A term loan is one kind of business loan: a set amount paid back in fixed monthly payments over a set number of months. "Business loan" is the wider label that also covers credit lines, equipment financing and more. The invented cases below, from Lenawee County, MI trades, show when a term loan fits and when another type does; funding partners set any actual terms.
A term loan is a business loan with a fixed amount, fixed payments and an end date. The invented cases here set it beside equipment financing for a pharmacy, beside a credit line for a janitorial company's scrubbers and van, and beside the corporate Term Loan A and B labels, then show what an early payoff changes.
Business loan vs term loan: where one sits inside the other, shown on an Adrian, MI pharmacy's tablet counter
A term loan is one kind of business loan; lines of credit and equipment financing are others. What separates the types is how the money arrives and how each one is settled:
| Funding type | How the money arrives | How each one is settled |
|---|---|---|
| Term loan | One lump sum | Fixed monthly payments until a set end date |
| Business line of credit | Draws as needed, within a set limit | Interest on what is drawn; paying down opens the limit again |
| Equipment financing | Paid to the seller of one item | Fixed payments, with the item backing the agreement |
| Merchant cash advance | One lump sum | A share of card sales until an agreed total is collected (an advance, not a loan) |
In this invented example, an Adrian, MI pharmacy wants a tablet counting machine quoted at $16,940, a label printer at $1,180 and a year of software support paid in advance at $2,760, $20,880 in all. A term loan can carry the whole list. Thirty-six invented payments of $697.51, priced at a 12.4% annual rate, come to $25,110.36 by the end.
Equipment financing may cover the counting machine alone, because the machine itself can back the agreement, while a prepaid software year is not an item a partner can hold. In the same invented example, $16,940 over 48 months at an 11.25% annual rate comes to $439.88 a month, and the pharmacy pays the other $3,940 from its account. One route puts everything on a single payment; the other keeps the software year out of the borrowing.
Term loan or credit line for a Lenawee County, MI janitorial company's floor scrubbers and cargo van
A line of credit is built for costs that come back and get paid down: supplies, or a payroll that lands before a client pays. Machines and vehicles that work for years fit a term loan or equipment financing, because the payments can be spread over the years the asset is in use.
In this invented case, a Lenawee County, MI janitorial company adds two ride-on floor scrubbers at $14,350 each and a cargo van at $33,900, $62,600 in all, for a new office-building contract. Financed with a term loan for five years at a 10.85% annual rate, the invented scrubbers and van cost the company $1,356.40 per month.
Put the same invented $62,600 on a credit line and the line needs a limit at least that large, with the scrubbers and van sitting on it. Clearing it within 12 months at a 13.9% annual rate takes $5,617.73 a month in this invented example, $4,261.33 more each month than the term loan. If the contract's first invoices are paid a month after the work, the wages in between are a separate cost, and a working capital loan is sized to that gap rather than to the machines.
What are Term Loan A and Term Loan B? The corporate labels next to a Lenawee County, MI indoor golf studio's loan
Term Loan A and Term Loan B are names from large corporate lending, where one loan package is split into pieces held by different lenders. A Term Loan A is paid down steadily over its life. A Term Loan B has small scheduled payments, as little as 1% of the original amount a year, with the rest due at the end.
The term loans page describes fixed-payment loans that pay down to zero, the Term Loan A shape, though nobody calls them that at this size. In this invented example, a Lenawee County, MI indoor golf studio borrows $27,900 for two golf simulator bays with launch monitors, projectors and impact screens, over 48 months at an 11.05% annual rate: $721.77 a month.
| Year | Payments made | Balance left |
|---|---|---|
| Year 1 | 12 | $22,030.33 |
| Year 2 | 24 | $15,478.18 |
| Year 3 | 36 | $8,164.21 |
| Year 4 | 48 | $0.00 |
The 48th payment in this invented schedule is $721.60, which absorbs the rounding, so the payments total $34,644.79 and the balance ends at zero. A loan shaped like Term Loan B, paying down 1% of $27,900 a year, would still owe $26,784 after four years in the same invented case.
Paying a term loan off early: what an Adrian, MI owner can ask before signing
Some agreements charge a prepayment fee, and some figure interest in ways that leave less to save by paying early. Before signing, an owner can ask whether a fee applies, how it is calculated and whether an early payoff lowers the interest owed.
Back to the invented golf studio loan: after 24 of the 48 payments, the balance is $15,478.18. If the agreement has no prepayment fee and charges interest only on the balance, paying the invented $15,478.18 then replaces the remaining 24 payments, which total $17,322.31, so $1,844.13 of interest is never charged. With a 2% prepayment fee instead, $309.56 of that invented saving goes to the fee.
By Valeshire Financial · Updated
