A business term loan advances an agreed lump sum and repays it, with interest and fees, over a set period. It is the familiar shape of company borrowing, but the label says little about security, rate type, covenants or the true cost of leaving the facility early.
Section 01
How a term loan works
Once the facility completes, the lender advances the full amount to the business. The agreement sets a repayment schedule, usually monthly, over months or years. Each payment can include capital and interest, although some facilities allow an initial interest-only period or a larger final payment.
With an amortising loan, the outstanding balance falls as capital is repaid. A bullet or balloon structure leaves more capital until the end, reducing earlier payments but increasing the refinancing or final-payment risk. Directors should know which structure the cash-flow forecast is modelling.
Section 02
Where it fits
Term debt is a strong candidate where the amount and purpose are clear: machinery, fit-out, acquisition, a new site, a recruitment programme or a defined growth project. The investment should have a plausible route to cash generation before the repayments create strain.
It is less efficient when the business does not know how much it needs or only faces intermittent short gaps. Interest usually runs on the whole outstanding loan, including cash left unused in the bank. A revolving facility or overdraft may provide better control for repeatable short-term needs.
Section 03
Fixed versus variable rates
A fixed rate makes scheduled payments easier to budget, but fixed-rate agreements can include meaningful break costs if repaid early. A variable rate normally combines a reference rate with a lender margin. Payments then move as the reference rate changes, subject to any floor or cap in the agreement.
Ask for the total repayable at the expected payment dates and a separate illustration of higher rates. A company with thin headroom should not choose a variable facility simply because its starting rate is lower.
Section 04
Secured, unsecured and guaranteed
A secured term loan may take a fixed charge over property or a specific asset, a floating charge over wider company assets, or both. Security can support a larger amount, longer term or lower price, but valuation and legal work add time and cost. Default can lead to enforcement against the secured asset.
An unsecured company loan does not take a specified company asset as primary collateral. It may still require a director’s personal guarantee. That can transfer the economic risk to the individual even though the company is the borrower.
Section 05
Build a full-cost comparison
Request a written illustration that shows the gross advance, any fees deducted, the cash the company actually receives, each repayment and the total repayable. Put competing offers on the same assumed drawdown and repayment dates.
- Interest rate, reference-rate margin, floor and reset frequency.
- Arrangement, broker, legal, valuation and monitoring fees.
- Early-settlement charge and fixed-rate break calculation.
- Security, guarantee and insurance requirements.
- Financial covenants, information duties and default triggers.
- Whether further borrowing needs lender consent.
Section 06
Application evidence that matters
Lenders commonly ask for filed accounts, current management accounts, business bank statements, debt schedules, forecasts and details of directors. Larger or more complex requests need a clear business plan, use-of-funds schedule and downside case.
A forecast is more credible when its assumptions link to evidence: orders, conversion rates, staffing plans, supplier quotations and gross-margin history. Show how much cash remains after debt service, tax and working-capital needs—not just whether the project is profitable on paper.
Sources
Primary sources and further reading
Facts and status were checked against the following sources on 13 September 2026. External pages can change. Worked examples use the assumptions stated alongside them.