Loans are intrinsic to all business enterprises for their establishment, operations, expansion, and upgrade from time to time. The financial allocation for any business is likely to be huge, and any promoter entrepreneur has to seek a loan from a suitable lender for financing the project.
In fact, loans are the mainstay of the lending ecosystem. Most of the business loans are taken for specific one time purposes and repaid in a defined mutually agreed upon time frame. These loans are thus called term loans due to its life span being restricted to a definite period.
What is Term Loan?
Typically a Term Loan is meant to meet the one-time capital needs of an enterprise confined to a pre-defined term. The capital need may be for the acquisition of Land, Building and Plant Machinery or other necessities related to the business, including Working Capital as part of a composite loan.
The loan is extended to both industrial and non-industrial borrowers involved in manufacture, services or trading. The term loan is usually classified based on the time scale of its life, denoted as short term or long term.
Types of Term Loan:
The primary determinant being the defined period, a term loan can be categorized as:
- Short-Term Loan: Usually repaid within a maximum of 5 years.
- Long Term Loans: The repayment period for this loan goes beyond five years, which can extend up to 30 years.
Term loans can be further classified depending on the security requirement imposed by the lenders. Based on this criterion, a term loan can be further categorized as:
- Secured: Some collateral security has to be provided for availing of this Most Bank and NBFC lenders seek suitable security for business loans.
- Unsecured: These loans are provided without any collateral as security. Most of the Digital Platforms providing business loan offer unsecured loans which may be for amounts up to Rs. 2 Cr as in Lendingkart. However, such loans are generally short-term loans to be liquidated in 2 years.
The spread of Term Loan:
When we talk of loans, we generally consider only business loans. But there is an important segment of term loans which are part of retail banking. These are extended to individuals for specific purposes. Before we delve deeper into the intricacies of term loans in general, let us look at the different retail and business term loans. The example of term loans described below is not exhaustive as there are bound to be others with different flavors. Lendingkart for one offers business loans of different hues including to SME and MSME and one specifically for the woman entrepreneur.
Term Loan Example – Retail:
- Home Loan: It is a typical long term loan provided to an individual or groups of persons for homeownership. The repayment period for such loans is very long, usually ranging from 15 to 30 years.
- Education Loan: This loan is provided to individuals to pursue higher studies, and the terms are very liberal. Most banks do not seek collateral for loans up to Rs.4L. There is a moratorium period on the loan and repayment commences one year after the completion of the course of employment, whichever is earlier. The repayment tenor can be up to 7 years.
- Car Loans: An individual aspiring to buy a car can avail of easy finance options for funding the purchase. The repayment period generally extends up to 5 years.
- Personal Loans: These are loans for individuals to meet personal expenses as varied as marriage, medical treatment, or any other emergent need. Generally, they are liquidated in 3 years.
Term Loan Example – Business:
When it comes to business loans, there are the host of schemes that cater to the various entrepreneurial ventures encompassing manufacture, services, and trading. Accordingly, the business loans that are commonly sought can be both in the long term and short term categories. Some of the examples are:
- Equipment Financing: Machineries and equipments are capital intensive, and most banks have schemes specific for this requirement. The loan amounts are high, and they are repaid both in the short term or the long depending on the terms.
- Commercial Vehicle Financing: It comes under the purview of road transport both for passenger and cargo traffic. The terms of this type of loan are
- Overdraft: It is a flexible loan where you can draw funds according to your requirement to the maximum of sanctioned limit and the drawing power. The other form of this loan is cash Normally such loans are secured using collateral.
- Working Capital Loan: Any business needs funds to run its operations and daily functioning. In times where the cash flow is insufficient, this loan is a handy, slated to be liquidated in the short term, mostly by a year.
Term Loan Interest Rates:
With the term loan calculator, you may arrive at the financials that will involve the loan amount. An important factor impacting the cost of capital is the rate of interest applicable to the loan. There are primarily two types of rates applied to term loans. They are:
- Floating Rate
The interest rate regime is different in the banks as compared to the NBFC and Digital Platforms who have their reference rates. In the case of banks, they fall within the Marginal Cost of Lending Rate (MCLR) regime since 1st April 2016 based on the repo rates declared by the RBI from time to time.
Term Loan Fees:
Business loans attract a host of charges that adds to the overall outgo on your part. A snapshot of the key features and charges shall be enlightening:
Customized between 1% to 2% per month
One-time up to 2 to 3% of the loan amount subject to a minimum cap
Up to 3 years in Digital NBFC but maybe longer in banks.
Quantum of Loan
Rs.50K to Rs.2C in NBFC. In banks, it depends on the scheme
Features of Term Loan:
The features of business term loans vary in flavor depending on the tenor of the loan primarily and the flexibility of the lender. While banks follow stricter norms, the Digital NBFC like Lendingkart have their benchmark. Accordingly, the key benefits of business loans are:
- Flexible loan tenors.
- Competitive interest rates varying with the term of the loan. The long term loans offer a lower rate of interest.
- Business term loans in Digital platform are collateral-free. On the flip side, the loans are mostly for short term.
- Most lenders now permit online processing. Business loan terms are set online for the new age digital platforms.
Eligibility of Term Loan:
There is a host of eligibility criterion for a business loan that varies according to the type of lender, the purpose, and the quantum of loan. However, the norms can be generalized basically into the following.
- Age: In the case of an individual, there is an upper age limit ranging from 55 to 70 years.
- Vintage: The business enterprise must be operational for at six months in the least and can go up depending on the lender.
- Turnover: There is the limit for turnover also which at a conservative estimate is Rs. 90K during the last three months.
How to apply online for Term Loan:
Most lenders allow expression of interest in their portals authorizing their representatives to call on you. Banks have set up their loan hubs and processing centers to streamline the approval of loans. It is the only option with the Digital platforms where it is paperless once you have used the business term loan calculator and worked out the financials. The key steps in the process are:
- Step 1: Submission of application with your personal, business, and financial data.
- Step 2: Upload the digital documents.
- Step 3: Receive approval intimation and disbursal in a maximum time of 72 hours.
Documentation for Term Loan:
The list of documents can be elaborate determined by the type, term, borrower profile, and the lender. However, the bare minimum that is mandatorily required for a business loan, either in the short-term or in the long-term requires the following:
- PAN card of the individual and the business enterprise as the case may be.
- Aadhaar card of the individual promoter.
- Address proof of the individual as well as the firm.
- Proof of the existence of the business, including all registration certificates.
- Bank statements as specified by the lender. In Lendingkart we seek it for 12 months.
- Project report with technical feasibility and economic viability.
- ITR, balance sheets, and P&L statements as required for specified periods.
Term Loan FAQs:
1. How is the repayment schedule in term loan arrived at?
2. What are the key factors for the rate of interest?
3. What are the other types of business loans offered irrespective of the term?
- Invoice Discounting
- Merchant Cash Advance.