Business always seeks to acquire funds. The acquisition sometimes inflates the cost of financing and sometimes deflates it. Business gets along with both scenarios. It chooses inflation when the requirement is urgent and it is not eligible for having low-cost loans like Term Loans.
Having low-cost financing is the ultimate target of the business and to ace that businesses choose Term Loans. Through this write-up we will give you a detailed idea on Term Loans, the eligibility criteria and why businesses choose Term loans.
Table of Contents
What is Term Loan?
Term Loans allow the businesses to have a lump sum cash in exchange for some specific borrowing terms. Usually, this loan is taken by the small business owners because they are in the quick need of cash. However, term loans come with fixed or floating interest rates. The borrower (business) agrees to a certain repayment schedule with a fixed or floating interest rate.
Businesses opt for term loans generally when there is a requirement for equipment, real estate, working capital payments or production process.
The only limitation of term loan is the tenure. A term loan can be sanctioned for the period of 3 Years. The due dates start on each installment. This might create a pressure on small businesses if they lack sufficient funds for interest and principal.
A rigorous approval process is required in having a term loan. This loan will require collateral also to reduce the risk of default. Term loan providers sometimes ask lenders to give some down payments before having the loan.
To have a sorted and seamless process businesses are recommended to have a finance team as a support. A recognized finance team always seeks to help small businesses by having term loans with less haste.
Classification of Term Loan
Term loans are classified into three categories. The type of Term Loan grant will depend on the consideration of three points:
- Financial Resource needs of the business.
- Capacity of the business to repay.
- Cash flow and cash in hand status of the business.
The categories of the Term Loan include:
Short Term: This type of Term Loan is taken by the business when there is an urgent requirement of cash. This loan is provided for the period between 12 and 18 months. This loan will finance the temporary business requirements. The business is required to pay the interest on short term loans before the loan tenure ends. Rate of interest in this type is generally high because of the shorter time frame. For some businesses the loan involves weekly repayment schedules.
Intermediate Term: Intermediate term loans run between two to five years and can be paid in monthly installments from the company’s cash flow. Intermediate Term Loans generally take one to three years of time to mature. This loan is also said to be a hybrid type because of the short- and long-term characteristics. The loan is used for the renovation and repairing of the fixed assets. Interest rates are higher than the long term loans in this. The documentation process is comfortable as compared to the longer-term loans.
Long Term: This loan is taken for the investment in enterprises, real estate and huge machineries. It is important to have collateral for this type of loan. Long term loans have a longer period and are granted at competitive term loan interest rates. Simple EMI options are offered in this. The loan comes with a tenure of over five years. It can be extendable up to 25 to 30 years depending on the business requirements. The interest rates are comparatively lower because of collateral support. When the long-term loan is unsecured, the interest charges tend to go higher.
Why do businesses seek Term Loans?
Interest Rates
The interest rates on term loans are lower when they are taken out for longer periods of time compared to when they are taken out for shorter periods of time. In addition to this benefit, the interest rate will remain the same during the duration of the loan.
Increased Capacity for Adaptability
Term loans offer a great deal of financial freedom. There is a significant amount of wiggle room for discussion regarding anything from the time frame to the principal amount and the interest rate. When your company’s credit score is higher, you have more wiggle room when it comes to the terms of any loans you take out.
Cash Flow Changes
Because the size of the loan fulfills the funding requirements for significant capital expenditures, an organization that secures a term loan is able to efficiently free up cash flow for use in other areas of the business. A company, for instance, might take out a term loan in order to cover the costs of conducting a round of recruitment. This will preserve the expenses connected with the time required to educate employees before they can begin contributing to the bottom line. Educating employees is necessary before they can begin contributing to the bottom line.
Quick Approval
In most cases, the authorisation of a bank loan will take two or three days to complete. Even approval for loans with a very lengthy duration only takes a little bit of time. As a consequence of this, term loans are a means of funding that is far quicker than the other options that are available.
Maintains the Value of the Ownership Interest
Due to the fact that term loans are a kind of debt financing, they do not have any impact on the shareholder equity of the firm, which remains unaffected. In addition, in contrast to the case with equity finance, owners of businesses are not required to exercise any influence on day-to-day business operations.
Who is Eligible for Term Loans?
Businesses can apply for the term loan like any other credit facility. The business has to submit the financial statements and other financial evidence. The agenda of a financial statement is to show the creditworthiness of a company.
A business needs to have the following eligibility for applying to a Term Loan:
- Operational history minimum of 1 Year.
- 1 Year ITR Return of more than 10 Lacs.
A business need to submit the following set of documents for applying to a Term Loan:
- Business Registration Proof.
- KYC Documents of the applicant and the organization.
- Aadhar Card of the business promoter.
- PAN Card of the business promoter.
- Bank Statement of the business for the last half year.
Conclusion
Small and Medium sized businesses look for a term loan because it is comparatively easy to get. Further there are no tax charges for the interest given on Term Loan. With help from a financial agency it gets easier to convince the loan agency or the banks on the Term Loan Sanction. Find the right agency for your business and have the benefits of Term Loan without looping into a number of procedures.
