A term loan is a line of credit that must be repaid regularly over a predetermined duration. It is typically offered for a period ranging from 1 to 30 years. A term loan requires minimal documentation and offers flexible repayment options, making it a convenient financing option. It is appropriate for small business enterprises, but individuals too can avail this loan scheme.
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
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
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
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
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:
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.
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 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.
The term loan can be availed by the following eligible entities:
Private limited companies
Public limited companies
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.
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.