Term Loan for Business
Loans are necessary for the formation, operation, development, and improvement of all commercial companies. Any firm would almost certainly require a sizable financial investment, and the promoter entrepreneur will need to secure funding from a qualified lender.
Indeed, loans are the backbone of the lending environment. The majority of company loans are borrowed for one-time reasons and are returned within a mutually agreed upon time frame. These loans are referred to as term loans since their duration is limited to a specified period.
There is requirement of Term Loan in various aspects in business activity as per below details.
What is a Term Loan
Term loan is a short-term or long-term loan approved and disbursed by any financial institution. The offered loan amount shall be repaid in regular payments, such as Equated Monthly Installments (EMIs) over a defined period of time. Term loans can be offered in both fixed and floating rate of interest. The repayment tenure of a term loan for business purposes is usually between 12 months to 60 months and 84 Months. Term loans are offered among various lending products that include business loan.
Purpose of Term Loan – Business Aspects
Term loans can be used for various business purposes, such as for business expansion, to purchase equipment, machinery or raw materials, to manage cash flow, to meet working capital requirements, buying office or business space/land, paying-off rent and salaries, hiring new staff, debt consolidation, etc.
Term Loan Features
Term Loan Benefits
Term loans are a key component of project finance. The following are some of the benefits of term loans:
From the Borrower's Perspective
- Cheap: It is a less expensive source of medium-term borrowing.
- Tax Advantage: Interest on a term loan is a tax-deductible expense, and hence there is a tax advantage on interest.
- Adaptable: Term loans are loans that are negotiated between borrowers and lenders. As a result, the terms and conditions of these types of loans are not restrictive, allowing for some degree of flexibility.
- Subsidy : Term loans are that are receivable Subsidy from Government Scheme for SME and MSME Unit.
From the Lender's Perspective:
- Assured: Banks and other financial organizations give term loans in exchange for collateral—thus, term loans are secured.
- Regular Sources of Income: The borrower is required to pay interest and repay principal regardless of its financial situation—this ensures the lender receives a regular and constant revenue.
- Adaptation: Financial institutions may require borrowers to convert term loans to equity to avoid default. As a result, they might get the authority to manage the company’s affairs.
Types of Term Loan
Businesses can pick from a variety of different forms of term loans. They are frequently tailored to the needs of borrowers depending on parameters such as the amount of capital required by the business, the borrower’s repayment capability, and the corporation’s economic health in terms of profits and cash on hand. The majority of the loan’s terms, including the interest rate charged, are determined by these criteria. The most often used categorization scheme for term loans is by loan tenure. As a result, the following types of term loan exist:
These are short-term loans with a maximum duration of 2 years. Typically, these loans have a term of one to two years. These loans are typically utilized to meet the business’s day-to-day demands or meet the firm’s working capital requirements. A firm can obtain a short-term loan from a variety of sources. They include commercial banks, trade credit, and bill discounting.
Generally, short-term business loans have a higher interest rate than some other types of term loans, owing to the shorter repayment period. These loans may even require weekly repayments if the loan term is extremely brief. Any business considering such a loan should keep in mind that these loans include interest, but the costs are also greater if the firm fails on any payment.
These are loans with a term of between two and five years. These loans can be considered a combination of short- and long-term loans. Typically, firms obtain these sorts of loans to renovate or repair a fixed asset. Consider the refurbishment of a showroom as an example. These loans have certain features of both short- and long-term loans. While the interest rates are greater than those on long-term loans, the information required during the loan application procedure is far less demanding than on longer-term loans.
These are loans with a length of more than five years in the majority of circumstances. Tenure periods may potentially exceed 25 or 30 years, depending on the nature of the obligation. Due to the larger ticket sizes and accompanying risks, most long-term loans are secured, requiring collateral. Home loans, auto loans, and loans against property are all examples of these types of loans. Rates are also cheaper when loans are secured. Even long-term loans, however, might be unsecured in some instances. Interest rates are typically higher in these instances owing to the increased risk.
Term loans in India are divided into two categories
If an individual wants to obtain a secured loan from banks or NBFCs, they must offer collateral security to the lender. Collateral might include equipment, machinery, raw materials, stock, or residential/commercial real estate.
The majority of financial institutions offer unsecured business loans, meaning the lender does not need any collateral or security. Banks and non-bank financial companies (NBFCs) charge reasonable interest rates on business loans, as there is no risk to the borrower.