A term loan is a loan, usually from a bank, taken by a business wherein the amount to be borrowed is specified. Along with the amount, the repayment schedule of the loan is also pre-determined. However, the interest rates on these term loans might be fixed or floating. Generally, the tenure of these term loans goes up to 5 years, but occasionally, the mandate for these loans can extend up to 10 years.

These term loans are not for personal use and hence, are offered only to businesses for capital expenditure and business expansion amongst others. They are often tailor-made to suit the financial needs of MSME businesses. There are also various benefits of using term loans to raise capital. The benefits include a requirement of minimal documentation, quick and easy disbursal of the required funds, as well as flexibility in repayment of the term loans.

Types of Term Loans:

There are various types of term loans that businesses can choose from. They are often suited to the requirements of borrowers based on factors like- the amount of funding required by the business, the repayment capacity of the borrower and the financial health of the company in terms of cash flow and in-hand availability of cash. Most terms of the loan, including the rate of interest to be charged on the term loan depends on factors like these. The most common classification of term loans is done in terms of the loan tenure. Hence, the types of term loans are as follows:

Short-Term Loans:

These are term loans which have a maximum tenure of 2 years. Mostly, these loans have tenures of 1 to 2 years. These kinds of term loans are primarily used for the day-to-day requirements of the business or for the fulfilment of the working capital needs of the business. There are various sources from which a business can get a short-term loan. They are- commercial banks, trade credit, discounting bills of exchange etc.

Usually, short term business loans have a rate of interest which is higher than the other type of term loans, principally due to the shorter time frame. These loans may even involve weekly repayment schedules if the loan tenure is very short. Any business willing to procure such a loan should be mindful of the fact that not only these loans have rates of interest, but the charges are also higher, in case the business defaults on any instalment.

Medium-Term Loans:

These are term loans which have a tenure of 2 to 5 years. These types of loans could be said to be a hybrid of the short- and long-term loans. In most cases, these types of loans are procured by businesses to carry out renovation or repairing of a fixed asset. An example could be the renovation of a showroom. The characteristics of these term loans are somewhat a mixture of short- and long-term loans. The rates of interest charged are higher than the long-term loans; however, the documentation during the loan application process is relatively more comfortable when compared to longer-term loans.

Long-term Loans:

They are term loans which, in a majority of the cases, have a tenure of over five years. The tenures can even extend up to 25 or 30 years depending on the nature of requirement. Due to the higher ticket size of loans and higher associated risks, most of the long-term loans are secured, i.e. they require collateral. Examples for these kinds of loans are home loan, car loan or loan against property etc. In the case where the loans are secured, the rates charged are also lower. However, there are cases where even long-term loans are unsecured. In such cases, the interest rates charged are higher due to the higher risk involved.

How does a term loan work?

Due to various reasons like pre-determined loan value and repayment schedule, interest rates etc., term loans are one of the most convenient loans for businesses to avail. There are various aspects which are required to be understood for the business to comprehend how a term loan works. There are five aspects of a term loan: the loan value, interest rate, loan tenure, the repayment schedule, and whether the loan is secured or unsecured.

The loan value of a term loan is fixed. This amount depends on the type of term loan chosen as well as the eligibility of the borrower. The loan interest rates charged on the term loan can be fixed or floating. It depends on the borrower what kind of rate it opts for. The loan tenure is also pre-determined. The business must pay the amount availed in EMIs according to the predetermined repayment schedule throughout the loan tenure. Finally, the loans availed can be secured or unsecured. However, unsecured loans would have a higher rate of interest when compared to secured loans.

Eligibility & Documents Required For Term Loan

Eligibility Documents

Minimum operational history of 2 years

2 years ITR for >10 lacs

VAT returns for the last 12 months Business Registration Proof

KYC documents of the applicant and the organisation

Bank statement for the last 9 months

Pan Card of the promoter

Aadhaar Card of the promoter

Conclusion

Due to the various advantages provided by term loans like the flexibility of loan tenure, ease of repayment via affordable EMIs, easy application and documentation process, and limited cost of borrowings, they are one of the most preferred instruments of lending and borrowing. Indifi is a company which leverages technology to provide the borrower with the required funds at the best rate possible without the need for any collateral. Indifi is a market leader in this domain. Hence, if a business is looking to take up a business loan at the cheapest rate, it should consider Indifi as an option.