What is a term loan?
A term loan is a fixed sum of money lent to a business on a stated date and repaid, with interest, by instalments over an agreed period, the term. The three things that define it are fixed: the amount, which is drawn once; the term, in months or years; and the repayment schedule, which the loan agreement sets out instalment by instalment. Once repaid, the money cannot be drawn again, which is the line between a term loan and a revolving facility or an overdraft.
Term loans are the structure behind most business loans, commercial mortgages, acquisition debt and development exits. They can be unsecured, resting on the trading record and the directors’ guarantees, or secured on property, equipment or the whole of a company’s assets under a debenture. We have access to a range of UK commercial finance lenders through our principal, White Rose Finance Group Limited. Each lender publishes its own amounts, terms and criteria and makes its own decision.
The parts of a term loan
The principal, the sum borrowed. The term, over which it is repaid. The interest rate, fixed for the term or variable over a reference rate, stated in the agreement. The repayment profile: amortising, where each instalment repays some capital and some interest so the balance falls to zero on the last day; interest-only with a bullet, where the instalments cover interest and the capital is repaid in one sum at the end; or a mix, with a reduced balance left to a final balloon payment. The fees: an arrangement fee at the start, and sometimes an exit fee or an early repayment charge. And the security and the guarantees the lender holds.
How amortisation works
On an amortising loan the instalment stays the same, but what it is made of changes. In the early months most of each payment is interest, because the balance is at its largest; in the later months most of it is capital. The practical consequence is that a loan settled early has repaid less capital than the number of instalments suggests, and the settlement figure is higher than a straight-line share of the original sum. The loan agreement or the lender’s statement shows the capital balance at any date.
Covenants and events of default
A term loan agreement with a lender that underwrites the business, rather than the asset alone, commonly includes covenants: promises the borrower makes for the life of the loan. Financial covenants set tests, such as a minimum ratio of profit to debt service or a maximum ratio of borrowing to profit, measured against the accounts at set dates. Information covenants require accounts and management figures to be delivered. Negative covenants restrict what the borrower may do without consent: grant further security, sell major assets, change ownership. Breaching a covenant is an event of default, which lets the lender demand repayment, raise the rate or enforce its security, whether or not an instalment has been missed.
Secured and unsecured term loans
An unsecured term loan rests on the company’s accounts, its bank statements and the directors’ personal guarantees, and is typically smaller and shorter than a secured one. A secured term loan gives the lender a registered charge, over a property, a piece of equipment or the company’s assets as a whole, which must be delivered to Companies House within 21 days of its creation under Part 25 of the Companies Act 2006. The secured business loans page explains the forms of security; the unsecured business loan answer explains what stands in for it.
We work with UK limited companies and LLPs only, for business and commercial purposes. Enquiring does not affect your credit score. If you apply to a lender, it runs its own credit search, which may be recorded on your file. We arrange loans from £10,000, for businesses that have traded for 3 months or more.
Where a term loan is used
A purchase that will earn over years: premises, a business, a fit-out, a fleet. The refinance of a bridging loan on to a longer footing. A one-off cost with a known payback. What it is not designed for is a gap that opens and closes every month, because the instalments continue in the months when the money sits idle; the working capital answer explains the cycle and the revolving credit facility page the structure built for it. Which structure a business uses is its own decision, made on the figures each lender provides.
Frequently asked questions
What is the difference between a term loan and a line of credit?
A term loan is drawn once and repaid to zero over its term. A line of credit, such as a revolving credit facility or an overdraft, is a limit that can be drawn, repaid and drawn again, with interest on the balance in use.
Can a term loan be repaid early?
Usually, on the terms in the agreement. Some lenders rebate part of the remaining interest, some charge the full interest for the term, some add an early repayment charge. The clause is worth reading before signing.
What is a balloon payment?
A larger final instalment that repays the capital left after smaller regular instalments. It lowers the monthly payment during the term and leaves a sum to be paid, refinanced or, on an asset agreement, covered by the asset’s sale at the end.
What is a fixed-rate term loan?
One where the interest rate is set for the whole term, so the instalment does not change. A variable-rate loan moves with the reference rate it is priced over, and the instalment moves with it.
Is CapExpand regulated?
CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. If you have a complaint, our complaints page explains how it is handled.
How is CapExpand paid?
We will receive commission from lenders. On some cases we also charge a fee, which we set out in writing and agree with you before you proceed.
More funding questions answered
- What do lenders look for in a business loan application?The six things a lender reads before it decides: affordability, trading time, the credit files, the purpose, security or the guarantee, and the conduct of the bank account.
- What is a valuation report?The surveyor’s written opinion of a property’s value prepared for the lender under the RICS Red Book: what it contains, the bases of value, and why the figure decides the loan.
- What is a bridging loan?Short-term borrowing secured on property, repaid in one sum from a defined exit: the four things that define it, what it is for, and what it is not.
- What is asset finance?Borrowing to acquire or release value from equipment, vehicles or machinery where the asset is the security: hire purchase, leases and refinance, and what defines each.
- What is invoice finance?Borrowing against unpaid invoices: the advance, the balance on payment, factoring against discounting, recourse against non-recourse, and what defines it.
- What is a commercial loan?Lending to a business for business purposes, as distinct from consumer lending: what the term covers, the main kinds, and what a commercial loan agreement contains.
A fixed sum over a fixed term
The amount, the purpose and the term you have in mind are enough for us to check the case against lenders’ published criteria before anything is sent anywhere.
Sources
Checked 26 October 2026. This page explains the structure of a term loan; each lender publishes its own amounts, terms, rates, fees and covenants, and nothing on this page is a quote.
CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. We do not provide financial advice.