Securing the right financing can make or break a business. Whether you’re purchasing equipment, expanding operations, or managing cash flow, a term loan offers a structured way to borrow and repay over time.
For businesses that need a lump sum with predictable payments, term loans provide a clear path to funding. But how do they work, and what should you consider before applying?
This guide breaks down the essentials — types of business term loans, repayment structures, qualification factors, and how to choose the right option for your business.
Table of Contents
- What is a Term Loan for Businesses?
- How Does a Term Loan Work?
- How Long Are Term Loans?
- What is an Example of a Term Loan?
- Why Term Loans Could Be Right for Your Business
What is a Term Loan for Businesses?
A term loan provides businesses with a lump sum of capital, repaid over a fixed period with interest. Companies often use this type of financing for significant, one-time expenditures. It plays a crucial role in growing businesses, funding capital investments, and enhancing operational capacity.
Also known simply as a “term,” this loan structure allows businesses to make regular payments over a predetermined timeframe. The predictable repayment schedule makes it a popular choice for companies looking to manage cash flow while financing growth.
Under this loan structure, borrowers receive funds upfront and repay them in installments. Banks, private lenders, and other financial institutions determine loan terms based on factors like creditworthiness, loan size, and commercial loan interest rates.
How Does a Term Loan Work?
A term loan provides a business with a lump sum of capital, which the business repays in fixed installments over a set period, including interest.
To secure a term loan, a business must first identify its funding needs and then apply through a bank, credit union, or private credit lender. The application process requires details like loan purpose, requested amount, and financial records. Lenders assess risk using this information and a credit check before approving the loan. Many lenders do soft credit pulls to approve applications, however. It’s crucial to ask questions about credit checks up front to avoid being surprised by a credit inquiry you weren’t expecting.
Once approved, the lender issues a loan agreement outlining key terms, including repayment schedule, interest rates, and fees. After signing, the borrower receives the funds and begins making scheduled payments.
How Long Are Term Loans?
Term loans can be short-, medium-, or long-term, depending on the repayment period:
- Short-term business loans typically last less than a year.
- Medium-term business loans range from one to five years.
- Long-term business loans extend beyond five years.
Each option serves different business needs, from covering immediate cash flow gaps to financing large-scale expansions.
Understanding the different types of term loans helps businesses make the right decision.
What is an Example of a Term Loan?
A powerful example of a term loan in action is a resort company that secured $1.1 million to solve a recurring infrastructure issue.
Each winter, a critical bridge on their property would break and limit access to event spaces, costing over $100,000 annually in repairs. This ongoing expense created cash flow challenges and restricted growth opportunities.
Traditional lenders required collateral the resort couldn’t provide, but they secured funding in just two weeks with alternative financing. The loan allowed them to rebuild the bridge permanently, eliminate repair costs, and open new revenue streams.
This case study illustrates how term loans can provide businesses with the capital to overcome financial obstacles and fuel long-term success.
Why Term Loans Could Be Right for Your Business
A term loan can be a strategic solution for businesses looking to fund major expenses while maintaining cash flow stability.
Whether you need capital to invest in new equipment, expand operations, or cover unforeseen costs, term loans for business offer structured financing with predictable payments — making budgeting easier and growth more achievable.
With flexible terms, a team of expert business advisors, and a streamlined approval process, securing a term loan from National Business Capital isn’t complicated.
Start your term loan application today to explore financing options tailored to your business needs.
Frequently Asked Questions
Is a Term Loan Good or Bad?
When used strategically, a term loan can lead to positive outcomes, offering predictable payments that help businesses budget for growth. However, high interest rates or excessive debt can strain cash flow if not managed properly.
What is the Difference Between a Term Loan and a Normal Loan?
A term loan provides businesses with a lump sum and fixed repayments over time, ideal for long-term investments. In contrast, a “normal loan” covers various lending options with flexible or revolving terms.
Why Do Businesses Get Term Loans?
Businesses use term loans for major expenses like equipment, expansion, or refinancing. They allow for large investments while preserving cash flow, making them ideal for companies with stable revenue and long-term growth plans.
For instance, companies exploring small business funding options may choose small business term loans to cover equipment purchases, expansion, or working capital needs.
Who Is Eligible for Term Loans?
Term loans are typically available to established businesses with a proven record of revenue, good credit history, and stable operations. Eligibility generally requires that businesses:
- Have been operating for at least 1-2 years
- Maintain a minimum annual revenue threshold
- Demonstrate positive cash flow
The business owner will also need to show credit worthiness, possessing a credit score above 600. In addition to the above, lenders will usually consider the business’s debt-to-income ratio, collateral availability, and industry when determining whether to approve.
What is the Difference Between a Term Loan and a Line of Credit?
The difference between a term loan and a line of credit is a term loan provides a lump sum repaid over time and is ideal for large purchases. A line of credit offers flexible borrowing, letting businesses draw funds as needed for short-term expenses.
Joseph Camberato
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
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