Understanding term loans

A term loan is simple: You borrow money and agree to pay this back with interest at a set monthly amount for a set period of time.  

• It usually carries a prime-linked interest rate.
• It’s paid back in equal monthly instalments.
• It’s commonly paid back over 60 months but can vary between 12 months and 10 years, depending on your needs.

You can expect the lender to request that you provide collateral at least equal to the full cost of the loan (the amount you borrow plus the total interest and administration charges).  is often a huge stumbling block for small businesses as few have the required collateral. Fortunately, SEFA has partnered with the major banks and will stand guarantee for up to 90% of the collateral amount.  

So, always remember to ask whether your bank is a Khula Credit Guarantee partner (this is the name of the fund administered by SEFA to provide a collateral guarantee for small businesses). The amount of collateral guarantee that SEFA will provide depends upon your individual circumstances. However, you will always need to raise at least 10% of the total collateral.

Expect your business credit rating to be checked. Often lenders will also check the personal credit rating of the business owners. This information tells them whether you have a history of repaying your debts. 

Other costs you will need to consider when dealing with a term loan is that you will get charged a once-off administration fee (the “origination fee”), as well as a small monthly admin fee (in most cases).

Lenders offer a range of benefits, so make sure you check to see whether your lender offers any of these benefits:

Some lenders allow a business a little grace before starting to pay back a loan, generally 2 to 3 months. The interest on the loan will be added to the principal amount over the grace period, so make sure you check how this will impact on the total amount you have to repay.

If you find that you are going through a particularly bad patch, you can arrange for a payment holiday. In this case, the lender could give you 2 to 3 months break from making repayments. It will be easier to negotiate this if you can prove that the cash crunch wasn't due to bad management. It will also cost you money, so be sure to check the overall cost implications.

In the world of agriculture, it's common that farmers repay their loans in two instalments during the year. This allows the farmer to cash in on his/her winter and summer harvests before he/she has to pay back the lender. Even if you're not a farmer, the principle applies. 

Lenders are often willing to design the instalment period according to the income patterns of your business. This might mean making instalments twice a year, or even four times a year.

Some lenders offer both equity and loan finance (or a combination of the two).  They may be willing to convert a loan to equity in the event that your business goes through a cash crunch, and is struggling to pay back the loan. Obviously, they need to believe that your business will get through the crunch and that their equity investment will be worth money in the long run.

With some term loan products, extra money paid by the business, above and beyond the monthly instalment, can be withdrawn again when the business needs it. However, rules apply and you have to stick to them, such as a minimum amount that can be withdrawn. 

Alternatively, some lenders will allow you to extend your loan as soon as you've paid off a certain portion of it (usually a quarter of the loan). This saves you from having to fill out another application form, but it doesn't mean that you can simply withdraw money whenever you feel like it. You'll still have to put in a formal application, it's just quicker than the original application process that you had to go through.

If you think that a rise in interest rates will damage your business, ask for a fixed rate. However, bear in mind that you won't benefit if the interest rate drops.