Term Loan: Meaning, Types, Benefits, and How It Works

A term loan is a popular borrowing option that provides funds for a fixed period with scheduled repayments. It can be useful for startups, businesses, or individuals who want to meet specific financial needs like expansion or asset purchase. Understanding term loans helps borrowers make informed financial decisions.

A term loan is a type of credit facility where an applicant borrows a lump sum amount upfront and then repays this sum with interest over a fixed period. The repayment schedule is typically set monthly or quarterly. These loans generally have predetermined terms regarding the loan tenure, repayment amount, and interest rate, which can be fixed or floating. These loans are often used to finance business expansion, equipment purchase, or other long-term financial needs. 

The loan term may range from a few months to several years depending on the requirement. Usually, lenders require some security or collateral to mitigate lending risks. This structured borrowing method suits borrowers who want predictable payments and a clear end date for their debt.

Term loans come in several varieties depending on the tenure and security involved: 

• Short-Term Loan: 

Typically repaid within 12-18 months, these loans address immediate financial needs such as working capital or urgent expenses. Interest rates can be higher due to the brief tenure. These may be secured or unsecured loans. 

• Medium-Term Loan: 

These loans last from 2 to 5 years and are often used for buying machinery, business expansion, or renovations. The loan amount is generally higher than short-term loans and rates may be moderate. 

• Long-Term Loan: 

Usually spanning over 5 years, these loans finance large investments like buying property or major infrastructure. Interest rates tend to be lower compared to shorter-term loans. 

• Secured Term Loan: 

These require collateral such as property or fixed assets. Due to lower risk to the lender, interest rates can be more favourable. 

• Unsecured Term Loan: 

No collateral is needed but eligibility depends heavily on creditworthiness, which usually results in higher interest rates and stricter terms. 

Thus, the variety of term loan options allow borrowers to choose a loan that best fits their repayment capacity and financial goals.

Term loans come with distinct features that make them suitable for various financing needs:

• Fixed Loan Amount: Applicants borrow a lump sum upfront, allowing clear planning of expenditures. 

• Defined Repayment Schedule: Regular repayments start immediately or after a moratorium, ensuring predictability. 

• Fixed or Floating Interest Rates: Interest can be constant for the tenure or vary with market rates, impacting EMI stability. 

• Collateral Requirement: Many term loans require collateral, reducing lender risk and possibly lowering rates. 

• Loan Tenure: Typically ranges from months to years based on the loan purpose and borrower profile. 

• Usage Flexibility: Funds can be used for various purposes such as asset acquisition, business expansion, or debt consolidation. 

These benefits create a clear framework that helps businesses and individuals plan their finances with certainty.

The factors that affect your term loan eligibility are majorly in line with your repayment ability. Lenders assess the following to evaluate your repayment ability, which affects your eligibility.

• Project or Business Plan

The business gives the lender an idea about its feasibility and repayment plan. If the lender determines that the repayment can happen smoothly, they may extend the loan offer. This essential component also plays a role in determining the loan interest rate and amount.

• Operational Efficiency 

The operational efficiency gives the lender an idea of the business’ profit in several financial situations. Given this, this is generally assessed for an already established firm seeking a term loan.

• Background of the Promoters 

The credibility and history of the promoters are gauged. The likelihood of a successful negotiation increases with the promoters' credit score.

• Credit Repayment History

The corporate entity's credit repayment history is checked. The terms will be more favourable as it assures them that new credit is managed well.

• Actual and Expected Performance 

The lender estimates the current financial performance. The financial success over 3-5 years is forecasted in the business strategy to assess the organisation’s ability to manage credit.

• Security of Collateral

If you default on loan repayment, lenders assess the security of the collateral offered to ensure that the loan amount recovery is done.

• Business Infrastructure

The business' infrastructure is evaluated to ensure the term loan can be repaid in full in the event of default. Even if the collateral for these loans is equal to the extended loan, this element is still taken into consideration. The loan is secured by already-built infrastructure.

These loans offer numerous benefits that make them appealing for fulfilling diverse financial needs: 

• They provide lump sum access to funds, ideal for capital-intensive projects.

• Structured repayments aid in budgeting without surprises.

• Interest rates are often lower than other types of loans, reducing cost.

• Fixed tenure provides clarity on when the loan will be fully repaid.

• Collateral-backed loans may attract more favourable terms.

• Proceeds can be used flexibly across business or personal needs.

• They help preserve working capital by spreading costs over time.

• Timely payments can help improve credit score and borrowing capacity.

These positives make term loans a practical financial instrument for planned borrowing.

Despite their benefits, these loans have their limitations that borrowers should consider:

• The requirement of collateral can put assets at risk if repayments fail. 

• Repayments start immediately, which can strain cash flows, especially for startups. 

• Inflexible repayment schedules may not suit fluctuating income patterns. 

• Prepayment penalties or charges may apply, discouraging early loan closure. 

• Approval processes can be lengthy and document-intensive. 

• Poor credit history can lead to higher interest rates or rejection. 

• Market-linked floating rates can create uncertainty in payment amounts. 

• Borrowers with unstable business plans may struggle to qualify. 

Understanding these downsides helps borrowers plan better and weigh options effectively.

The following entities can get a term loan: 

• Salaried professionals

• Self-employed persons

• Small businesses

• Manufacturers and Retailers

• Trusts

• Traders

• Small-business owners

• Private limited companies

• Public limited companies

• Co-operative societies

• Non-governmental Organisations (NGOs)

• Partnership firms

Businesses apply for term loans in order to keep capital secure for future long-term requirements. These loans offer businesses a substantial upfront lump sum, often exceeding the amounts available through short-term financing options like credit lines. This makes them ideal for:

• Purchasing equipment

• Renting or buying offices or warehouses

• Buying raw materials for production

• Funding marketing expenses

• Capitalising on time-sensitive growth opportunities

These loans offer clear and fixed repayment plans, enabling businesses to manage their budgets more effectively. Through these loans, businesses grow and expand their profitability without worrying about cash depletion.

It is now easier than ever to apply for a term loan online. The typical steps include: 

• Step 1: Assess Your Financial Need

Determine the loan amount you need and the tenure your are comfortable with as per your project requirement, financial liabilities, etc. 

• Step 2: Compare Lenders

Research various banks and NBFCs for interest rates, processing fees, and customer reviews. You can do so easily online on financial marketplaces like Bajaj Markets. 

• Step 3: Check Eligibility

Use online loan eligibility calculators to shortlist suitable lenders. Go over your chosen lender’s financial criteria and make sure you and your business ticks all the boxes. 

• Step 4: Prepare Documents

Gather the documents required by the lender. These can include KYC proof, income statements, business plans, and collateral documents if required. 

• Step 5: Fill Application Form

Complete the online application with accurate information and double check. Submit the necessary documents through the lender’s website or app. 

The lender reviews your profile with due diligence and will approve your application if all is in place. Be sure to review and understand the meaning of the loan terms before signing the agreement. Once any auxiliary processes are completed, the loan amount will be credited to your account to be utilised as intended. 

Following these steps ensures a smooth, fast, and transparent loan application experience.

Reference of all T&C necessarily refers to the terms of the Partners as regards to pre-approved offers and loan processing time amongst other conditions.