What Is a Term Loan?

A term loan is a lump-sum business loan you repay over a fixed period (the “term”) through scheduled payments that cover principal and interest. Terms can be short (12–24 months), medium (2–5 years), or long (5–10+ years), with either fixed or variable pricing. In practice, term loans fund one-time needs—like buying equipment, renovating a facility, consolidating debt, or raising growth capital—while keeping repayment predictable.

If you need a clear, amortized payment for a specific purchase or project, a term loan is often the most straightforward, budget-friendly choice compared with revolving credit.

How a Term Loan Works

A lender advances a lump sum at closing. You repay in equal installments (monthly or quarterly) until maturity. Each payment includes interest plus principal, steadily reducing your balance. Key mechanics:

• Amortization: Payments follow an amortization schedule so your balance declines to $0 by the end of term.
  
  
• Pricing: Fixed rates keep payments constant; variable rates can move with benchmarks.
  
  
• Security: Term loans may be secured by equipment, vehicles, AR/inventory, or a general security agreement—or unsecured based on credit strength.
  
  
• Fees & Prepayment: Origination and admin fees are common; some loans include prepayment privileges or penalties—review before you sign.
  
  
• Use of Funds: Capital expenditures, expansion, acquisitions, or business refinancing.
  
  

If your need is equipment-specific, compare a term loan to equipment loans or equipment leases—both purpose-built for assets.

When a Term Loan Makes Sense

• Buying long-life assets: Trucks, trailers, shop machines, kitchen lines, or medical devices (you can also use dedicated equipment financing).
  
  
• Renovations & expansion: A single draw with predictable repayment.
  
  
• Consolidating short-term debt: Replace expensive revolving or merchant advances with one fixed payment.
  
  
• Refinancing owned equipment: Tap equity via refinancing & sale-leaseback if asset liquidity is the priority.
  
  

If your need is ongoing (inventory buys, payroll timing gaps), a line of credit or working capital loan may be a better fit.

Term Loan vs. Other Financing Options

Explore details: Line of Credit, Merchant Cash Advance, Invoice/Freight Factoring, and Asset-Based Lending.

Typical Structures You’ll See

• Amortizing fixed-rate: Same payment every month; simplest for budgeting.
  
  
• Variable-rate with amortization: Payment may change with prime—useful if you expect rate declines.
  
  
• Balloon or step-up: Lower payments today with a larger amount due at maturity or scheduled increases; align to seasonal cycles.
  
  
• Secured vs. unsecured: Collateral can improve approval odds and terms; unsecured prioritizes speed and simplicity.
  
  

How Lenders Evaluate a Term Loan

Underwriting focuses on the ability to repay and the value of collateral (if secured):

• Cash flow (bank statements, margins, DSCR)
  
  
• Time in business and management track record
  
  
• Credit profile and current debt obligations
  
  
• Asset value and useful life (if funding equipment)
  
  
• Purpose of funds and realistic payback plan
  
  

Government-backed programs like the Canada Small Business Financing Program (CSBFP) can help newer firms or asset-heavy projects qualify through risk-sharing with lenders.

Costs to Expect (and How to Manage Them)

• Interest: Fixed or variable; influenced by credit, collateral, term, and industry.
  
  
• Fees: Origination/admin, appraisal (if applicable), legal/registration on secured deals.
  
  
• Prepayment terms: Some loans allow partial or full prepayment; others have penalties—confirm early.
  
  
• Insurance & covenants: Lenders may require asset insurance and basic financial covenants.
  
  

To pressure-test affordability, estimate payments with our Calculator and compare against loans vs. leases for the same asset.

Application Checklist

• Government ID and company details
  
  
• Recent bank statements and financials (if available)
  
  
• Equipment quote or Inventory selection if purchasing through Mehmi (we sell equipment directly)
  
  
• Existing debt summary and purpose of funds
  
  
• Collateral list (if secured), insurance details, and ownership structure
  
  

Not sure where to start? See our Business Loans overview or About Us for how we underwrite as credit analysts.

Realistic Canadian Case Study

A Toronto-area fabrication shop wanted a CNC upgrade to win larger contracts. A revolving facility wouldn’t work—the cash need was a one-time $180,000 purchase with a 10-year useful life. We compared an asset-secured term loan to an equipment lease. The lease offered a slightly lower monthly payment with a nominal buyout; the term loan built equity faster and allowed principal prepayments after year one. The owner chose the fixed-rate term loan, matched to a 60-month amortization. Within two quarters, throughput rose 22% and the shop prepaid 10% of principal using retained earnings—saving interest without disrupting cash flow.

Term Loans for Equipment: When to Use the Dedicated Route

If your primary goal is acquiring a specific asset—tractor, reefer trailer, excavator, or imaging unit—dedicated equipment products may offer longer terms, higher loan-to-value, and asset-tailored buyouts. Compare Equipment Loans, Equipment Leases, and Refinancing/Sale-Leaseback if flexibility around upgrades or end-of-term options matters.

Frequently Asked Questions

What exactly is a term loan?
A lump-sum business loan with a fixed repayment schedule over a defined period. Payments reduce principal until the balance hits zero at maturity. See Term Loan.

How is a term loan different from a line of credit?
A term loan funds a one-time need with set payments; a line of credit is revolving—you draw, repay, and redraw for ongoing working capital.

Is a term loan secured or unsecured?
Both exist. Secured loans use collateral and can improve pricing; unsecured loans prioritize speed and simplicity. Learn more: Secured Loan and Unsecured Loan.

Can I use a term loan to buy equipment?
Yes, but asset-specific solutions like equipment loans or leases may offer better alignment with asset life and residuals.

Do startups qualify for term loans?
With strong personal credit, a down payment, collateral, or support through CSBFP, yes—especially when the loan purpose clearly drives revenue.

What if my cash need is short-term or tied to receivables?
Consider Working Capital Loans, Invoice/Freight Factoring, or Asset-Based Lending.

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Next Steps

If you’re weighing a term loan against other options, run a scenario in our Calculator and compare it to a lease or line of credit for the same need. Then share your numbers with us—Feel free to contact our credit analysts via Contact Us. We’ll structure terms around your cash flow, equipment life, and growth plan—often with 24–48-hour approvals.