Term loan
What it means
A term loan is a type of business loan. You borrow a set amount up front and pay it back in regular instalments, usually monthly, over a fixed period, with interest.
It's not the same thing as a loan term, which is simply how long any loan lasts.
See also: Loan term, Typical business loan terms
Why lenders ask
Term loans are the usual way businesses pay for things that last: equipment, vehicles, renovations, a building, or buying an existing business. The lender sets the length of the loan to fit the life of whatever it pays for.
How long is a term loan?
It depends mostly on what the money is for. A loan for equipment is usually amortized over the equipment's appraised useful life, while a loan for a building runs much longer. The lender wants the loan paid off before the thing it bought wears out or loses its value.
Term loan vs. line of credit
A term loan is borrowed once and paid down to zero. A line of credit works more like a credit card: you draw on it as you need to, pay it back, and draw again. Lines of credit are meant for short-term needs like covering the gap until customers pay you, while term loans are meant for things the business will use for years.
Using a line of credit to buy long-lasting assets is a common mistake, because it leaves no room on the line for the everyday swings it was meant for.
Good to know
If you're applying for a term loan, the Loan Ready calculator shows how its monthly payment fits with the rest of your cash flow.