Description

In this case, a term loan provides borrowers with a lump sum of cash upfront in exchange for specific borrowing terms. Borrowers agree to pay their lenders a fixed amount over a certain repayment schedule with a fixed or floating interest rate. Small businesses commonly use term loans to purchase fixed assets, such as equipment or a new building.

Instrument category

Debt financing

Implementation status

Moderate - tried and tested

Enabling conditions and success factors

• Some degree of term loan funding is available in every country as the majority of the financing in countries is provided by commercial banks.

Instrument benefits

• Simple application process.
• Allows receiving an upfront lump sum of cash.
• Specified payments.
• Lower interest rates.

Challenges and risks to implementation

• The loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments.
• Some lenders may require down payments before they advance the loan.