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 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.