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Businesses frequently require cash for expansion, equipment purchases, and personnel hiring. These frequently necessitate big capital investments, which can have a negative impact on cash flow. While there are alternatives to term loans, such as purchase order finance, buy order financing and working capital loans, but term loans have significant advantages. Afinoz can be a great helping hand in order to get the best business loan.  

What are Term Loans and How Do They Work? 

Term loans are short- to medium-term lending solutions with terms ranging from one to ten years. They are often used for expansion, asset acquisition, diversification, and other purposes, and provide a substantial sum of money in one go. Because of the advantages they provide, term loans are a popular type of finance. Let's look at the benefits of a Term Loan.

Features of Term Loan  

Term loans have the following features: 

• Secured loans are term loans. The asset purchased with the term loan amount will act as principal security, while other firm assets will act as collateral security. 
• Regardless of the firm's financial status, the loan must be repaid within the specified time frame. 
• The interest rate on the loan is determined after assessing the credit risk of the proposal, as well as the loan amount and term. A minimum loan rate will apply to the interest rate. At the time of loan distribution, the rate is negotiated between borrowers and lenders. 
• The term loan has a maturity of 5 to 10 years. The loan is repaid in monthly installments. To assist borrowers in dealing with financial problems, the tenure might be rescheduled. 
• The lender will request that the borrower refrains from taking out new loans, repay existing debts, and maintain a minimal asset basis. 
• Term loans can be converted into equity if the lender's terms and conditions are met. 
• Defaults are penalized by financial institutions. The unutilized loan amount is levied as a commitment fee. 
• After the first grace period of 1–2 years, the principal loan amount is due to be repaid. 
• Term loans from commercial banks are repaid in equal quarterly installments, but term loans from financial institutions are repaid in equal semi-annual installments. 
• The loan's servicing burden decreases over time. The interest rate will be lower, yet the principal repayment will be the same. 

Types of Term Loans 

Term loans are classified according to the length of time they are taken out. In layman's terms, the categories are — 

• Short-term Loans 

Short-term loans are defined as term loans with a repayment period of one year or less. Short-term loans have a higher interest rate than other types of loans, including long-term loans. Many banks in industrialized economies provide payday loans, which are unsecured short-term loans with periods as short as three or four months. However, in India, this approach has failed to catch on. Certain banks, on the other hand, provide credit card and existing loan customers with the option of purchasing consumer electronics with loans with exceptionally short terms, such as 3 or 6 months. 

Eligibility for a Short-Term Loan 

The eligibility conditions differ from one bank to the next, as well as from different loan types. Nonetheless, there are a few broad norms that Indian banks and financial organizations should adhere to. A few of these are listed below. 

• The applicant's age range must be between 21 and 60 years old. 
• A steady source of income is required of the applicant. 
• The applicant must be a citizen of India. 

Some of the examples of short-term loans are a personal loan, customer loan, bridge loan, demand loan, and others. 

• Long term Loans 

Long-term loans are those that are paid out for a longer length of time and have a longer repayment period. In India, term loans with a three-year or longer repayment period are commonly referred to as long-term loans. Long-term loans are defined as those with a term of more than seven years. In India, the most widely accessible long-term loans have a maximum period of ten years. Home loans and mortgages, on the other hand, are among the most common long-term loans offered by banks and financial institutions. These contracts might last up to 30 years. 

Eligibility for a Long-Term Loan 

• The applicant's age range must be between 21 and 60 years old. 
• A steady source of income is required of the applicant. 
• The applicant must be a citizen of India. 

Some of the examples of long-term loans are car loans, home loans, education loans, and others. 

Factors affecting Term Loan eligibility criteria 

Eligibility for a Term Loan is determined by several factors. The following factors influence your ability to obtain a term loan: 

• Background of the promoters - The promoters' background and credibility are assessed. The stronger the promoters' credit score, the better the prospects of a favorable deal. 
• Company plan - The financial viability and loan repayment capabilities of the business plan will be assessed. The loan will be renewed based on this rigorous appraisal. This crucial component determines the size of the loan and the interest rate. 
• Operational efficiency — If the loan is being requested by an established company, its operational efficiency is assessed. Before a loan is approved, the operating profit is assessed. 
• Infrastructure - The business's infrastructure is analyzed to guarantee that, in the event of default, the sale of infrastructure can fully repay the loan. Even if these loans have collateral equal to the loan amount, this factor is considered. This is especially important when term loans are used to expand a business and there is no underlying asset. The loan will be secured by existing infrastructure. 
• One of the most important criteria for term loan eligibility is collateral security. Term loans are used for a variety of objectives, including the purchase of equipment, machinery, and plant. In such circumstances, the collateral is the asset itself. The collateral must be considered carefully in circumstances when the loan is extended for business expansion, obtaining economies of scale, and so on. 
• Credit repayment history - The corporate entity's credit repayment history is investigated. The more credible you are, the better the terms will be. 
• Financial performance, both current and anticipated - The current financial performance is evaluated. Financial performance projections for the next 3 to 5 years are also included in the business plan. The lender evaluates the borrower's financial prospects. 

Term loans in India 

The following are some of the lenders in India that provide term loans: 

• Term Loans are available from IDBI Bank. 

For project financing, term loans are approved. The financing will be used to open a new unit or expand an existing one. The loan can also be used to purchase the plant, machinery, or building. The interest rate is usually based on a floating rate, and it is determined by the borrower's creditworthiness, credit rating, the risk involved, loan tenure, and other pertinent criteria. 

• Term Loans are available from the Union Bank of India. 

Union Bank of India provides term loans to help you acquire long-term capital goods or asset creation for your business. You can also swap high-interest debts with other banks or lenders. The loan can be taken out based on a Deferred Payment Guarantee. The maximum period of employment is 84 months. The loan might also be taken out in a different currency. 

• Term Loans are available from the United Bank of India. 

Term loans are available to cover capital expenditures such as the installation of new units, the expansion of existing units, and the project's modernization. 

• Term Loans are available from HDFC Bank. 

Term loans are available to businesses for five years to help them expand their business, finance capital expenditures, and purchase fixed assets. A short-term loan option is also available to fit the needs of the borrower. The repayments are calculated based on the borrower's financial flow. 

Conclusion: 

Lastly, a term loan can be of great financial help. You can also apply for a term loan with Afinoz as we help you to get the best business loan.