A term loan is a type of loan offered by financial institutions that are usually availed by business to help them manage their cash flows. It can be categorized into two types, depending on the tenure of the loan, such as unsecured and secured ones. An unsecured loan does not require any collateral to be provided whereas a secured one does.
Term loans have a shorter repayment tenure of upto 8 years but can vary depending on the needs of the borrower.
These loans, offered by banks as well as financial institutions, are suited for various purposes based on the business requirement such as working capital for day to day activities, expansion related needs, buying inventory and more.
Types of term loans
Term loans are shelled out to suit the borrower funding needs based on various factors, such as:
Amount of funding required
Regularity of cash-flow and availability of funds
Repayment capacity of the borrower
These factors influence the term loan interest rates. There are three types of term loans, namely, short term loans, intermediate term loans, and long term loans.
Short term loans:
A short term loan is a type of loan offered to the borrower for a duration of 12 to 18 months. Some lenders also give a tenure of 84 months for short term loans. Business owners requiring immediate financial assistance avail short term loans to fulfill their needs and repay the loans in a short amount of time.
Intermediate term loans:
Intermediate term loans or midterm loans have a tenure longer than 84 months. These types of loans are useful for businesses with big-budget financial needs such as purchasing machinery, boosting working capital, etc.
Long term loans:
Long term loans have a tenure from anywhere between 3 years to 30 years. Available at attractive interest rates and easy EMI rates, long term loans come with a lump-sum funding, fulfilling all business requirements and are easy to repay over the long tenure.
Categories of Term Loans
Term loans can be classified into secured loans and unsecured loans.
Secured loan: A secured loan or collateral loan is a type of loan that enables the borrower to use the asset or items that he/she has pledged as collateral for the lender.
The borrower's assets include machine, car, real estate and other worthy items which are useful in day-to-day life.
Unsecured loan: Unsecured loans are those where loans are given with no collateral or security required from the borrower. Unsecured business loans usually involve minimal paperwork and offer quick approval.
The interest rates charged by these lenders tend to be higher than rates charged for secured loans as there is risk involved in non-collateralised lending.
Features of term loan
The features of term loans are:
Term loans are Secured Loans. The asset purchased using the term loan amount serves as primary security and other assets of the business are used as collateral security
The term loan must be repaid within the specified amount of time regardless of the firm’s financial situation
The amount and tenure for which the loan is taken are usually based on the purpose of borrowing. The rates offered by the lenders vary from borrower to borrower depending upon the risk associated with his credit profile, the proposed loan amount, and tenure for which it is taken
The term loan has a maturity period of 5 to 10 years. The loan is repaid in monthly installments. Sometimes, the tenure is rescheduled to assist borrowers in dealing with financial emergencies
The lender will request that the borrower refrain from obtaining additional loans, repay existing loans, and maintain a minimum asset base
Term loans can be converted into equity in accordance with the lender's terms and conditions
Defaults are penalized by financial institutions
The unutilized loan amount is subject to a commitment fee.
After the initial grace period of 1-2 years, the principal loan amount must be repaid
The term loan of a commercial bank is repayable in equal quarterly installments, whereas the term loan of a financial institution is repayable in equal semi-annual installments
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The loan's servicing burden decreases over time. The interest will be lower, but the principal repayment will remain the same
Advantages of term loan
Given below are some of the benefits of a term loan :
The loan comes cheap for the borrower at lower interest rates and higher loan amount
The interest paid on the term loan is tax deductible, so the borrower can benefit from the interest paid
The terms and conditions of the loan are flexible, so the borrower can negotiate to suit his/her needs
The term loans are debt financing, and the equity shareholder's interest is not jeopardized
Term loans are secured, so the lender has collateral security and the loan will not pose a huge risk to the institution
The borrower has long repayment tenure, so the loan will not be a burden for the business
Because the loan can be converted to equity, the lender has the right to gain control of the company's or firm's affairs
Disadvantages of term loans:
As term loans have a long repayment tenure, the borrower has to pay EMIs for a long time
To secure term loans, the borrower must have high CIBIL or credit score
Non-repayment of loan or EMIs in a timely manner will lead to high penalty
As the terms are negotiable, the conditions of the loan will favor the borrower
What is the eligibility criteria for term loans?
Banks or financial institutions lending term loans will only lend to applicants who fulfill the necessary criteria. The borrower
Must have a minimum of 18 years and maximum of 65 years
Should have high creditworthiness as well as good repayment history
Can only borrow the money if he/she has a credit score of 750 or above
Must have a regular stream of income
Moreover, the applicant should not have any past defaults with any financial institution.
Who is eligible to apply for term loans?
Salaried professionals
Start-ups or entrepreneurs
Self-employed individuals
Manufacturers
Traders
Small-business owners
NGOs etc
Term loans are up-front financial solutions for businesses that extend for a long period of time. Term loan interest rates vary from bank to bank depending on the applicant’s profile, business requirements, purpose of the loan, etc. Several banks as well as financial institutions such as Money View offer term loans to all kinds of businesses with varying interest rates if you fulfill the eligibility criteria.
You can avail a personal loan from Money View on our website or loan app easily for any kind of purposes mentioned above or for any other financial need of yours. Get in touch with us at care@moneyview.in or 08069390476.
