Term commitments: Overview, definition, and example
What is term commitments?
Term commitments refer to a lender’s agreement to make a specific amount of money available to a borrower for a fixed period of time—called the term. Once the money is borrowed, it must be repaid according to the agreed schedule, usually with interest. After the loan is fully drawn, it doesn’t automatically renew or revolve.
In simple terms, a term commitment is a promise from a lender to provide a loan of a set amount for a set time.
Why is term commitments important?
Term commitments are common in business financing, especially when you need capital for a specific project—like buying equipment, expanding operations, or acquiring another company. These commitments give you certainty: you know how much money is available and for how long.
Unlike revolving credit (which works like a credit card), a term commitment is usually a one-time draw with a clear repayment schedule. The lender is legally bound to provide the funds—assuming you meet the conditions—so it’s a key part of financial planning and deal execution.
Understanding term commitments through an example
Let’s say your business is approved for a $500,000 term loan to open a new location. The bank provides a term commitment for that amount, with a 5-year repayment schedule. You draw the full loan upfront, and now you’re required to repay it in monthly installments.
You can’t re-borrow money as you repay it (unlike a credit line), and once the 5 years are up, the loan ends. The bank’s commitment was for that fixed term only.
If you don’t draw the full amount during the commitment period, the unused portion may expire, depending on the agreement.
An example of a term commitments clause
Here’s how a term commitments clause might appear in a loan agreement:
“Subject to the terms and conditions of this Agreement, the Lender agrees to make available to the Borrower a term loan in the principal amount of up to $500,000 (the ‘Term Commitment’). The Term Commitment shall be available for a single draw and shall expire on [Date], after which no further advances may be requested.”
Conclusion
Term commitments are about securing funding with a clear structure: fixed amount, fixed period, and defined repayment. For SMBs, they offer a dependable way to finance growth, invest in big purchases, or complete one-time projects.
If you’re entering into a loan or financing agreement, understanding the term commitment helps you plan ahead, manage obligations, and avoid surprises as the loan progresses.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.