Term Loan

A term loan is a line of credit that you need to repay regularly over a predetermined duration. As a result, it is also referred to as Term Finance. Loan under this category is typically offered for a period ranging from 1-30 years.

 

A term loan requires minimal documentation, and flexible repayment options make it convenient. It is appropriate for small business enterprises, but individuals too can apply for this loan scheme. To sum up the term loan definition:

• It has a fixed repayment schedule

• The rate of interest on a term loan is either fixed or floating

• Individuals and businesses can both get it

• Widely offered by leading lenders

• Defaulting on a term loan attracts a high penalty

There are some key features of term loans that set term loans apart from other credit facilities. Some of them are:

• Term loans are secured or unsecured and offered by banks

• If secured, the lender offers the funding based on collateral

• The interest rate levied on the loan can vary based on the credit risk of the proposal, the loan amount, and the tenure

• The term loan’s repayment period ranges between 1-30 years

Some of the most notable advantages of a term loan are as follows:

• The term loan is comparatively cheaper than other types of funding and brings better value for the borrower

• The interest paid on term loans is sometimes tax-deductible

• These loans have fixed interest rates, allowing you to save you from financial losses due to market fluctuations

• These types of loans come with no restriction on end usage

• It helps in better management of finances due to its structured repayment system

• The term loan has a longer repayment tenure so that you can repay conveniently

• Term loans mean debt financing, so it does not impact interest by equity shareholder

As with every kind of financial product, term loans carry a set of disadvantages. The disadvantages of term loans include the following:

• In case you fail to make the repayment in time, the lender can take legal action.

• The lender may impose some conditions which may hamper your ability to get another loan or close existing loans, thus affecting the usual functions of the firm.

• Due to longer repayment tenures, you may have to pay EMIs for a longer time.

• For secured term loans, you need to have good credit or a CIBIL score.

Here is an example to better determine the term loan meaning and how term loan works.

 

Suppose you need funding of ₹50 Lakhs to expand your business activities and apply for the same with your chosen lender.

 

Once you have applied, the lender will assess your application by evaluating some factors. These factors play a crucial role in determining your repayment ability. This includes collateral security, cash flow, profits, business infrastructure and more.

 

Now, if the lender determines that you cannot repay the proposed loan amount, they will offer a feasible loan amount. After you have accepted the offer, the repayment structure is planned based on the assessment.

 

If you have chosen a floating interest rate, the EMI amount will change. It can also change when the lender changes the interest rates following an economic fluctuation. This can either reduce or increase your EMI amount.

 

In a fixed interest rate, the EMI amount stays the same throughout the tenure. However, in both cases, the repayment tenure depends on your purpose of getting a term loan. Once the repayment starts, you can prepay/foreclose the term loan as per the terms and conditions mentioned by the lender.

 

Keep in mind that the lender may levy an additional charge on foreclosure of the loan. If it is a secured loan, the lender will lose the rights on the assets once you repaid the term loan as per the terms and conditions.

 

In case of default, the lender has the right to seize the asset to recover the loan amount.

A term loan is available in different categories. These categories reflect the repayment period of a term loan. Some different types of term loans available are:

• Short-Term Loan

You can use a short-term loan to meet immediate funding needs. The duration of the term loan ranges from a few weeks to a year. However, lenders offer this type of loan as per your correspondence to quickly repay the loan.

• Intermediate-Term Loan

This loan is classified as an intermediate loan as it is usually offered for a period ranging from 1-5 years. An intermediate-term is usable to fund needs to boost working capital and purchase advanced machinery. Meanwhile, this type of term loan is useful for medium-sized project funding.

• Long-Term Loan

Long-term loans offer an extended tenure of more than 5 years, up to 30 years. The term loan can be repaid monthly or quarterly through the profits or cash flow of the company. A long-term loan is preferably taken to purchase assets, purchase real estate, or fund a large business project.

The following entities can get a term loan:

• Salaried professionals

• Self-employed persons

• Small businesses

• Manufacturers and Retailers

• Trusts

• Traders

• Small-business owners

• Private limited companies

• Public limited companies

• Co-operative societies

• Non-governmental Organisations (NGOs)

• Partnership firms

Businesses opt for term loans in order to keep capital secure for future long-term requirements. Term loans offer businesses a substantial upfront lump sum, often exceeding the amounts available through short-term financing options like credit lines. This makes them ideal for:

• Purchasing equipment

• Renting or buying offices or warehouses

• Buying raw materials for production

• Funding marketing expenses

• Capitalising on time-sensitive growth opportunities

 

These loans offer clear and fixed repayment plans, enabling businesses to manage their budgets more effectively. Through these loans, businesses grow and expand their profitability without worrying about cash depletion.

The factors that affect your eligibility for a term loan are majorly in line with your repayment ability. Lenders assess the following to evaluate your repayment ability, which affects your eligibility.

• Project or Business Plan 

The business gives the lender an idea about its feasibility and repayment plan. If the lender determines that the repayment can happen smoothly, they may extend the term loan offer. This essential component also plays a role in determining the term loan interest rate and amount.

• Operational Efficiency 

The operational efficiency gives the lender an idea of the business’ profit in several financial situations. Given this, this is generally assessed for an already established firm seeking a term loan.

• Background of the Promoters 

The credibility and history of the promoters are gauged. The likelihood of a successful negotiation increases with the promoters' credit score.

• Credit Repayment History

The corporate entity's credit repayment history is checked. The terms will be more favourable as it assures them that new credit is managed well.

• Actual and Expected Performance 

The lender estimates the current financial performance. The financial success over 3-5 years is forecasted in the business strategy to assess the organisation’s ability to manage credit.

• Security of Collateral

If you default on loan repayment, lenders assess the security of the collateral offered to ensure that the loan amount recovery is done.

• Business Infrastructure

The business' infrastructure is evaluated to ensure the term loan can be repaid in full in the event of default. Even if the collateral for these loans is equal to the extended loan, this element is still taken into consideration. The term loan is secured by already-built infrastructure.

Given below is the list of documents required for a term loan:

• Duly filled application form

• Identity Proof: Passport, PAN card, Aadhaar card, Voter’s ID card

• Address Proof: Telephone bill, water connection bill, gas bill

• Financial Documents: Bank statement for last 12 months, proof of turnover, etc.

• Business Documents: Proof of business, self-drafted business plan, etc.

 

Check that you have all the term loan documents required for a seamless process. A lender may request additional documents to support the application.

The majority of lenders enable you to apply on their portals, allowing their representatives to contact you. To speed up the loan approvals, banks have established loan hubs and processing facilities.

 

Once you have calculated your finances using the term loan calculator and chosen one of the digital platforms, follow these steps:

1. Submit your application with your financial, company, and personal information

2. Submit the documents and fill in the online application form

3. Get an approval notification after the lenders assess your application

 

Once your term loan request is approved, the lender will directly transfer the sanctioned amount to your bank account.

 

Term loans are a good opportunity for individuals as well as business entities wanting to get quick funding easily. The requested amount, when approved, is quickly disbursed into the applicant’s bank account.

 

All these factors work wonderfully when it comes to accessing immediate funding. Visit Bajaj Markets to get the best deals on a term loan.

Reference of all T&C necessarily refers to the terms of the Partners as regards to pre-approved offers and loan processing time amongst other conditions.