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.

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