term loan

A term loan is a type of business credit with a repayment period between one and fifteen years. These loans are typically repaid through systematic amortization payments over their lifespan. While they can be secured by equipment, larger, financially stable companies may obtain unsecured term loans.1

Commercial banks and life insurance companies are the primary providers of term loans. The interest rate on these loans varies based on the loan amount and the borrower's financial standing. Term loans carry more risk for lenders than short-term loans because their funds are committed for an extended period, during which the borrower's financial situation could change significantly. To mitigate this risk, lenders often include covenants in the loan agreement that require the borrower to maintain specific financial ratios and adhere to certain business policies.1