In corporate borrowing, a term loan is usually for equipment, real estate, or working capital paid off between one and 25 years. Often, a small business uses the cash from a term loan to purchase fixed assets, such as equipment or a new building for its production process. Some businesses borrow the cash they need to operate from month to month. Many banks have established term-loan programs specifically to help companies in this way.
The term loan carries a fixed or variable interest rate—based on a benchmark rate like the U.S. prime rate or the London InterBank Offered Rate (LIBOR)—a monthly or quarterly repayment schedule, and a set maturity date. If the loan proceeds are used to finance the purchase of an asset, the useful life of that asset can impact the repayment schedule. The loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments. However, term loans generally carry no penalties if they are paid off ahead of schedule.
Term loans come in several varieties, usually reflecting the lifespan of the loan.
Both intermediate-term loans and shorter long-term loans may also be balloon loans and come with balloon payments—so-called because the final installment swells or "balloons" into a much larger amount than any of the previous ones.