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 Instalments (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. Term loans are offered among various lending products that include business loan, personal loan, home loan, education loan, auto loan and gold loan.
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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 Eligibility – Business Loan
- Age Criteria: Minimum age of the applicant should be 18 years at the time of loan application and maximum should be 65 years at the time of loan maturity
- Applicant with good repayment history and high creditworthiness
- Applicant should possess good credit score or CIBIL score, ideally above 700
- Applicant should maintain regular source of income
- Applicant with no defaults with any financial institution
Also Read: Eligibility criteria for MSME loan
Eligible Entities for Term loans
Individuals, salaried professionals, startups, self-employed, manufacturers, traders, artisans, retailers, small business owners, entrepreneurs, sole proprietorship, Micro Small and Medium Enterprises (MSMEs), private and public limited companies, partnership firms, Limited Liabilities Partnerships (LLPs), Co-operative societies, Trusts, NGOs, etc.
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Types of Term Loan
- Short-term Loan: Short term loans are loans often repaid within 12 months
- Long-term Loan: Long term loans are loans that can be repaid in longer time durations that range between 5 years. In some special cases the repayment tenure may exceed up to 6 years
- Self-drafted Business Plan
- Duly filled application form with passport-sized photographs
- KYC Documents (Identity, Address and Age Proofs) – Passport, PAN card, Aadhar Card, Voter’s ID card, Driving License, Utility Bills (Electricity, Telephone or Water), etc.
- Business establishment proof
- Last 12 months’ bank statement
- Minimum turnover as per bank or lender
- Any other document required by the bank or lender
Term Loan Category
Secured Loan: Collateral security is required to be submitted to the lender by an applicant, if he/she wants to avail secured loan from banks or NBFCs. Collateral submitted can be in the form of equipment, machinery, raw materials, stock, or residential/commercial properties.
Unsecured Loan: Business loans offered by most of the financial institutions are unsecured loans that do not require any collateral or security to be submitted to the lender. The interest rate offered by banks and NBFCs for unsecured loans are comparatively on higher side, as there is no borrower’s risk involved in availing loan.
Term Loan Interest Rates
Term loan interest rates offered to application shall vary from bank to bank and mostly it depends on the applicant’s profile and business requirements. Good credit/CIBIL score also plays a vital role in getting term loans at lower interest rates. Term loan interest rates offered by banks are comparatively lower, as compared to NBFCs or other lending institutions.
Term Loan Examples related to Business Loan
Working Capital Loan: Businesses that require instant funds to maintain the cash flow or to meet day-to-day business expenditure opt for working capital loans. Working capital loans are usually termed as short-term loans and are repaid within 12 months from the date of loan disbursal.
Overdraft: Overdraft is another form of loan in which the financial institution issues a credit limit, as per the requirement and the interest rate is paid only on the amount used and not on the whole assigned withdrawal limit. The repayment tenure is as low as 1 month and can exceed up to 12 months. Every year the limit has to get renewed by the borrower from the lender.
Equipment Financing: This type of loan can be used by businesses and enterprises for financing equipment or vehicles used for various purposes like agriculture, farming, commercial transportation, construction, etc. Equipment finance loan amount shall range anywhere between Rs. 1 lakh to Rs. 10 crore. The term loan interest rate and depends on the applicant’s profile and nature of business.
Top 5 Pros and Cons of Term Loan or Term Financing
|Lower Interest Rates||Long-term burden of loan & EMIs on borrower|
|Higher Loan Amount||High CIBIL/credit score required|
|Loan approval within 59 minutes||Guarantor is required|
|Longer repayment tenure||High business volume and vintage|
|Quick Loan amount disbursal||Good business stability with profitability|
|No Collateral required for Unsecured Business Loans||Collateral required – Term loans are mostly unsecured|
|Interest paid is tax deductible||Non-repayment of loan/EMI result to high penalty|
How to Apply for a Term Loan?
To apply for a term loan or term financing, an applicant needs to visit paisabazaar.com and check and compare from all the available options or information related to loan deals offered by banks and NBFCs. If the applicant finds his/her loan that is fulfilling all their business requirements, he/she can simply submit the required details for further loan processes to be performed by bank authorities. If loan is approved from the lender, then the requested loan amount is disbursed in the bank account of the application in defined time duration.