Medium Term Loans: Benefits, Eligibility Criteria, Documents Required, and How to Apply

Explore how medium-term loans work, their benefits, eligibility, interest rates, documents, and online application steps.
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Business Loan
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4 min
24 November 2025

In the dynamic world of business, having access to timely financial resources is crucial. Medium-term loans offer a balanced solution for businesses seeking funding without the immediate pressure of short-term loans or the long commitment of long-term loans. Typically ranging from one to five years, these loans provide flexibility and manageable repayment schedules. Whether you're looking to purchase equipment, expand operations, or manage cash flow, understanding how medium-term loans work can help you make informed financial decisions.

How does a medium-term loan work?

A medium-term loan is a financial product that provides businesses with capital for a specific purpose, to be repaid over a period of one to five years. Here's how it works:

  • Loan amount: Varies based on the lender and the borrower's creditworthiness.
  • Interest rates: Typically fixed or variable, depending on the agreement.
  • Repayment schedule: Monthly, quarterly, or semi-annual instalments.
  • Collateral: May or may not be required, depending on the lender's policies.

These loans are ideal for financing projects that require a moderate amount of time to complete and generate returns. If you're interested in checking your financing options, you can also check your pre-approved business loan offer, which may provide a faster path to securing funds.

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Benefits of medium-term loans

Medium-term loans offer several advantages for businesses:

  • Flexible repayment terms: Allows businesses to manage cash flow effectively.
  • Lower interest rates: Compared to short-term loans, medium-term loans often have more competitive rates.
  • Larger loan amounts: Suitable for significant investments like equipment purchase or facility expansion.
  • Predictable payments: Fixed repayment schedules help in budgeting and financial planning.

These benefits make medium-term loans an attractive option for businesses with medium-term financial needs.

Eligibility criteria for medium-term loans

To qualify for a medium-term loan, businesses typically need to meet the following criteria:

  • Business vintage: At least 1–2 years in operation.
  • Credit score: Generally, a score of 700 or above is preferred.
  • Annual revenue: Varies by lender; however, a consistent revenue stream is essential.
  • Business plan: A clear plan outlining the purpose of the loan and expected outcomes.

Meeting these criteria increases the likelihood of loan approval and favourable terms.

Interest rate and charges for medium-term loans

Interest rates and charges for medium-term loans can vary based on the lender and the borrower's profile:

Lender type Interest rate (p.a.) Processing fee
Banks 8% – 12% 0.5% – 2%
NBFCs 10% – 18% 1% – 3%
Online Lenders 12% – 24% 1% – 2.5%



Note: Rates and fees are indicative and may vary. Always check with the lender for the most accurate information.

Documents required to apply for a medium-term loan

The documentation required for a medium-term loan application typically includes:

  • Identity proof: PAN card, Aadhaar card, passport, or voter ID.
  • Address proof: Utility bills, passport, or Aadhaar card.
  • Business proof: GST registration, trade license, or partnership deed.
  • Financial statements: Income Tax Returns (ITR) for the last 1–3 years.
  • Bank statements: Last 6–12 months of bank statements.
  • Business plan: A detailed plan outlining the loan's purpose and expected outcomes.

Having these documents ready can expedite the loan application process.

Medium-term loan vs. other types of loans

Understanding the differences between medium-term loans and other loan types can help businesses choose the right financing option:

Loan type Term length Ideal for Interest rates
Short-term loans Up to 1 year Immediate working capital needs Higher
Medium-term loans 1 – 5 years Equipment purchase, expansion Moderate
Long-term loans 5+ years Large-scale investments Lower



Each loan type serves different business needs, and selecting the appropriate one depends on the specific requirements and financial situation of the business.

Easy steps to apply for a medium-term loan

Applying for a medium-term loan involves the following steps:

  • Assess your needs: Determine the amount required and the purpose of the loan.
  • Check eligibility: Ensure your business meets the lender's criteria.
  • Gather documents: Prepare all necessary documentation.
  • Choose a lender: Compare different lenders to find the best terms.
  • Submit application: Complete the application form and submit the documents.
  • Await approval: The lender will review your application and notify you of the decision.
  • Receive funds: Upon approval, the loan amount will be disbursed to your account.

Following these steps can streamline the loan application process.

Conclusion

Medium-term loans provide businesses with the necessary capital to invest in growth opportunities without the immediate pressure of short-term loans or the long commitment of long-term loans. By understanding how these loans work, their benefits, eligibility criteria, and the application process, businesses can make informed decisions that align with their financial goals. For businesses seeking tailored financing solutions, business loan offers competitive interest rates and flexible terms to support your business growth. Check your business loan eligibility today and explore your pre-approved business loan offer to see how quickly you can access the funds needed for growth.

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Frequently asked questions

Can I prepay a medium-term loan without penalties?
Many lenders allow early repayment of medium-term loans without penalties. However, it's essential to review the loan agreement for any prepayment clauses. Some lenders may offer a discount on the outstanding principal if the loan is repaid early, while others may charge a fee. Always consult with your lender before making early repayments. To ensure you're on track with your loan options, check your business loan eligibility to see if you qualify for favourable prepayment terms.

How is interest calculated on a medium-term loan?
Interest on medium-term loans is typically calculated using either the reducing balance method or the flat-rate method. The reducing balance method charges interest only on the outstanding principal, while the flat-rate method charges interest on the entire loan amount throughout the tenure. It's advisable to understand the method used by your lender to estimate the total interest payable.

What happens if I default on a medium-term loan?
Defaulting on a medium-term loan can lead to penalties, a decrease in credit score, and potential legal action by the lender. To avoid defaults, it's crucial to maintain timely EMI payments. If you foresee difficulties in repayment, communicate with your lender to explore possible solutions, such as restructuring the loan or negotiating a revised repayment schedule.

What industries benefit most from medium-term loans?
Medium-term loans are beneficial for industries that require capital for expansion, equipment purchase, or project financing. Sectors like manufacturing, retail, healthcare, and construction often utilise medium-term loans to fund growth initiatives. These loans provide the necessary financial support to invest in assets that generate returns over a moderate period. Before applying, check your pre-approved business loan offer to ensure you're getting the best terms tailored for your industry and financial needs.

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