What Is a Term Loan?
A term loan can help businesses obtain funds swiftly at a certain interest rate. Business loans like term loans can help businesses tackle challenging situations, make necessary investments, and improve financial health. Generally offered to MSMEs, secured term loans can help businesses free up the funds from their cash flows & revenue stream, allowing them to save or utilise said funds for future endeavors such as asset purchase, acquisitions, expansion, etc.
Term loans are called so as they need to be repaid within a certain agreed-upon time period and at fixed or floating interest rates. Banks and non-banking financial institutions offer term loans to businesses with a healthy credit score & flawless credit history. They must be paid in installments at specific intervals with repayment periods attuned to a business’s specific needs.
These loans have a specific maturity date associated with them. One key thing to note is that specific lenders may demand particular collateral security depending on the amount of money borrowed. Secured loans generally have longer repayment schedules and large principal loan values. The nuances & conditions associated with the approval & disbursement of such loans vary from one lending institution to the other.
Types of Term Loans
There are three types of term loans, each with features that suit different business requirements. Certain factors determine a borrower’s eligibility for a particular type of loan, with repayment ability, the company’s financial health, cash flow, and liquidity being of paramount concern.
1. Short-term Loans
Small businesses generally take out short-term loans for immediate funding needs and working capital expenditures. The maximum repayment period of these loans is two years; however, repayment schedules of short-term loans vary from one lender to another, with certain lenders offering short-term loans with 5 to 7 years repayment terms.
The interest rates of short-term loans are higher than other types of term loans as they have a shorter repayment schedule. In the case of extremely short terms, these loans may have weekly repayment systems in place.
2. Intermediate-term Loans
Intermediate term loans generally have fixed terms of 2 to 5 years. They are like a hybrid of short and long term loans and have higher interest rates than long-term loans. Intermediate-term loans are best suited for start-ups looking to accelerate their business quickly or planning for a business expansion.
Long term loans have a minimum tenure of 5 years which may go up to 25 to 30 years. There are no end-user restrictions concerning these loans. As the tenure and risks are higher, most long-term loans are secured by some collateral.
Most banks and NBFCs demand collateral security for long-term loans of high value. Asset securities associated with a term loan ensure timely repayments and protection against defaults. If the debt obligations dictate, a company may have to put forth its assets as collateral and make monthly or quarterly payments. In cases where any collateral does not secure loans, the rate of interest charges is much higher to counter the credit risk accrued.
Term loans can also be categorised into secured and unsecured loans.
- A secured loan has some collateral as its security and generally has a longer loan tenure. Businesses might offer some fixed assets as collateral security for a term loan.
- Unsecured loans do not require any collateral and are generally lower in value with reasonable interest rates & short repayment schedule.
Advantages of Term Loan
Term loans offer numerous benefits to businesses. Among such advantages are quick disbursing funds that can reduce cash crunch, meet capital expenditure and address urgent business requirements.
- Cheap To Acquire: With competitive interest rates & flexible repayment schedules, term loans are one of the most economical debt funding instruments.
- Tax Deductible: You can enjoy tax deductions on the interest paid for term loans.
- Immense Flexibility: Borrowers can negotiate with lenders regarding the rate of interest, loan period, and other terms & conditions.
For a financial institution, term loans assure asset collateral, regular instalment payments, and a chance to gain business equity in case of a default.
Features of Term Loan
- A term loan, especially longer term loans, is secured by business assets. In some instances, there can be both primary and secondary assets.
- Term loans must be repaid within a fixed term, no matter the company’s financial condition. Defaulting means losing the asset collateral and other repercussions.
- Flexible and negotiable rate of interest depending on the loan amount, associated credit risks, and loan tenures.
- Borrowers and lenders can negotiate repayment schedules under certain particular circumstances.
- Lending institutions can convert defaulting loans into equity holdings.
- Minimal documentation and simple eligibility criteria make term loans easily accessible to different kinds of businesses.
- Commercial banks allow an initial grace period of 1 to 2 years before loan repayment.
- In certain cases, a certain commitment fee may apply to the underutilised loan amount.
Factors that determine the Term Loan Eligibility
Specific key nuances decide whether you and your business are eligible for a term loan.
- Credit Score & History: The higher the credit score & better the credit history, the higher the likelihood of negotiating a favourable deal with the lender.
- The Business Plan: The business plan that necessitated taking out a loan will be carefully evaluated and determine the amount to be lent as well as the rate of interest.
