Business Loan · Question

What is a term loan, and what kind of spending is it meant for?

Short answer

A term loan is a fixed amount a lender releases to you and you repay in scheduled instalments over an agreed period. It is meant for spending that builds lasting capacity, such as machinery, a workshop, a vehicle or premises, whose benefit stretches over several years. It is not designed for day-to-day running costs, which are normally met through working capital facilities.

In more detail

The defining features are a set amount, a fixed repayment period and a repayment schedule. Each instalment repays part of the principal and pays interest on what remains. Unlike a revolving limit, once you repay a portion you generally cannot draw it again.

Lenders match the repayment period to the life and earning power of what you buy. A machine that earns for many years supports a longer period than a stock purchase that is sold within months, which is why stock and receivables funding is usually handled differently.

Typical uses include:

Buying plant, machinery or equipment
Constructing or fitting out a unit or shop
Acquiring commercial vehicles
Funding the capital portion of an expansion

Some term loans offer a moratorium, which is an initial period when only interest, or nothing, is due while a new asset starts earning. Ask whether it applies and how interest is treated during it.

Using a term loan to fund recurring costs such as wages and raw material can leave you repaying instalments out of the very cash you are short of. If your real problem is a gap between paying suppliers and collecting from customers, a working capital limit generally fits better.

Check the stated purpose

Term loans are sanctioned for a defined purpose, and lenders often verify how the money was used. Spending on something else can breach the loan conditions.

Key points

A term loan is a lump sum repaid through scheduled instalments over a fixed period.
It suits assets and capacity that earn over several years, not recurring operating costs.
Repaid amounts normally cannot be redrawn, unlike a revolving working capital limit.
A moratorium, where offered, delays instalments while a new asset begins to earn.

Who this applies to

Owners planning to buy machinery, vehicles or build premises.
Beginners confused about how a term loan differs from other business facilities.
Businesses deciding whether their need is long term or a short cash gap.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority. Lalsar Holdings' financial advisory and financing work is advisory and facilitation only. Lalsar Holdings is not a lender. Sanction and disbursement of any credit facility is at the sole discretion of the partner bank, NBFC, or financial institution involved, subject to their own eligibility criteria and credit policy.