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As a small business owner, you know the challenges of securing funds to invest in new growth opportunities. From acquiring fixed assets to managing day-to-day operating costs, from expanding your facility to meeting an emergency situation at business – obtaining funds for your small business is easier said than done. Fortunately, many banks and lending institutions have term loan programs that are designed for businesses to help meet their capital expenditure and expansion goals.
In this blog, we will understand what a term loan is, the different types of term loans available, eligibility, features and benefits. So let’s dive in.
A term loan is usually granted to small businesses wherein a bank or lending institution provides you with a one-time lump sum upfront payment to help meet your financial goals – purchase a new establishment to fuel your production process or get equipment or other assets to keep your business running. You can also use the cash to meet your month-to-month working capital needs.
The loan is extended for a fixed tenure, and you must repay it in equated monthly instalments. The repayment amount includes the principal and an interest rate, which may be fixed or variable depending on the type of loan you take. A term loan is generally given for a longer tenure, say one to twenty years. Minimal eligibility requirements, flexibility of repayment, and quick fund disbursal are some of the key benefits of term loans.
Now, you know what is a term loan, but you do not know how it works. Financial issues can hit your business when you least expect it. A term loan eases this burden by providing immediate cash access when traditional options fail you. The money arrives in your account, and you can focus on growing your business rather than worrying about bills.
Some term loan examples include credit cards, gold loans, and salary loans. The process to obtain a term loan involves these simple steps:
Research Options
You explore various lenders, comparing interest rates, tenure options, and eligibility criteria that match your specific business needs.
Document Preparation
You gather all required paperwork, including identity proof, income statements, bank records and business details for faster approval.
Application Submission
You complete the application form with accurate information about your business situation and specify exactly how much money you need.
Credit Assessment
The lender reviews your credit history, business performance and repayment capacity to determine if you qualify for the loan.
Loan Approval
Once approved, you receive the loan agreement outlining all terms including interest rates, repayment schedule and any associated fees.
Fund Disbursement
The approved amount gets transferred directly to your bank account, often within hours of final approval.
If you are considering getting a term loan, you typically have three options: short-term loan, intermediate loan and long-term loan.
As the name suggests, short-term loans are taken out for a shorter repayment tenure, usually 12–18 months. It is ideal to help meet your temporary financial requirements, such as a working capital crunch, business expansion, or operating costs. The principal loan amount is less and is determined based on your eligibility. The interest rates are generally higher for short-term loans because of their shorter repayment period.
This type of term loan can be unsecured or secured. To obtain secured loans, you have to provide some form of collateral, and hence, the interest rates are typically lower. On the other hand, lenders provide unsecured loans based on your creditworthiness. The interest rates are often higher for these types of loans.
Some common examples of short-term loans are salary loans, credit cards, gold loans, overdraft facilities, demand loans, etc.
These are medium-term loans that are granted for a period of around 2–5 years. You can obtain an intermediate loan for equipment or asset purchases, business expansion, repairing or renovating manufacturing plants and buildings, etc. The loan amount may vary from anywhere between ₹25 lakhs and ₹5 crores. These are ideal for MSMEs or businesses that have a turnover of ₹1 crore to ₹250 crore.
The interest rate on an intermediate-term loan is often lower compared to short-term loans because it is charged annually. This type of loan is generally unsecured, and the maximum principal amount you can borrow depends on your business’s creditworthiness, your eligibility, and the lender’s policies.
Long-term loans are available at attractive interest rates and come with an extended repayment tenure of up to 25–30 years. When you need lump-sum funding for your business or personal needs, this is the best option. The loan amount is huge and spreads across monthly/quarterly instalments over the repayment tenure. The interest rates are also lower than for short-term and intermediate loans.
Since this involves a lump-sum loan amount, long-term loans are mostly secured in nature. The borrower must fully own the pledged collateral, and it should be free of all litigation and mortgages. You may also find long-term loans that offer tax benefits for individuals and businesses. Some common examples of this type of loan are home loans, business loans, auto loans, etc.
Not all types of loans are ideal for your business or personal needs. Therefore, it is crucial to thoroughly assess the pros and cons of a term loan to determine if it is a good option for you.
Understanding the pros and cons of a term loan can help you make an informed choice and fulfil your financial obligations.
Wondering how does a term loan works? Discussed here are the key features of various types of term loans.
With term loans, you get a fixed lump sum amount, which typically varies based on your eligibility and the type of loan you take.
Term loans can be both secured and unsecured loan in nature. For secured loans, you need to put down your business asset as collateral, whereas unsecured term loans do not require any collateral – however, the interest rates are much higher.
This type of loan has a specific repayment tenure – short, medium, and long-term. You have the flexibility to choose your preferred repayment tenure depending on your loan requirement. You can repay the loan in monthly, quarterly and half-yearly instalments based on the type of loan.
In general, term loans have fixed interest rates, so your scheduled repayment amount remains the same throughout the loan tenure. Your lender will decide the rate of interest based on your creditworthiness and eligibility. However, some term loans also come with floating interest rates.
If you are purchasing a fixed asset, equipment, or business establishment, the lending institution will only provide up to 75% of the value. You are required to arrange the remaining margin amount. This margin depends on your eligibility and is often, negotiable.
The eligibility criteria for term loans may vary from one lender to another. However, there are a few basic standards that most lenders require you to fulfil. These include:
As proof of your eligibility, you must produce various documents as required by the bank or lending institution:
The documents mentioned above are only indicative. Your lender may require you to submit additional documents when applying for the loan.
