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Tata Capital > Blog > Term Loan > Which Types of Businesses are eligible to get a Term Loan?

Term Loan

Which Types of Businesses are eligible to get a Term Loan?

Which Types of Businesses are eligible to get a Term Loan?

It is no secret that the correct type of financing unlocks the potential to accelerate business growth. While there are many financing alternatives accessible for businesses today, a term loan is generally preferred by those who wish to infuse capital for a specific purpose. It refers to one-time financing that is paid back over a set repayment tenure (typically one to five years) and terms (that is, at a fixed interest rate). Term loans can be both secured and unsecured loans.

As businesses resume their growth trajectory post the widespread consequences of the pandemic, here is a look at companies that would benefit from a term loan

Businesses looking at adding critical assets

Investing in machinery and equipment is essential for some businesses to optimize productivity. A term loan could help in updating current equipment or purchasing new equipment. Depending on the nature of business and assets, companies can consider leasing assets instead of outright purchase.

However, it may help explore equipment loans and equipment financing options if the purpose is solely adding on the new assets. If the addition is to be accompanied by a fund requirement for other set-up and establishment costs like procuring land and building, construction, furnishing, a term loan may be a good option.

Companies that wish to future-proof themselves

The uncertainty of the pandemic has led many businesses to think about how they could meet unexpected future challenges. For example, some companies may want to integrate their network operations on a cloud-based system. Some may want to set up an e-shop and invest more in expanding their digital presence. The upfront set-up costs and licensing fees for the same could be funded by a term loan.

Additional Read: Grow your business with a Term loan in 2021

Businesses enhancing production capacity

An increase in production capacity could be the need of the day for some businesses. Several industries have seen a spike in demand after COVID, including pharmaceutical, ed-tech, specialty chemicals, FMCG, and medical device manufacturers. Players in these industries cannot meet the current rise in demand due to a lack of production facilities.

A term loan could fund expansion in production without adding stress to the capital reserves. Companies could use the loan for investing in the addition of plant and machinery, acquisition of suppliers or competitors, which would ultimately lead to increased output.

Additional Read: Everything You Need to Know about a Term Loan

Companies targeting geographical expansion

Expanding services to other areas requires massive upfront investments. For example, a home-cleaning service business may want to offer their services in another city.

Term loans can help companies establish the infrastructure needed to operate across locations. 

Businesses looking at integration

The pandemic caused a disruption in supply chains for some businesses. Many companies have now started thinking about integration. Horizontal integration is when a company acquires a similar company or competitor to expand. Vertical integration involves acquiring another company that operates before or after the acquiring company in the supply chain. Expansion, growth, and value addition being the key purpose behind such moves. A term loan could fund both these integrations to expand market reach and the presence of businesses.

Eligibility for term loan

Financial institutions usually have some eligibility criteria that should be satisfied to grant you term credit. While the exact requirements vary from lender to lender, there are some basic conditions that most lenders expect before approving your short-term trade credit. Some of these include:

1. Your age must be at least 21 while applying and a maximum of 65 at the time of the last EMI payment.

2. You must have a good credit score, usually around 650 or higher.

3. You must have a profitable business.

4. You must have business stability for a particular number of years, usually 2 or 3.

5. You must have a stipulated minimum amount in the bank.

Documents required for term loan

To apply for term credit, you must produce the basic documentation. Here is a non-exhaustive list of documents your financial institution may ask for while applying for short-term trade credit:

1. Business proof like a Trade License, Business Registration Certificate, GST Registration Certificate, Partnership Deed agreement, or Declaration of Sole Proprietorship.

2. KYC documents like Aadhar and PAN cards, and sometimes other Identity proofs like Driving license, voter’s ID, Passport, etc.

3. Financial documents like Income tax returns, Computation of Income documents, Tax Audit Reports, Audited balance sheets, profit and loss statements, etc. While most lenders ask for documents pertaining to the last two years, it could differ based on the lender.

4. Bank records of your current account and GST statements.

Financial institutions will also ask for a detailed business plan. This document will tell the lender how you plan to use the funds you may receive and how you plan on repaying the term credit.

So before you apply for a term loan, be clear about the objective for the same. Consider how exactly you want to employ the funds to serve the growth of your business.

Take your business to the next level by talking to one of our advisors. Tata Capital leverages decades of experience to understand your unique business needs and offer you a solution that suits your requirements. Our online application system takes the grind out of the application process, and the intuitive interface makes it easy to apply and manage your loans. Reach out to our experts to know more about our Term Loan offering.

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