Business term loans

How it works

A term loan advances an agreed amount, usually as a lump sum, that the business repays over a specified term. Payments may include principal and interest; some structures defer principal or leave a final balloon payment. The amortization period and maturity date can differ, so a quoted monthly payment does not tell the whole story.

Where it can fit

A defined project is the natural starting point: a new location, a business acquisition, or an investment that will generate cash over several years. Match the repayment horizon to the useful life of what you are buying and to when the investment is expected to produce cash.

Look closely at the trade-offs

Compare the net proceeds after fees, payment frequency, security, guarantees, and any balloon balance. A lower monthly payment achieved by stretching the term can increase total interest. Variable-rate payments or renewal requirements can change the risk after closing.

Follow a term loan from deposit to final payment

Start a financing comparison with four entries: the amount advanced, the cash actually received, the dates of the payments and the balance due at maturity. A fixed rate makes the rate predictable; it does not eliminate fees, security requirements or a final balance. A repayment schedule makes those separate obligations visible.

In the fictional example below, a business borrows $100,000 at a fixed 12% nominal annual rate with monthly compounding and 36 equal month-end payments. There are no fees and the full amount arrives at the start. The calculated payment is approximately $3,321.43, and the unrounded schedule totals $119,571.52. A real schedule normally rounds individual payments and adjusts the last one.

Source: BDC: fixed-rate term loans

A lower payment can hide a balance at maturity

Keep the same $100,000 and 12% assumptions, but calculate the payment over 60 months. The monthly amount falls to approximately $2,224.44. If the agreement nevertheless matures after month 36, approximately $47,254.74 remains immediately after that month’s scheduled payment. That remaining balance needs a separate repayment source.

Do not put “refinance” in the forecast as if it were a confirmed source of cash. A useful downside question is whether the business could fund the remaining balance if a new lender declined, the asset sold for less, or the business needed cash for something else at the same time. The term is the contractual horizon; amortization describes how scheduled payments reduce principal.

Source: BDC: amortization period

Build the project budget before choosing the loan amount

Suppose a project requires $90,000 for the main purchase, $8,000 for installation and $12,000 for the first operating cycle. Its cash need is $110,000. If the owners contribute $20,000, the arithmetic funding gap is $90,000. A $100,000 borrowing request needs an explanation for the remaining $10,000, such as a specifically budgeted contingency. This is a planning exercise, not a rule about lender-approved uses.

Next, place the payment dates beside the project’s expected collections. If installation takes two months, model those months without new project revenue. Add existing loan payments too. A project can make a profit over its lifetime and still create a cash shortfall in the first few payment periods.

Compare the written schedules, not just the headline

Ask each provider for a schedule that shows the deposit, every payment, all fees and any final balance. Use the same requested amount and the same project assumptions in each comparison. For a variable-rate option, ask how a rate change affects the payment or remaining term, then rerun your forecast.

The Canadian educational sources linked here explain general mechanics. This file does not promise Canadian or U.S. approval terms, security treatment or prepayment rights. Those come from the proposed agreement and the applicable jurisdiction.

Ask your broker

• Do the maturity date and amortization period match?
• What cash reaches the business after all upfront charges?
• What remains due if we repay early or reach maturity?

Your next-step checklist

• Project budget and use of funds
• Historical financials and current interim results
• Existing debt schedule
• Base-case and downside cash-flow forecast