What is a Term Loan?
Term loan is a loan approved and disbursed by a bank or NBFC for a fixed amount that 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 is usually between 12 months to 60 months in case of business loans. For other lending products like personal loan or home loan the repayment period could be as long as 10 years or more, depending upon the loan amount and interest rate.
Term loan can be any loan that has a tenure defined to it and shall be repaid in a definite time frame. Term loans can be offered among various lending products that include business loan, personal loan, home loan, education loan, auto loan and gold 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 Eligibility – Business Loan
- Age Criteria: Minimum age of the applicant should be 21 years at the time of loan application and maximum should be 65 years at the time of loan maturity
- Applicant should be Indian citizen
- Applicant should possess good credit score
- Applicant should maintain regular source of income
Term loan can be availed by the following business entities:
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, co-operative societies, NGOs and many more.
Types of Term Loan
Short-term Loan: Short term loans are loans often repaid within 12 months or 24 months.
Long-term Loan: Long term loans are loans that can be repaid in longer time durations that range between 10 years to 30 years.
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 Rate
Term loan interest rate offered to application shall vary from bank to bank and mostly it depends on the customer’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 repayment tenure depends on the loan amount and the interest rate on which the loan is approved and disbursed.
- Passport-sized photographs
- Business Plan
- Filled application form
- 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 address proof: Property papers, rent agreement or lease document
- Income Proof: Last 6 months’ salary slips
- CIBIL report, if required by lender
- Last 12 months’ bank statement
- ITR, Sales Tax report, Profit and loss statement of last 2 years
- Any other document required by financial institution
How to Apply for a Term Loan?
To apply for a term loan, an applicant needs to visit the official website of the desired financial institution and have to fill in the loan application form online. After the form submission, the bank’s representative may contact the applicant and shall proceed with the bank formalities. Secondly, an applicant can also 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.