Disruptions in business cash flow are imminent, especially in the wake of COVID-19. But when faced with unprecedented times, how can businesses sustain operations?
Fortunately, term loans offer a formidable finance solution to overcome the rainy days effectively. Backed by attractive interest rates, flexible repayment terms, minimal documentation, and swift approval, as well as disbursal, term loans are lucrative choices to overcome the financial albatrosses smartly.
Here is a lowdown on how term loans work.
What is term loan?
A term loanis a type of commercial credit, which comes with predefined repayment terms, including a set loan tenure and interest rate. Borrowers need to repay the loan amount in fixed equated monthly instalments or EMIs until the maturity date.
The EMIs mainly comprise of two components, namely the principal amount and the interest, which is estimated based on the applicable rate of interest.
To illustrate: suppose a business entity borrowed Rs. 1,00,000 for a tenure of two years at any set interest rate. In such a case, they will have to repay the entire loan amount in a total of 24 EMIs.
On top of the equated monthly payments, borrowers also need to prepare for additional expenses such as:
- A loan processing fee
- Document processing charges
- A down payment, if applicable
Now, while the typical term loan tenures last anywhere between one to ten years, they can extend for up to 30 years in some instances.
Based on the tenure, term loans are classified into two primary types –
Short-term loan –
Generally availed for medium-sized funding requirements, short term loans are provided for a tenure of one year or less. And are usually available at higher interest rates with quick approval and disbursal process. However, in some cases, short-term loans can also last for about 18 months.
Long-term loan –
Available for a tenure of up to 30 years, long term loans are usually advanced at competitive interest rates and flexible repayment schedules. EMI payments are comparatively small, with lucrative tax benefits in terms of deductions on monthly interest outgo. As such, long-term loans meet the lump sum funding needs of a business conveniently.
Additional Read: Benefits of a Term Loan
About term loan approval
Approval for term loans varies from case to case. Since term loans are usually provided to meet specific project requirements, lenders typically check the commercial and technical viability of the project before they approve the loan application.
Other significant factors include:
- Revenue projections
- Collateral, in case of unsecured credit
- Credit capacity
- In-hand funds
- Monthly cash flow
Financial institutions also consider the credit history of the business entity, along with project viability and debt structure, before they approve the loan.
Additional Read: What is the Difference between Term Loan and Working Capital Loan?
So, if you need funds to meet specific revenue objectives, why break investments? At Tata Capital, you can avail of term loans at competitive interest rates, with minimal documentation. From brownfield investments to new machinery purchase, our business finance solutions are custom made to meet your unique requirements conveniently.