What is Term Loan?
Short answer: A term loan is borrowing made available for a defined term and repaid according to a contractual schedule. Unlike a revolving facility, an amount repaid usually cannot be redrawn unless the documents expressly permit it. A term loan may be secured or unsecured, senior or subordinated, fixed-rate or floating-rate. Those features, rather than the name, determine its cash cost, risk and flexibility.
Term loans can fund equipment, expansion, acquisitions, shareholder transactions or refinancing. An amortising loan repays principal during its life. A bullet loan leaves most or all principal to maturity. Some facilities permit several drawings during an availability period and then convert to repayment. Pricing may combine a reference rate, margin, floor, arrangement fees, commitment fees, original issue discount and prepayment costs. Mandatory prepayments can capture disposal proceeds, insurance proceeds or excess cash flow. Covenants and reporting duties give lenders information and intervention rights before maturity.
How it works
Build a dated debt schedule from the executed facility. Record each drawing, interest period, reference rate, floor, margin, fee, scheduled amortisation, mandatory prepayment and maturity. Calculate interest on the contractual day-count basis and update floating rates at reset dates. Link closing cash, fees and permitted uses to the funds flow. Forecast leverage, debt service and liquidity for every covenant test date under base and downside cases. Check whether repayments reduce the commitment permanently and whether voluntary prepayment changes later instalments or the final bullet.
Closing principal = opening principal + drawings - scheduled repayments - voluntary and mandatory prepayments
Example
A company draws 5,000 on 1 January. The loan amortises 10% of original principal at each year-end for four years, with the balance due at the end of year five. Annual scheduled principal is 500 in years one to four, leaving a 3,000 bullet. Assume a fixed 8% rate paid on each year-end balance before repayment. Interest is 400 in year one, then 360, 320, 280 and 240. Total scheduled cash debt service is 900, 860, 820, 780 and 3,240. A model that simply divides 5,000 over five years would materially understate maturity risk.
Why it matters
Term loans match committed capital with multi-year investments and can avoid immediate equity dilution. A board should compare total cash cost, amortisation, collateral, covenants, prepayment flexibility and refinancing risk rather than interest margin alone. Acquisition models use the repayment schedule to determine the equity contribution and future distributions. Lenders assess the primary repayment source, downside cash flow, collateral and management information. For related planning, use Alehar’s Debt Capacity Calculator. The decision should still be supported by a full forecast using the proposed documents.
The executed facility, security documents and local law control. Benchmark replacement, withholding tax, interest deductibility, financial-assistance restrictions, security perfection and insolvency priority vary by jurisdiction. Accounting effective interest can differ from cash interest because fees and discounts are amortised. Current portions may require separate balance-sheet presentation. A lender commitment can be conditional on representations, conditions precedent and absence of default. Do not assume a stated principal amount is immediately drawable or that a bullet can be refinanced. Counsel and tax and accounting advisers should review the structure before signing.