Term Loan Definition
A term loan, defined as a loan which exist for a specific, predetermined amount of time before it is called and requires payment, is a staple in the loan industry. A term loan contract defines the period of time when the loan must be repaid. The agreement for this is negotiated and signed by both lender and receiver.
Term Loan Explanation
A term loan, explained as a loan that exists for only a certain period of time, is one of the many types of financing for a business. Most loans, regardless of type, have some sort of time when they are expected to be repaid. A term loan agreement, in comparison, establishes the period which the loan remains open as part of the agreement. There are both short term and long term loans. Short term means less than 1 year. Long term, on the other hand, means greater than 1 year. These loans maintain interest, principle payments, fees, and other requirements just as non-term loans do.
For example, Kevin has started an A/C and heating company. He has worked to the bone to establish his company. He has gained accounts receivable, clients, some assets, and quality employees. Now Kevin must continue to grow his business. To do this, he needs financing.
Kevin has evaluated his options and now sees a term loan as his best financing opportunity. He makes sure to know what he wants and expects from the loan before he schedules a meeting with agents. Kevin will plan now rather than paying later.
When Kevin meets with the bank they negotiate an interest rate, principal payment schedule, and other details. With this he also negotiates a term loan amortization schedule. He decides on 5 years; ample time to repay. He also arranges for no penalty for early repayment to Kevin has flexibility in his loan. He leaves the meeting confident that he has made a good situation for his business.
For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.