Term Loan
Last updated October 1, 2026
A term loan is a loan for a set amount of money, paid out at the start (or in a few planned stages) and repaid over a fixed period on a fixed schedule. The borrower knows the amount, the rate or rate formula, the payment dates and the maturity date from day one. Once principal is repaid, it cannot be borrowed again. That is the main difference from a business line of credit.
Most business term loans are repaid in equal monthly payments that follow an amortization schedule. Some have a long amortization and a shorter term, leaving a balloon at the end. For example, a lender might make a hypothetical $300,000 equipment loan over five years at a fixed rate. The borrower pays the same amount each month, and the balance reaches zero at the last payment.
Term loans fund things that pay off over several years: machinery, vehicles, a building, a business acquisition or a large build-out. Government-backed options in the US, such as the Small Business Administration (SBA) 7(a) program, are mostly term loans.
Why it matters for lenders
A term loan is repaid mainly from the borrower's operating cash flow over a long period. US bank examiners note that term loans commonly finance capital spending and depend on that cash flow continuing. A lender is betting on how the business will perform for years, not months. Underwriting therefore looks at historic and projected cash flow, debt coverage and the useful life of the asset being financed.
To manage that long exposure, term loans usually carry collateral, a personal guarantee from the owners and loan covenants such as a minimum debt coverage ratio and a duty to send annual financial statements. Those terms only protect the lender if someone checks them after closing.
Term loans also need clean servicing. Prepayments, rate resets on variable loans and payment changes all have to flow through the schedule correctly.
How it works in practice
A community lender approves a $250,000 term loan for a bakery to buy ovens and expand its storefront. At closing, the loan officer records the amount, rate, term, payment day, collateral and the owner's guarantee. Funds go partly to the equipment vendor and partly to the contractor.
After boarding, the system bills the bakery monthly by automatic bank debit. Each spring, it asks for the year's financial statements and tax returns. A credit analyst spreads the numbers and tests the coverage covenant.
When this runs on spreadsheets and calendar reminders, annual reviews slip and covenant tests are skipped. A lender may not notice a weakening borrower until payments stop. Tying the reporting dates and covenant tests to the loan record keeps the review on schedule.
Related terms
Business Line of Credit
A credit limit a business can draw from as needed, repay and draw again, much like a business credit card but usually larger and cheaper. Interest is charged only on the amount drawn. Lines of credit typically fund working capital, such as inventory, payroll gaps or receivables, and are often renewed each year after the lender reviews the business.
Amortization Schedule
A table that lists every scheduled payment on a loan and shows how much of each one goes to interest and how much reduces the principal balance. Early payments are mostly interest. Later payments are mostly principal. Lenders use the schedule to bill borrowers, track balances and check that a loan is paying down as planned.
Loan Covenant
A promise in a loan agreement that the borrower will do, or not do, certain things while the loan is open. Covenants include sending financial statements, keeping insurance, staying above a minimum debt service coverage ratio and not taking on more debt without approval. Breaking a covenant can be an event of default, even if every payment is on time.
Collateral
Assets a borrower pledges to a lender to secure a loan. If the borrower does not repay, the lender can take and sell the collateral to recover what it is owed. Common collateral in business lending includes real estate, equipment, inventory, receivables and cash accounts. Collateral is a secondary source of repayment, behind the borrower's cash flow.
SBA 7(a) Loan
An SBA 7(a) loan is a small business loan made by a bank or other approved lender and partly guaranteed by the US Small Business Administration. It is the SBA's main loan program and can fund working capital, equipment, real estate, refinancing or the purchase of a business. As of 2026, SBA lists a maximum loan amount of $5 million.
See how lenders put this into practice
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