for established small businesses that have sound financial statements. In exchange for a specified amount of cash, the borrower agrees to a fixed repayment schedule with a fixed or floating interest rate. Term loans may require a substantial down payment to reduce the repayment amount and the total cost of the loan.

A term loan is usually for equipment, real estate or paid-up working capital between one and 25 years. A small business often uses the cash from a term loan to purchase real estate, such as equipment or a new building for its production process. Some businesses borrow the cash they need to operate from month to month. Many banks have specifically set up term-loan programs to help companies in this way.

Term loans come in several varieties, which usually reflect the life of the loan. A short-term loan, usually given to firms that do not qualify for a line of credit, typically lasts less than a year, although it can also refer to loans of up to 18 months.

An intermediate-term loan typically lasts longer than one to three years and is paid off in monthly installments from the company’s cash flow. A long-term loan lasts three to 25 years, uses company assets as collateral, and requires monthly or quarterly payments from profit or cash flow.

Term loans have a fixed or variable interest rate, a monthly or quarterly repayment schedule, and a specified maturity date. If the loan is used to finance the purchase of an asset, the useful life of that asset may affect the repayment schedule. Loans require collateral and a rigorous approval process to reduce the risk of default or failure to make payments. However, term loans usually do not carry any penalty if they are repaid ahead of time.