Understanding Term Loans: Your Complete Guide for Businesses in India

In India's fast-paced business landscape, securing timely funding is critical for growth, operations, and expansion. Term loans are a powerful financing tool for startups and established enterprises alike. Whether you're eyeing new machinery, commercial property, or business expansion, understanding term loans can unlock your business’s potential.

This guide explains what term loans are, their key features, how they differ from short-term loans, and how to apply for one in India. Let’s dive in to help you make informed financial decisions!

What is a Term Loan?

A term loan is a type of loan provided by financial institutions, such as banks and Non-Banking Financial Companies (NBFCs), to businesses for a specific purpose and a pre-determined period. Unlike working capital loans or overdraft facilities that offer revolving credit, a term loan involves a fixed sum of money that is repaid over a defined tenure through regular instalments.

Think of it as a structured financial agreement where the lender provides capital upfront, and the borrower commits to repaying the principal amount along with accrued interest over an agreed-upon timeframe. This structured repayment schedule provides businesses with clarity and predictability in their financial planning.

Key Features of Term Loans:

To gain a deeper understanding, let's explore the defining characteristics of a term loan:

• Fixed Loan Amount: The borrower receives a specific, predetermined sum of money at the outset. This amount is typically based on the borrower's needs and the lender's assessment of their repayment capacity and the project being financed.
• Defined Repayment Period: This is a crucial aspect of a term loan. The loan is to be repaid over a specific duration, which can range from a few years to several decades, depending on the loan's purpose and the borrower's financial profile. This period is often referred to as the loan tenure.
• Regular Instalments: Repayment of a term loan typically occurs through Equated Monthly Instalments (EMIs). Each Term Loan EMI comprises a portion of the principal amount and the interest accrued for that period. As time progresses, the principal component of the EMI increases, while the interest component gradually decreases.
• Specific Purpose: Term loans are often sought for specific capital expenditures, such as purchasing machinery and equipment, expanding facilities, acquiring real estate, or funding significant projects. While some term loans might be more general in purpose, lenders usually require clarity on how the funds will be utilised.
• Interest Rate: Term loans come with an interest rate, which is the cost of borrowing the money. Interest rates can be fixed or floating. A fixed interest rate remains constant throughout the loan tenure, providing predictable repayment amounts. A floating interest rate, on the other hand, fluctuates based on prevailing market conditions or a benchmark rate.
• Security/Collateral: Lenders often require collateral or security for term loans, especially for larger amounts or longer tenures. This could be in the form of property, plant and machinery, or other assets. The collateral acts as a safeguard for the lender in case of default.
• Loan Agreement: The terms and conditions of a term loan are clearly outlined in a legally binding loan agreement. This document specifies the loan amount, interest rate, repayment schedule, any fees or charges, and the rights and obligations of both the borrower and the lender.

Long-Term Loans vs. Short-Term Loans: What’s the Difference?

Short-term loans suit immediate needs like inventory purchases or cash flow gaps, with quicker repayment. Term loans, however, are ideal for long-term investments, offering lower monthly payments over extended tenures.

Why Choose Term Loans for Your Business in India?

Term loans offer several compelling advantages for businesses in India. You can have a look at a few advantages listed below:

• Funding for Growth and Expansion: Term loans provide the necessary capital for significant investments that fuel business growth, such as expanding production capacity, entering new markets, or upgrading technology.
• Predictable Repayment: The structured EMI system allows businesses to plan their finances effectively, knowing the exact amount payable each month. This predictability aids in cash flow management and budgeting.
• Asset Acquisition: Term loans are often specifically tailored for acquiring fixed assets like machinery, equipment, and commercial vehicles, which are crucial for operational efficiency and long-term productivity.
• Debt Consolidation: In some cases, businesses might use a term loan to consolidate existing debts into a single, more manageable loan with potentially better interest rates and terms.
• Tax Benefits: In India, the interest paid on term loans used for business purposes is generally tax-deductible, which can help reduce the overall cost of borrowing.

For instance, a retail chain might use a term loan to open new stores, leveraging tax benefits while spreading repayments over a decade.

Types of Term Loans Available in India

Term loans in India can be broadly categorised based on various factors. A few of the factors are discussed below:

Based on Tenure:

1. Short-Term Loans: Tenure typically up to 3 years.
2. Medium-Term Loans: Tenure ranging from 3 to 7 years.
3. Long-Term Loans: Tenure extending beyond 7 years, often used for large capital expenditures like real estate.

Based on Security:

1. Secured Term Loans: Backed by collateral, such as property, machinery, or other assets. These often come with lower interest rates due to the reduced risk for the lender.
2. Unsecured Term Loans: Do not require collateral. These are typically offered based on the borrower's creditworthiness and financial track record and may have higher interest rates.

Based on Purpose:

1. Equipment Finance: Specifically for purchasing machinery and equipment.
2. Commercial Vehicle Loans: For acquiring trucks, buses, and other commercial vehicles.
3. Project Finance: For funding large-scale infrastructure or industrial projects.
4. Real Estate Loans: For purchasing or constructing commercial properties.
5. Working Capital Term Loans: While seemingly contradictory to the general definition, some term loans can be structured to provide a longer-term solution for working capital needs.

Government-Backed Schemes

1. CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises)
2. MUDRA Loans (for higher amounts): These offer low-interest loans with relaxed eligibility, especially beneficial for MSMEs and startups.

How to Apply for a Term Loan in India?

