Term

Written By
Paul Tracy
Updated November 4, 2020

What is a Term?

In the finance world, a term is the length of time until a debt matures. A term can also be a condition of a deal, as evidenced by the phrase term sheet, which describes the terms of a deal.

How Does a Term Work?

Let's say Company XYZ wants to borrow $1 million to build a factory. It meets with its bank, ABC Bank, to negotiate the loan. The company and the bank agree to a 10-year loan with quarterly payments and a 7% interest rate. In this case, the term is 10 years.

Why Does a Term Matter?

The longer the term of a piece of debt, the lower the payments usually are. However, the interest rate may be higher due to the lender's increased risk exposure.

In the second instance, when two companies are negotiating a deal and are working through a term sheet, one term may have more influence over the deal than another and thus may create significant sticking points.

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