What is a Term Loan, and How Can You Secure One?

Dec28,2023

Access to capital is vital for any business, big or small, to grow and thrive. One of the most common ways for businesses to raise money is through term loans – fixed-amount, fixed-period loans that provide operating capital.

In this comprehensive guide, we explain everything you need to know about what term loans are, their key features, how they can be used, eligibility criteria, loan amounts and interest rates, as well as the major advantages they offer businesses. Read on for an in-depth look into term loans and how your company could benefit from one.

What is term loan?

A term loan, sometimes called an amortising loan, is a business loan that gets repaid in regular instalments over a set period of time or term. It provides borrowers with a lump sum of capital upfront, which then gets paid back monthly in equal payments that cover both principal and interest.

NBFCs offer term loans ranging from one to eight years in length. The loan amount, repayment structure, interest rates, and other terms depend on factors like the size and financial health of the business taking out the loan.

Key features of term loans

There are several distinctive features of most term loans:

  1. Duration: Short-term, intermediate-term, or long-term durations extending from 12 months to 96 months
  2. Interest rates: Fixed or floating interest rates, depending on what the borrower chooses
  3. Unsecured: Term loans like personal loans and small business loans etc. don’t require collateral, depending on the loan amount and the borrower’s creditworthiness
  4. Repayment: Fixed, predictable repayment schedule

Common uses for term loans

Term loans offer businesses instant access to capital that can be used to cover a wide variety of operational expenses, including:

  1. Purchasing raw materials and inventory
  2. Investing in new equipment or machinery
  3. Settling existing debts
  4. Covering overhead costs like rent, salaries, utilities
  5. Managing seasonal fluctuations in cash flow
  6. Digitising the business
  7. Expanding the business 

Eligibility criteria for securing a term loan

When applying for a term loan, there are some key eligibility criteria lenders like NBFCs consider:

  1. Indian citizenship
  2. Minimum age of 24 years at the time of application and maximum age of 70 years at the time of loan maturity
  3. Business operational for at least 3 years
  4. Minimum CIBIL Score requirement (typically 685+)
  5. Self-employed status

Loan amounts and interest rates

Both the loan amount and interest rates can vary considerably between lenders and borrowers. Some key factors impacting them include:

  1. Business revenue
  2. Expenses
  3. Credit score
  4. Business history
  5. Income level

Advantages of term loans

Some notable upsides to term loans for businesses are:

  1. Predictable repayment structure helps financial planning
  2. Typically lower interest rates than other financing options
  3. Immediate access to capital can boost cash flow for operations
  4. Flexible terms and tenure options

Getting approved for a term loan requires thorough financial documentation and a good credit standing, but the injection of capital it provides SMEs can be invaluable.

For small and mid-sized enterprises needing money to cover operational expenses, term loans present an accessible financing avenue to consider. Their structured repayment plans and flexibility make term loans a strategic choice to bridge temporary capital needs. Understanding the eligibility norms, loan conditions, and advantages term loans offer is key to determining if one makes sense for your business. Approach such financing decisions carefully and fully-informed.

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