Securing a term loan in India involves a systematic process. While the specifics might vary slightly between lenders, the general steps include:

1. Identifying the Need and Loan Amount: Clearly define the purpose of the loan and the exact amount required. Having a well-defined project plan or business proposal is important.
2. Researching Lenders: Explore different banks and NBFCs offering term loans. Compare their interest rates, fees, eligibility criteria, and repayment terms.
3. Preparing the Application: Gather all the necessary documents, which typically include:
   1. Business registration and legal documents
   2. Financial statements (balance sheets, profit and loss accounts, cash flow statements) for the past few years
   3. Income tax returns
   4. Bank statements
   5. Business plan or project report
   6. KYC (Know Your Customer) documents of the promoters and directors
   7. Details of the collateral offered (if applicable)
4. Submitting the Application: Submit the completed application form along with all the required documents to the chosen lender.
5. Due Diligence and Appraisal: The lender will conduct a thorough review of your application, including assessing your creditworthiness, financial health, and the viability of your project. This may involve site visits and further information requests.
6. Loan Sanction: If the lender is satisfied, they will issue a loan sanction letter outlining the loan amount, interest rate, repayment terms, and other conditions.
7. Loan Agreement and Documentation: You will need to sign the loan agreement and complete any remaining legal formalities.
8. Disbursement: Once all the formalities are completed, the loan amount will be disbursed to your business account.

What are the Factors Influencing Term Loan Eligibility and Terms?

Lenders in India consider several factors when evaluating a term loan application:

• Creditworthiness: Your business's credit history and credit score are critical. A good credit rating indicates a lower risk of default.
• Financial Stability: Lenders will analyse your financial statements to assess your profitability, cash flow, debt-to-equity ratio, and overall financial health.
• Business Plan/Project Viability: For loans related to specific projects, the lender will evaluate the feasibility and potential success of the project.
• Collateral: The value and quality of the collateral offered play a significant role, especially for larger loan amounts.
• Repayment Capacity: The lender will assess your ability to repay the loan based on your current and projected income and cash flows.
• Industry and Economic Outlook: The industry in which your business operates and the overall economic conditions can also influence the lender's decision.

Using a Term Loan EMI Calculator

The Term Loan EMI Calculator is an invaluable tool for businesses considering a term loan. It allows you to estimate the monthly repayment amount based on the loan principal, interest rate, and loan tenure.

The basic formula for calculating EMI is:

E=(1+r)n−1P×r×(1+r)n​

Where:

• E = EMI (Equated Monthly Instalment)
• P = Principal Loan Amount
• r = Monthly Interest Rate (Annual interest rate divided by 12 and then by 100)
• n = Number  of Months in the Loan Tenure

Using a Term Loan EMI Calculator helps you:

• Determine Affordability: Understand the monthly financial commitment involved.
• Compare Loan Offers: Evaluate different loan options based on their EMI amounts.
• Plan Your Finances: Incorporate the EMI into your budget and cash flow projections.
• Experiment with Variables: See how changes in the loan amount, interest rate, or tenure affect the EMI.

Most banks and financial institutions in India provide online Term Loan EMI Calculator tools on their websites, making it easy for businesses to get an estimate.

Considerations Before Opting for a Term Loan

There are several factors that one needs to take into consideration before making an application for a term loan. This will help plan better and make the right decision. Before taking out a term loan, businesses in India should carefully consider the following:

• Actual Need: Ensure that the loan amount is justified and aligned with your business goals. Avoid over-borrowing.
• Repayment Capacity: Honestly assess your ability to meet the regular EMI obligations without straining your cash flow.
• Interest Rate and Fees: Understand the total cost of borrowing, including the interest rate, processing fees, prepayment penalties, and other charges. Compare offers from different lenders.
• Loan Tenure: Choose a tenure that balances affordability with the overall interest paid. A longer tenure means lower EMIs but higher total interest.
• Collateral Implications: If offering collateral, understand the risks involved. Defaulting on the loan could lead to the loss of the pledged asset.
• Loan Agreement Terms: Carefully review all the terms and conditions of the loan agreement before signing. Seek legal advice if needed.
• Prepayment Options: Understand if there are any prepayment penalties if you wish to repay the loan before the end of the tenure.

Conclusion: Empower Your Business with Term Loans

Term loans are a strategic financing option for Indian businesses, enabling investments in growth, assets, and stability. By understanding their features, comparing lenders, and using tools like EMI calculators, you can secure the right loan for your needs.

Ready to take the next step? Explore term loan options with trusted lenders or use an EMI Calculator to plan your repayments. For personalized advice, contact experts at x.ai/grok or check government schemes like Mudra at muddyojana.gov.in.

Author: Rajesh Mishra

Rajesh Mishra is a professional and multilingual writer with over 12+ years of versatile experience in content writing.

He has crafted compelling narratives across a diverse array of industries, including BFSI, fintech, IT, pharmaceuticals, e-commerce, education, fashion, and more. He is a commerce graduate from Mumbai University. His strong academic foundation and passion for storytelling enable him to engage audiences and deliver impactful content.

 

He is adept at transforming complex concepts into clear, relatable language, making his work accessible to both, industry professionals and everyday readers. He thrives in dynamic environments, leveraging his extensive knowledge to create articles, blogs, whitepapers, and marketing materials that resonate with target audiences. Driven by a commitment to excellence and a keen eye for detail, Rajesh Mishra continuously explores emerging trends and technologies, ensuring his content remains relevant and thought-provoking.