What is a Term Loan?
A term loan has a set maturity date and usually has a fixed interest rate.
How Does a Term Loan 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.
Term loans often mature within 10 years, but this is negotiable. They usually require collateral. Not all banks make term loans, and an existing relationship with a bank is usually helpful.
Why Does a Term Loan Matter?
Term loans are very common, and they provide a level of certainty to the borrower and the lender. The borrower usually has access to the full amount of principal upfront, knows when to make payments, and knows how much to pay. The lender knows that the principal will be repaid over time on a regular basis.