Term Loan - Term Loan Eligibility & Term Loan Interest Rates

What is a Term Loan?

To sum up a term loan:

• It has a fixed repayment schedule

• It may have a fixed or floating interest rate

• It can be availed by individuals and businesses both

• Widely offered by leading lenders

• Defaulting on a term loan attracts a high penalty

Features of Term Loan

Here are some key features that set term loans apart from other credit facilities:

• Term loans may be secured or unsecured. If secured, the lender offers the funding based on collateral. The asset purchased using the funds availed from a term loan acts as the primary security.  The company assets serve as additional collateral

• A loan term must be paid in a timely and stipulated period

• The interest rate levied on the loan can vary based on the credit risk of the proposal, the loan amount, and the tenor for which the loan is taken. The interest rate is negotiable based on all the relating terms

• The term loan’s repayment period ranges between 5-10 years. The repayment of the loan must be made in installments as stated by the borrower

• The borrower must follow the restrictive covenants laid down by the lender. This could include not raising additional loans, repaying the existing loans, and maintaining a minimum asset base

• Term loans can be converted into equity depending upon the terms of the lender

• Borrowers may incur a hefty defaulting fee if the loan is not repaid within the tenor

• The borrower pays a commitment fee on the unutilised term loan amount

• Over time, the burden of the loan reduces and the interest charged will be less. However, the principal amount will remain constant

Advantages of Term Loans

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

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

• The interest paid on term loans is tax-deductible. Hence, borrowers enjoy tax benefits through term loans

Disadvantages of Term Loans

As with every kind of financial product, term loans too carry a set of disadvantages, namely:

• In case the borrower fails to make the repayment in time, the company's credibility is at stake as the lender can take legal action

• A term loan is a form of debt financing and it affects the interest of stakeholders

• There are restrictive covenants that may be imposed by the lender. These may hamper the borrower's ability to get another loan or close existing loans, thus affecting the usual functions of the firm

What are the Different Types of Term Loans?

Terms loans are offered in different categories. These categories reflect the lifespan of a term loan. Read on to the available types of term loans:

• Short-Term Loan:

A short-term loan is typically used to meet immediate funding needs that can be repaid immediately. The duration of the term loan ranges anywhere from between 12 to 18 months. However, lenders, at times, also offer this type of loan for up to 5 years.

• Intermediate-Term Loan:

This loan is classified as an intermediate loan as it is usually offered for a period of up to 84 months (7 years). Intermediate-term loans can be used to fund big-ticket needs such as boosting working capital and purchasing advanced machinery, among other things. The EMIs can be paid through affordable EMIs, making it a convenient option for business enterprises.

• Long-Term Loan:

Long-term loans are offered for an extended tenure that can reach up to 25 years. The loan can be repaid monthly or quarterly through the profits or cash flow of the company. A long-term loan, however, may limit the ability of the company to take on other forms of business debt.

WhIch Entities are Eligible for a Term Loan?

The term loan can be availed by the following eligible entities:

• Salaried professionals

• Self-employed persons

• Small businesses

• Manufacturers

• Trusts

• Traders

• Artisans

• Retailers

• Small-business owners

• Private limited companies

• Public limited companies

• Co-operative societies

• NGO

• Partnership firms

What are the Business Prospects of a Term Loan?

A term loan can be used to serve different aspects of a business. The acquired funds can be directed towards expanding the business, purchasing advanced equipment, buying office space, hiring talent, meeting working capital needs, and more.

What Documents are Needed to Apply for a Term Loan?

When applying for a term loan, the following documents must be mandatorily furnished:

• Duly filled application form

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

• Self-drafted business plan (in case of a business unit)

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

• Bank statement for last 12 months

• Proof of turnover (in case of a business unit)

A lender may request additional documents to support the application.

Term loans are a good opportunity for individuals as well as business entities wanting to avail quick funding through a smooth application process. 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 Finserv MARKETS to avail the best deals on a term loan.