What is a Term Loan?

Term loans are loans which are of fixed amount distributed by the banks or NBFC to entrepreneurs for capital expenditure and expansion of business with fixed and floating rate of interest. It is a good way of quickly increasing capital in with minimal risk involved.  Flexibility in repayment, minimal documentation, quick disbursal of funds are the benefits of these loans.

In business aspect, term loans can be used to maintain the cash flow or to meet day-to-day business expenditure.

Considering the term loan as a source for your business plan/project report, this guide is useful to look forward:

Types of Term Loans

How to choose the right Term Loan for your Business?

Term loans can be classified based on the tenure for which they are borrowed; also calculate the time for the asset to provide a return. Here’s what you need to know:

  • Short-term loan :

The loans matures within one year and duration of 24 months . It can be used as working capital in the production industry for inventory purchase. It helps to boost flow of cash in business.

  • Intermediate term loan :

The period for such loans could vary from 2 year – 5 years. These loans could be critical for company’s cash flow. Typically, companies which are new and have established afresh may need such intermediate term loans.

  • Long-term loan :

These loans can run anywhere between 3 years – 7 years and sometimes the maximum tenure will be 10 years. The company’s assets are offered as collateral. The repayment could be either monthly or quarterly as per the company’s profit or cash flow recognition. These loans are most appropriate for large construction business, purchasing heavy equipment, buildings etc.

 Other than these, few other things to be considered in terms:

Term Loans 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 is comparatively on higher side.

Who can apply for Term 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 civil score.
  • Applicant should maintain regular source of income.

What Documents Required to Apply for Term Loan?

  • Passport-sized photographs.
  • Project Report/ Business Plan.
  • Filled application form.
  • KYC Documents (Identity, Address and Age Proofs) – Passport, PAN cardAadhar 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.

For creating the project report/ projected balance sheet for term loan you can easily create it using Finline.

Once the application is submitted the bank’s representative may contact the applicant and shall proceed with the bank formalities.