Now you know what is a term loan. Getting your loan rejected because of missing paperwork feels embarrassing. Many people struggle with document needs. So, here is what you need to submit.
1. Aadhaar Card / PAN Card / Voter ID / Passport / Driving License
2. Utility Bills / Rental Agreement / Bank Statement / Property Tax Receipt
3. Bank Statements / Income Tax Returns / Form 16 / Business Financial Statements
Want to apply for a term loan? Discussed here are the steps that will make the entire process hassle-free for you.
Clearly determine the purpose of taking a term loan – whether it is for personal use, equipment purchase, or business expansion. Once you have assessed your needs, explore different banks, financial institutions, and online lenders that offer term loans. Compare them based on their interest rates, eligibility criteria, terms, repayment schedule, etc.
Check if you fulfil the eligibility criteria set by your preferred lender. Likewise, arrange all necessary documents, such as identity proof, bank statement, income proof, and other documents as required by the lender.
Fill out the loan application form with up-to-date and accurate information. This should include the purpose of the loan, personal and business details, and the desired amount.
Once you submit the application, the lender will review your creditworthiness and financial standing. If the loan application gets approved, you must review the terms & conditions carefully. This includes information about their repayment schedule, interest rates, additional fees, etc. Based on your understanding, you can decide whether to take the loan or not.
There are various factors that may affect the eligibility of your term loan. These include:
After knowing what is a term loan facility, you need to learn the factors. Lenders look closely at how steady your income flows into your account each month before approving loans. Frequent job changes or irregular business income makes lenders nervous about your repayment ability. They prefer borrowers with stable employment records or consistent business revenue patterns over several years.
Your past financial behaviour speaks volumes about how you might handle future loan payments. Late payments, defaults, or high credit card balances create warning signs for lenders. A strong credit score shows responsible financial management. It improves your chances of loan approval.
Lenders feel more comfortable funding specific purchases like equipment or property than general business expenses. Clear loan purposes with potential return on investment make your application stronger. Vague reasons for borrowing or using funds for risky ventures might lead to rejection or higher interest rates.
The calculation shows how much of your monthly income goes toward existing debt payments. High ratios suggest you might struggle with additional loan payments. Lenders prefer borrowers who use less than 30% of their income to ensure comfortable margins for new loans.
This measures the loan amount against the value of assets you're purchasing or pledging. Lower ratios mean less risk for lenders if they need to recover funds. Loans covering more than 75-80% of asset value typically face stricter terms or higher interest rates to compensate for increased lender risk.
Valuable assets you pledge against your loan provide lenders with backup repayment options if cash flow problems occur. Strong collateral like property or equipment in good condition improves loan terms. The quicker and easier your assets can be converted to cash, the more favourably lenders view your application.
Your history of paying previous loans on time creates trust with potential new lenders. Consistent on-time payments demonstrate financial responsibility that lenders reward with better terms. Even one or two missed payments in recent years can negatively impact your eligibility and interest rate options.
Established business operations with proper documentation and management systems signal stability to lenders. Organised financial records, good inventory systems, and efficient operational processes reduce perceived lending risks. Lenders view businesses with strong infrastructures as better prepared to weather challenges and maintain repayment schedules.
Whether you are an individual or a business owner, you can obtain a term loan for various purposes, such as expanding your business, purchasing fixed assets, or refinancing your existing debt. The payment structure, interest rates, and fees are often stable and will minimally affect your financial management. However, you should delve deeper into the pros and cons of a term loan before making a decision.
Presently, many lending institutions provide a 100% digital loan process with instant approval and disbursal, provided you fulfil all eligibility requirements. This ensures you have a seamless experience taking a term loan.
The tenure varies based on loan type and your specific needs. Features of term loans like short-term loans include 6-18 months of tenure for quick business needs. Medium-term options extend 2-5 years for equipment purchases or moderate expansions. Long-term loans stretch 10-30 years for major investments like property or large-scale business transformation projects.
Interest rates depend on your credit profile, loan size, and market conditions. Fixed rates stay consistent throughout your loan term, making budgeting easier. Floating rates adjust with market changes, starting lower but carrying future uncertainty. Your business stability, collateral quality, and relationship with the lender affect your personal rate.
Term loans fund specific long-term investments with fixed repayment schedules over the years. Working capital loans address short-term operational needs like inventory or payroll, typically repaid within months. Term loans involve larger amounts with lower interest rates and structured EMIs. Working capital loans offer quick access with flexible repayment but higher rates.
Collateral requirements vary based on the loan amount and your credit history. Secured term loans require assets like property, equipment, or investments as backup security. Unsecured options exist for smaller amounts if you have excellent credit scores above 750. New businesses typically need collateral, while established companies with strong financials might qualify for unsecured funding.
Most term loans allow prepayment after minimum lock-in periods, typically 6-12 months. Lenders often charge penalties ranging from 2-5% of the outstanding balance for early settlement. Some banks waive fees if you've completed at least one-third of your loan tenure. Business loans generally have more flexible prepayment terms than personal term loans.
Repayments occur through regular EMIs covering both principal and interest portions. Early EMIs primarily pay interest – while later ones reduce the principal faster. Payment frequency options include monthly, quarterly or semi-annual schedules based on your cash flow patterns. Amortisation schedules provide complete breakdowns showing exactly how each payment reduces your loan balance.
New ventures face tougher term loan eligibility, but specialised options exist. Lenders typically require a minimum of six months of operation history and revenue generation. Startup founders often need strong personal credit scores and may have to provide personal guarantees. Alternative funding like equipment financing or government-backed startup schemes offer better approval odds for newer businesses.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
