How a Term Loan Works

A term loan gives your business a lump sum up front and a clear plan to pay it back over a fixed period (the “term”) through scheduled payments that include principal and interest. Because payments are amortized, your outstanding balance falls with every instalment until it reaches zero at maturity. For Canadian SMEs, term loans are a straightforward way to fund one-time needs—equipment, renovations, acquisitions, or business debt consolidation—with predictable cash flow.

If you want a plain, budgetable path to fund a defined project or own an asset outright, start with a Term Loan. Then compare it with Equipment Financing and a Business Line of Credit to confirm fit.

The Core Mechanics (Step by Step)

Application → Approval → Funding → Repayment → Maturity. Under the hood:

• You receive a lump sum at closing to fund a specific purchase or project.
  
  
• You repay monthly (or quarterly) with a fixed schedule. Each payment contains interest (cost of borrowing) plus principal (your balance going down).
  
  
• You finish at $0 by the end of the term—unless there’s a balloon or you prepay early.
  
  
• Pricing can be fixed (stable payment) or variable (moves with a benchmark).
  
  
• The loan can be secured by equipment/vehicles or a unsecured cash-flow loan when speed and simplicity matter.
  
  

When the purpose is asset-specific (e.g., a truck, excavator, or imaging unit), also price Equipment Loans and Equipment Leases—they’re designed to match asset life and may lower payments via residuals.

What Drives Your Monthly Payment

• Amount & Term: Larger amounts and shorter terms mean higher payments; longer terms lower the monthly but increase total interest.
  
  
• Rate Type: Fixed = stable payment; variable = payment can change.
  
  
• Security: Collateral (equipment, vehicles, GSA) usually improves approval odds and pricing.
  
  
• Business Profile: Time in business, revenue stability, and credit history.
  
  
• Fees & Taxes: Origination/registration fees and sales tax on the asset (if applicable) affect cash flow.
  
  

Use the Calculator to model these variables side-by-side.

The Anatomy of a Term Loan (At a Glance)

Example: How Amortization Feels Month to Month (Illustrative)

Use the Calculator to replace “$X” with your numbers (amount, term, rate, down payment).

Term Loan vs Line of Credit vs Equipment Lease

Explore options: Line of Credit, Working Capital Loan, Equipment Leases.

Qualification: What Lenders Review

• Cash Flow: Ability to service the payment (bank statements, margins, DSCR).
  
  
• Time in Business & Management: Experience and contract pipeline.
  
  
• Credit Profile: Personal and business credit.
  
  
• Collateral & Useful Life (secured deals): Equipment value and resale strength.
  
  
• Purpose of Funds: Clear ROI and repayment logic.
  
  

Newer firms can also consider the Canada Small Business Financing Program (CSBFP). For asset-heavy firms, Asset-Based Lending may increase available capital. If you already own equipment and need liquidity, Refinancing & Sale-Leaseback can unlock cash while you keep using the asset.

Costs to Model (Before You Sign)

• Interest: Fixed or variable, driven by risk profile, term, collateral, and industry.
  
  
• Fees: Origination/admin, PPSA registration, legal, and any appraisal.
  
  
• Prepayment Terms: Some loans allow partial or early payout; others carry penalties—understand them upfront.
  
  
• Insurance & Covenants: Asset insurance and light reporting may apply in secured transactions.
  
  

Run side-by-side scenarios with the Calculator and compare total cost to Equipment Loans or a Line of Credit.

Documentation Checklist

• Government ID and company details
  
  
• Recent bank statements and any available financials
  
  
• Quotes/invoices (or select a unit from our Inventory—we sell equipment directly)
  
  
• Existing debt summary and purpose of funds
  
  
• Collateral list and insurance info (secured loans)
  
  

If conventional lenders are tight, ask about In-House Financing.

Realistic Canadian Case Study

A Calgary landscaping contractor wanted to add a skid-steer and attachments to take on municipal work. Paying cash would drain working capital before spring. Mehmi compared three options in the Calculator:

• Term Loan (60 months): Fixed payment, direct ownership.
  
  
• Equipment Lease (60 months, 10% buyout): Lower monthly; buyout at end.
  
  
• Sale-Leaseback + Term Loan: Monetize an owned dump trailer to fund part of the purchase, then finance the rest.
  
  

The contractor chose the term loan for faster equity build and predictable budgeting. With the new unit deployed, revenue rose ~20% over the season. They used the prepayment privilege to knock 8% off principal after peak months—saving interest while keeping cash for payroll and materials.

FAQs: How a Term Loan Works

How do payments work on a term loan?
They’re amortized: each instalment covers interest and pays down principal so the balance reaches $0 at maturity. See Term Loan.

Is a term loan secured or unsecured?
Both exist. Secured loans use collateral and often price better; unsecured loans favour speed and simplicity.

When is a line of credit better than a term loan?
When your need is ongoing or seasonal. A Line of Credit lets you draw/repay/redraw and pay interest only on what you use.

Can I use a term loan to buy equipment?
Yes—but compare Equipment Loans and Leases for asset-matched terms and potential residual savings.

What if I already own equipment but need cash now?
Consider Refinancing & Sale-Leaseback—unlock equity and keep using the asset.

Can I consolidate expensive short-term debt into a term loan?
Yes—Business Refinancing can replace multiple obligations with one predictable payment.

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Next Step

Model your scenario with the Calculator, compare a Term Loan to Equipment Financing and a Line of Credit, then contact us. Feel free to contact our credit analysts—we’ll structure terms around your cash flow, asset life, and timeline, often with 24–48h decisions.

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