Plain definition
A term loan is borrowing with a stated amount, maturity, and repayment schedule, commonly used for a defined asset purchase or longer-lived business need. The borrower normally receives the funds at or near closing, then repays principal and interest over the agreed term. The schedule may be fixed or variable, and the contract may allow or charge for early repayment.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A logistics company buys equipment for with a 24-month term loan. Its contract requires of principal each month, plus interest calculated under the agreement. The equipment may serve customers for longer than 24 months, but the company must reserve cash each month regardless of whether a particular vehicle is idle. A term loan makes the purchase possible; it does not make the monthly cash obligation disappear.
| Term-loan principal | |
|---|---|
| Loan term | |
| Principal per month |
The stated monthly payment may change when interest rates, fees, prepayments, or contract terms change.
Why it matters
Term loans are useful because they spread the cash cost of an asset over time. The risk is matching a fixed schedule to an uncertain revenue plan. A founder who approves the asset based only on expected sales can overlook the periods when the business must pay even if sales miss forecast.
Practical consequence
Read the payment schedule line by line and enter principal, interest, fees, and maturity into the forecast. Compare the repayment period with the asset’s expected cash contribution, maintenance cost, and resale assumptions. Test lower utilization and delayed customer payment. Ask about security, covenant tests, and early-repayment terms before treating the headline rate as the decision.