Using term loans to finance your small business

With a term loan, an institution – usually a commercial bank or credit union – will loan you money on a short-term or long-term basis, typically from a few months to 10 years.

All about term loans in Canada

A term loan may be payable in one of three ways:

• On demand (a demand loan)
• In equal monthly instalments (an instalment loan)
• Until further notice or due at maturity (a time loan)

The term of the loan should depend on the useful amount of years of the assets (usually equipment) that the loan is secured with. For example, you shouldn’t agree to a six-month term loan for a piece of equipment that’s expected to last for 10 years. Instead, tie the loan payment term to the expected life of cash inflows from your equipment, and then take your time repaying the loan.

The terms and conditions of a term loan, including repayment, the finance charge, or interest rate, are detailed in the loan agreement.

Remember that cash mismanagement is a common cause of small business failure. Be sharp when you’re negotiating your term loan!