- Business Performance: A company’s cash flow, financial situation, working capital, the efficacy of operations, projected business performance– all such critical factors get scrutinised heavily.
- Infrastructure: Banks and lending institutions assess the overall infrastructure of the borrowing business. This is all the more likely if the term loan is unsecured; the infrastructure becomes the asset collateral.
- Security: The collateral offered is another major factor in determining the amount of loan money. The assets themselves act as security for businesses looking to buy new assets using term loan funding.
How does a Term Loan work?
The flexibility of repayment schedule, attractive interest rates, and negotiable terms & conditions make term loans one of the most practical debt funding instruments for businesses across sectors.
The overall working of a term loan depends upon:
- The Loan Amount
A business’s performance, credit score & record, assets & infrastructure, financial health, and debt intent dictate the eligible loan amount.
- The Loan Tenure
One can avail of a short-term loan, an intermediate-term loan, or a long-term loan, as necessary. Interest rates, repayment periods, and the need for security differ.
- The Rate of interest
The interest rate can be fixed or floating, depending on the bank or NBFC.
- The Repayment schedule
Borrowers have to repay during the schedule in equated monthly installments.
- The Collateral Security
Depending on the loan amount & tenure, and business evaluation, a term loan can be secure or unsecured. Unsecured loans generally have higher interest rates.
Key Facts About Term Loan
- Term loans are excellent for businesses looking to maintain working capital expenditure during a cash crunch, maintain liquidity, embark on a new project, or grab a ripe opportunity to expand.
- On-time EMI payments from the borrower can boost credit scores and improve history.
- Loan security depends upon the loan amount and the borrower’s/business’ credibility.
- Loan foreclosure does not come with any penalty.
How to Apply for a Term Loan with Yubi
Yubi is India’s leading digital business lending platform, bringing lenders & borrowers from all corners under one roof. Connect with 750+ lenders, avail of 12+ loan products, and get hassle-free loan disbursement. AI/ML & analytics brings the right business partners closer, and a simple AI infrastructure facilitates communication and coordination among borrowers and lenders.
Apply for a term loan with Yubi through the two simple steps below:
- Choose your loan type and find the right lender. ( YubiMatch, our proprietary AI/ML engine, will help you find the right match)
- Mention critical details in our online survey form. Our company representatives will then get in touch with you and guide you through the rest of the process.
Eligibility Criteria for Term Loan
- The business must be at least 2 years old.
- The annual turnover should not be less than Rs. 2 crores.
- Applicant must be at least 21 years of age and not more than 65.
- The loan applicant should have a minimum of 3 years of experience.
- Flawless credit history and tax compliance are preferable conditions for eligibility.
Term Loan Interest Rates
The following lending institutions offer fixed rate term loans:
- SBI= 10.10 to 14.65 %
- HDFC= 11% onwards
- ICICI= 10.5% onwards
- Tata Capital= 10.99% onwards
- Axis Bank= 10.25% onwards
- Federal Bank= 10.49 to 17.99%
And the following offer floating interest rate term loans.
- Bank of Baroda= 9.7 to 17.05%
- UCO Bank= 11.45 to 11.70%
- Union Bank of India= 9.8 to 13.9%
- Punjab National Bank= 9.30 to 15.85%
- Punjab & Sind Bank= 10.4 to 12.4%
- Bank of Maharashtra= 9.35 to 13.7%
Documents required for Term Loan
- KYC Form
- Proof of Business Registration (GST registration certificate, establishment proof, etc.)
- Last six months’ bank statement
- PAN & AADHAR card of the applicant
- Income Tax Return filings, Audited Business Financials, and 6 months of proof of GST Returns ( for high-value loans)
Example of a Term Loan
Say a business intends to borrow Rs. 50 lakhs to buy machinery to increase its production and accelerate sales. If the interest rate is fixed at 14.65% and the loan tenure is 6 years or 72 months, the borrower must pay 72 EMIs, each amounting to Rs. 1,18,033.
Term loans are business loans that lending institutions offer for a particular term at a certain interest rate. They can be secured or unsecured and taken for any period due to any specific business requirement.
Businesses avail term loans for buying assets, meeting working capital expenditures, new projects, expansion, etc.
Fixed or floating interest rates, a pre determined loan value, fixed repayment period, instalment payments, tax advantage, and negotiable terms & conditions are standard features of term loans.
Term loans offer a lump sum of money to businesses per their requirements, assets & infrastructure, financial health & credit history. They can be secured using assets or converted to equity in case of default.