Term Loan Definition & Why Term Loan Is Important

October 11, 2021

Term Loan Definition

Term loans are short-term, up-front funding options for local and small enterprises with a long repayment period. These are long-term debts issued by businesses, with a payment plan and interest paid in instalments at set or fluctuating rates. These loans, on the other hand, are not given to enterprises that do not have solid financial statements and a track record of creditworthiness.

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Term Loan Meaning – In Detail

  • Term loans are advantageous due to the length of time required to repay the loan plus interest. Short-term loans require the borrower to repay the principal in less than a year, whereas term loans give them more time to organise cash and pay in instalments. Term loans are frequently used to finance the purchase of fixed assets such as machinery or buildings, as well as the initiation of projects that require a large sum of money and a long period of time to reap the benefits of such investments. Term loans help with this.
  • Term loans can be taken out for a year or for a period of up to 25 years. It helps firms avoid cash shortages. They have secured loans, and assets are frequently used as security or collateral towards payment in order to ensure that payments are made on time. Many businesses prefer these loans since they do not dilute administration as much as bonds, equity, or debt finance do.

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Highlights Of Term Loan Definition

  • Payments made on time and instalments improve a company’s credit score and creditworthiness.
  • Term loans are useful for obtaining fast funds while starting a new project or striving to meet a specific deadline.
  • They do, however, require stringent permission and appropriate main security (typically the new project itself) or collateral security to absolve defaulting on the payment on maturity, so reducing the risk.
  • Term loans, on the other hand, can be paid off ahead of time with no penalties.

Term Loan Definition & Category:

Secured Loan: If an individual wants to take out a secured loan from a bank or an NBFC, he or she must provide collateral security to the borrower. Equipment, machinery, stock, raw materials, and residential/commercial properties can all be used as collateral.

Unsecured Loan: Most financial institutions offer unsecured business loans, which do not need any collateral or security to be provided to the lender. Because there is no danger to the borrower in taking out an unsecured loan, the interest rates given by banks and NBFCs are on the higher side.

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Term Loan Definition & Examples In Regards With Business Loan

Working Capital Loan: Working capital loans are used by businesses who want immediate funds to maintain cash flow or fulfil day-to-day business expenses. Working capital loans are short-term loans that must be repaid within 12 months of the date of disbursement.

Overdraft: An overdraft is a type of loan in which a banking firm gives you a credit limit based on your needs, and you pay interest only on the amount you use, not on the entire withdrawal limit. The repayment period can be as short as one month or as long as twelve months. The borrower must renew the limit with the lender once a year.

Equipment Financing: Businesses and enterprises could use this sort of loan to finance equipment or vehicles for a variety of activities, including agriculture, farming, commercial transportation, construction, and so on. The amount of an equipment finance loan will range from Rs. 1 lakh to Rs. 10 crores. The rate of interest on a term loan is determined by the individual’s profile and the type of their business.

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Top Advantages & Disadvantages Of Term Loan Or Term Financing 

Pros Cons
Lower Interest Rates Long-term burden of loan & EMIs on the borrower
Higher Loan Amount Requires a high CIBIL/credit score required
59 minutes to approve the loan Guarantor is mandatory
Longer Repayment Timeline High business volume and vintage
Quick disbursement of loan funds Good business stability with profitability
No Collateral Required for Unsecured Business Loans Collateral required – Term loans are usually unsecured
Interest paid is tax-deductible Non-repayment of loan/EMI result in high penalty

Interest Rates on Term Loans

The interest rates on term loans granted to candidates vary from bank to bank and are largely determined by the applicant’s profile and company needs. A good credit score (CIBIL) is also important for acquiring term loans with lower interest rates. In comparison to NBFCs or other lending institutions, banks provide cheaper interest rates on term loans.

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AaliyaWitten by Aaliya A piquant and humorous writer with the love to scrawl and create. For me writing is supreme. To believe that I can give words to my thoughts and connect to people through it is extraordinary.
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