Term Loan
A term loan is debt advanced for a specified term and repaid according to the loan agreement through scheduled amortization, mandatory prepayments, a maturity payment or some combination of those mechanisms.
Term loans provide committed funded capital
The defining feature is that the lender advances principal under a facility with a stated maturity rather than merely making a reusable line available.
This makes term loans well suited to acquisitions, refinancings and other uses where the borrower needs a substantial amount of capital at a specific time.
Amortization can be light or substantial
Some term loans repay principal quarterly, while a large portion remains due at maturity. Other structures amortize more aggressively.
A loan requiring only 1% annual amortization behaves very differently from one that pays down 10% or 20% each year, even if both have the same stated maturity.
Floating-rate pricing is common
Many corporate term loans price at SOFR plus a contractual margin, sometimes subject to a SOFR floor. Borrowing cost therefore moves with the reference rate unless hedged.
Credit agreements can also offer a base-rate alternative and change the spread based on leverage or ratings.
Term loans can sit at different points in the capital structure
A term loan may be senior secured first lien, second lien, unsecured or subordinated. The repayment form does not determine priority.
Investors must distinguish the facility type—term loan—from the credit position—for example first-lien senior secured.
Term-loan cash flow should be separated into interest, amortization and maturity
A simple debt schedule makes the economics easier to see. Assume a $500 million term loan with 1% annual amortization and a five-year maturity. Only $5 million of scheduled principal is repaid each year before optional or mandatory prepayments. Most of the original principal therefore remains outstanding near maturity.
That structure preserves cash for operations and acquisitions, but it also leaves refinancing risk. If the borrower’s leverage remains high in year five, the maturity can become more important than the modest annual amortization.
Credit analysis should therefore model three paths separately: contractual amortization, likely cash-sweep or excess-cash-flow prepayments, and the residual balloon balance. A term loan with low scheduled amortization can still delever rapidly if free cash flow is strong and the agreement requires or encourages prepayment.
Common mistakes
Assuming term loan means fixed interest Many institutional loans are floating-rate.
Assuming principal can be redrawn Repayment generally does not recreate availability as it would under a revolver.
Ignoring the balloon maturity Light amortization can leave most principal dependent on refinancing or repayment at maturity.
Example
A borrower enters into a five-year credit agreement providing a $400 million term loan and a separate $600 million revolver. The term loan is funded at closing and follows its amortization schedule; the revolver remains available for future draws subject to its terms.
Example
A borrower enters into a five-year credit agreement providing a $400 million term loan and a separate $600 million revolver. The term loan is funded at closing and follows its amortization schedule; the revolver remains available for future draws subject to its terms.
Professional note
The label term loan does not reveal risk by itself. Analyze lien priority, maturity, amortization, interest spread and floor, prepayment requirements, covenants, collateral, guarantors and whether most principal remains due as a balloon at maturity.
Related terms
- Debt Paydown
Debt paydown is the reduction of a portfolio company’s outstanding borrowings after an acquisition, often through scheduled amortization, optional prepayments or required repayments funded by excess cash flow or asset-sale proceeds.
- Debt Commitment Letter
A debt commitment letter is an agreement in which lenders or arrangers commit, subject to stated terms and conditions, to provide debt financing for an acquisition or other transaction.
- Bridge Loan
A bridge loan is temporary debt financing designed to fund a transaction or liquidity need until the borrower completes a planned longer-term financing, asset sale, refinancing or other permanent source of capital.
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