Individuals or businesses require term loans to acquire assets, increase their working capital, fulfil a vast order, open up a new outlet, market their brand or products, or simply grow the business.
Let’s be honest. Even business giants sometimes do not have ready money to fund their requirements. And this is when the lending institutions come into the picture.
But what is a loan?
A loan is a debt amount lent by a corporation, financial institution or government to an individual or business enterprise for a certain period in exchange for a rate of interest that needs to be paid along with the loan amount. Additionally, the lending institution might keep any individual or business asset as collateral until the total loan amount, including the interest, is paid back.
So, a loan mainly has four features – the loan amount, interest rate, the tenure for which the loan is provided, and the collateral. Lending institutions offer different term loans to the entities based on the time factor.
To know more about term loans, keep reading the article.
What is a Term Loan?
A term loan is a secured loan given to the borrowers by the lending institutions for a fixed term, which they must repay in regular intervals. In simple terms, the loan is provided to financially sound small businesses or individuals in exchange for a fixed or floating interest rate.
As stated, it is a secured loan. Therefore, the assets purchased by the business using the loan amount will serve as primary security and other assets of the company as the collateral security to the lending institutions. Term loans may also require down payments to reduce the total loan amount.
Who Can Apply for Term Loans?
Term loans can be applied by the following entities.
- Self-employed professionals
- Salaried professionals
- Sole proprietor
- Micro, Small and Medium Enterprises (MSMEs)
- Private and public limited companies
- partnership firms
- Limited Liabilities Partnerships (LLPs)
- Co-operative societies
- NGOs and others
Types of Term Loans
There are basically three types of term loans based on the duration of the loan.
- Short-term Loans: Offered for a tenure of 12 to 18 months, short-term loans are for business enterprises that do not qualify for a line of credit.
- Intermediate-term Loans: Also known as mid-term loans, these loans are offered for a term of 12 months to 36 months. Some lending institutions provided intermediate loans for a tenure of 84 months.
- Long-term Loans: As the name suggests, long-term loans are available for a more extended period, lasting between 3 years to 25 years. A long term loan is also known as a small business loan that allows businesses to repay the amount and the interest in easy EMIs.
Term Loans Eligibility
Mentioned below is the eligibility required to apply for term loans.
- Applicants must be Indian residents.
- The applicants must be a minimum of 18 years and a maximum of 65 years old during the time of loan application and loan maturity, respectively.
- Applicants must have a good credit score or CIBIL score, generally above 700 at the time of application.
- The applicants must have a regular source of income.
- Applicants must not have a default history.
Documents Required for Term Loans
Find out the documents needed to apply for term loans.
- Application form
- Self-drafted business plan
- Business establishment proof
- Bank passbook or bank statement
- Minimum turnover proof
- KYC documents: Passport, PAN card, Aadhar card, Voter’s ID card, Driving Licence, Electricity bills, Telephone bills or Water bills, etc.
- Any other documents instructed by the lending institution.
Five Benefits of Term Loans
Here are a few reasons defining why you should apply for term loans.
- The interest rate is comparatively low.
- Applicants can avail of tax benefits on the paid interest amount.
- Term loans are considered debt, and thus, the shareholders do not have to compromise their share of the equity. However, the loan can be converted to equity at any point during the loan.
- The loan is given based on collateral, and therefore you can use your assets to pay the amount in case of default.
- You can pay off the loan amount and interest in small amounts for the said period.
- Terms and conditions are negotiable.
Five Disadvantages of Term Loans
Everything comes with a price. Listed below are some of the disadvantages of a term loan.
- High credit or CIBIL score required
- A guarantor is required for a higher amount
- Collateral is required
- High penalty for non paying the EMI or loan amount
- In case of default, the lending institutions take control of the collateral.
If you are a small business planning to expand your operations, then a term loan is an option you can consider. Having said that, a term loan usually takes a little time to get sanctioned, so strategise your activities accordingly.
Frequently Asked Questions
The interest rate on term loans can vary depending on the lending institution. Also, the interest rate can be fixed or variable that can be paid monthly or quarterly depending on the term loan agreement.
A term loan is a fixed amount borrowed from the lending institutions for a specified period. In contrast, a borrower can withdraw funds from the current account in excess of the available balance up to a certain limit with an overdraft facility.
State Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank are a few public sector banks offering term loans.