A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usually involves an unfixed interest rate that will add additional balance to be repaid.

Types of Term Loan

• Short-term Loan: Short term loans are loans often repaid within 12 months.
• Long-term Loan: Long term loans are loans that can be repaid in longer time durations that range between 5 years. In some special cases the repayment tenure may exceed up to 6 years

Term Loan Category

Secured Loan: Collateral security is required to be submitted to the lender by an applicant, if he/she wants to avail secured loan from banks or NBFCs. Collateral submitted can be in the form of equipment, machinery, raw materials, stock, or residential/commercial properties.

Unsecured Loan: Business loans offered by most of the financial institutions are unsecured loans that do not require any collateral or security to be submitted to the lender. The interest rate offered by banks and NBFCs for unsecured loans are comparatively on higher side, as there is no borrower’s risk involved in availing loan.

Term Loan Examples related to Business Loan

Working Capital Loan: Businesses that require instant funds to maintain the cash flow or to meet day-to-day business expenditure opt for working capital loans. Working capital loans are usually termed as short-term loans and are repaid within 12 months from the date of loan disbursal.

Overdraft: Overdraft is another form of loan in which the financial institution issues a credit limit, as per the requirement and the interest rate is paid only on the amount used and not on the whole assigned withdrawal limit. The repayment tenure is as low as 1 month and can exceed up to 12 months. Every year the limit has to get renewed by the borrower from the lender.

Equipment Financing: This type of loan can be used by businesses and enterprises for financing equipment or vehicles used for various purposes like agriculture, farming, commercial transportation, construction, etc. Equipment finance loan amount shall range anywhere between Rs. 1 lakh to Rs. 10 crore. The term loan interest rate and depends on the applicant’s profile and nature of business.

Pros and Cons of Term Loan or Term Financing