Term loan

In plain terms

A term loan is the most familiar form of business borrowing: you receive an agreed amount upfront and repay it over a fixed period — the term — in regular instalments. Each payment chips away at the principal while covering the interest, a process known as amortisation.

The defining traits are predictability and a clear end date. You know the amount, the schedule and the cost from day one. Terms can be short (a few months) or long (several years), and rates can be fixed or variable. Because it's a one-off sum rather than a reusable limit, a term loan suits a defined purpose with a known cost.

Why it matters to your business

A term loan turns a large one-off cost into manageable, budgetable payments. That's ideal for planned investments — a piece of equipment, a fit-out, an acquisition — where you know exactly how much you need and you'd rather not drain cash reserves in one hit.

The structure makes forecasting easy: the same payment lands each month, so it slots cleanly into a cash-flow plan. The flip side is rigidity. Once repaid, the funds are gone — you can't redraw them as you could with revolving credit. And you pay interest on the whole sum from day one, even if you don't deploy it all immediately. For irregular or ongoing needs, a flexible facility like Credicorp Flex often fits better; for a single, sizeable, planned outlay, a term loan is usually the cleaner choice. Our short vs long-term finance guide compares the options.

A worked example

A company borrows £50,000 as a term loan over three years to buy a new machine. The full £50,000 arrives upfront, and from the first month it repays a fixed instalment covering principal and interest.

Every payment is identical, so the finance director can drop the figure straight into the budget with no surprises. After three years the loan is fully repaid and the obligation ends. The machine, meanwhile, has been earning across the whole period — a textbook match of a fixed cost to a fixed-return asset.

What to check on a term loan offer

Before signing, look beyond the headline rate:

• The APR and the total amount repayable over the full term
• Whether the rate is fixed or variable
• Any arrangement or origination fee and how it's charged
• Whether you can repay early, and any early-repayment charge
• Whether the loan requires security or a personal guarantee

Comparing total cost — not just the monthly payment — tells you what the loan really costs. See how to read a loan offer.