fixed-term business loan with a maturity of more than one year, providing an organization with working capital to acquire assets or inventory, or to finance plant and equipment generating cash flow. The term loan is the most common form of intermediate-term financing arranged by commercial banks, and there is wide diversity in how it is structured. Maturities range from one year to 15 years, although most term loans are made for one- to five-year periods. Term loans are paid back from profits of the business, according to a fixed amortization schedule. Term loans may be secured or unsecured, and carry a rate based on the lender's cost of funds, the federal funds rate, LIBOR, or the bank prime rate. Loan interest normally is payable monthly, quarterly, semiannually, or annually.
Most business loans contain both affirmative and restrictive covenants that impose certain conditions on the borrower that permit acceleration of the maturity if the loan conditions are violated. The lender may, for example, restrict cash dividends paid and loans taken out by corporate officers, and usually will require the borrower to maintain the business in good order, keep adequate insurance, and file quarterly financial statements with the bank. Larger borrowings often are financed by several banks through a syndication arrangement.
intermediate to long-term (typically two to ten years) secured credit granted to a company by a commercial bank, insurance company, or commercial finance company, usually to finance capital equipment or provide working capital.
intermediate- to long-term (typically, two to ten years) secured credit granted to a company by a commercial bank, insurance company, or commercial finance company usually to finance capital equipment or provide working capital. The loan is amortized over a fixed period, sometimes ending with a balloon payment. Borrowers under term loan agreements are normally required to meet minimum working capital and debt to net worth tests, to limit dividends, and to maintain continuity of management.
one with a set maturity date, typically without amortization.
Example: Terry purchased a tract of land for $15,000, and borrowed $10,000 from a lender with a 5-year term loan. The interest rate is 8%, payable annually; the entire principal is due at the end of the 5-year term.
