Term Loan: Meaning, Types, Features, and Benefits

Term loans are short-term loans offered to businesses for capital expenditure and expansion, among others. Generally having a tenure up to 96 months, these loans are tailor-made to suit the various financial needs of businesses. Minimal documentation, quick disbursal of funds and repayment flexibility are some of the major benefits of these loans.

Term loans are available to suit a borrower’s funding requirements based on factors like:

• Amount of funding required
• Repayment capacity of the borrower
• Regular cash flow and in-hand availability of funds

Based on these, interest rates on term loan also vary along with other terms of lending. These advances are available in the following types:

Short-term loans

A short-term loan is a type of advance offered for a duration ranging between 12 to 18 months. Some lenders, however, also consider tenures of up to 8 years or 96 months as short-term loans. Borrowers usually avail of these loans to meet the immediate, medium-sized funding needs that they can repay easily within a short span.

Intermediate-term loans

Financial institutions generally classify intermediate or mid-term loans as they come with a longer tenure of up to 96 months. Available in considerable ticket size, these advances sufficiently make for big-budget funding needs of businesses like purchasing machinery, boosting the working capital, etc.

Long-term loans

Available at attractive Term Loan interest rates, long-term loans come with an extended tenure. The easy EMI option makes these advances convenient to repay over a long tenure while fulfilling a business’s requirement for lump-sum funding. Usually, such loans are secured in nature.

Among multiple financing options available, term loans are one of the most convenient ones as they come with pre-determined loan value, interest rates, EMIs, etc. Below is explained how a term loan works for an easy understanding of its functioning.

• Fixed loan amount: Term loans come with a fixed amount. Depending on the type of term loan chosen, the loan value may vary. Meeting the lender’s eligibility criteria is also essential in determining the actual loan amount.
• Fixed tenure of repayment: You must repay the amount availed in EMIs throughout a fixed tenure as determined while availing the loan. Depending on loan repayment duration, it is classified as a short, mid, or long-term loan.
• May or may not require collateral: Depending on the loan amount required, the borrower’s eligibility and choice, Term Loans are available as both secured and unsecured credits. While personal loans, business loans, etc., are unsecured forms of term loans, advances like home loans qualify as secured term loans sanctioned against collateral.
• Fixed or floating interest rate: Term loans are available at both fixed and floating rates of interest. It is up to the borrower to decide which type of interest to opt for.

Fixed repayment schedule: Every term loan comes with a repayment schedule, and a borrower must pay EMIs based on this schedule. The EMI comprises the principal and interest components calculated per the term loan interest rates applicable, thus enabling the borrower to repay quickly. You can determine the EMI amount before availing of the loan using an online business loan EMI calculator

Term loans, a popular form of financing, share several common attributes that distinguish them in the lending landscape. Firstly, borrowers receive a predetermined sum of money upfront, known as the fixed loan amount. This initial amount remains constant throughout the loan term. Additionally, term loans have a specific duration, typically ranging from one to ten years, providing borrowers with a defined repayment timeline. Regular payments are a key feature of term loans, with borrowers required to repay the loan in instalments, usually on a monthly or quarterly basis. Furthermore, term loans often come with fixed interest rates, ensuring predictability in repayment amounts over the loan term. Lastly, term loans may require collateral to secure the loan, such as property or equipment, providing lenders with added security.

How to apply for a term loan

To apply for a term loan, follow these steps:

• Assess your needs: Determine the amount required and the purpose of the loan.
• Check eligibility: Review the lender’s criteria for creditworthiness, business history, and financial health.
• Gather documentation: Prepare necessary documents such as financial statements, tax returns, business plans, and identification.
• Choose a lender: Compare terms, interest rates, and conditions from different banks or financial institutions.
• Submit application: Complete and submit the loan application form along with required documents.
• Review and approval: Await approval, and review the loan agreement carefully before signing.
• Receive funds: Once approved, the loan amount is disbursed, and you can begin using it as planned.