A business term loan is a lump sum borrowed upfront and repaid over a fixed period with scheduled repayments. It’s often used for planned investments—equipment, refurbishment, hiring, marketing—or to support medium-term working capital needs.
What a term loan is (simple definition)
With a term loan, you:
- Borrow an agreed amount (e.g. £25,000, £900,000).
- Repay it over a fixed term (often 12–60 months, sometimes shorter or longer).
- Make regular repayments (weekly or monthly), which include interest and/or fees.
Compared with a line of credit, you don’t redraw again without reapplying, but you gain a clear repayment schedule.
When a term loan is usually a good fit
Term loans can be a good match when:
- You have a specific project or investment
For example, buying machinery, refurbishing premises, hiring ahead of a growth push, or funding a defined marketing campaign. - The project has a clear payback
You expect extra revenue, margin or cost savings to more than cover the repayments over time. - You want stability
Fixed repayments can make budgeting simpler, as you know what’s leaving the account each period.
Many businesses in sectors like construction, professional services, hospitality, and transport use term loans to fund larger steps in their growth.
Pros of term loans
- Predictable repayments
You know your repayment amount and schedule in advance. - Good match for one-off investments
Term loans suit projects with a defined cost and timeframe. - Potentially competitive cost over the full term
Depending on the rate and structure, they can be more cost-effective than repeatedly using short-term funding for long-term needs.
Cons and what to watch
- Less flexibility
You receive the full amount even if your spend happens in stages; repayments start regardless. - Repayment pressure in slow months
Because repayments are fixed, a weaker trading month can feel tighter. - Security and guarantees
Some term loans may require security or a personal guarantee, depending on the lender, amount, and risk profile.
If the repayment amount only looks affordable in a “perfect” month, it may be worth rethinking the size, term, or product choice.
What lenders typically look for
Criteria vary, but common focus areas include:
- Trading history
How long you’ve been trading and how stable your revenue is. - Affordability
Whether your cash flows can reasonably support the repayments alongside existing commitments. - Use of funds
Lenders are often more comfortable when there’s a clear, sensible purpose and business case. - Credit profile and conduct
Bank statements and other data can give a picture of how your business manages money.
Term loan vs credit line: quick comparison
A simple way to think about it:
- Term loan
Best when you have a defined spend and want a longer-term, predictable structure. - Credit line
Best when you need ongoing flexibility to handle day‑to‑day cash flow or opportunities.
Some businesses use both: a term loan for larger, planned investments and a credit line for shorter-term cash-flow management.
How to prepare for a term loan application
To make the process smoother:
- Describe the funding need in one paragraph
Amount, what it’s for, expected impact on revenue or savings, and timeframe. - Prepare recent bank statements and basic financials
These usually show trading reality and help with affordability assessments. - Sense-check the downside
Ask: “If we have two weaker months back-to-back, can we still manage repayments without excessive stress?”
How Business Score helps
Business Score helps businesses and their advisers navigate term loan options by:
- Mapping your use case and trading data to suitable funding routes.
- Prioritising clarity and speed, while respecting that lender criteria and approval decisions sit with each provider.
Supporting you from initial conversation through to decision, so you spend less time applying everywhere.
