Most things in life are unexpected. Opportunities, setbacks and even love come to us in the most unexpected ways. However, in the ever-evolving business domain, unexpected expenses are a recurring one. These heavy expenses are primarily countered by businesses using loans, and among them, a term loan stands out as the most preferred option in India.

‍

A term loan provides businesses with a lump sum of cash wherein the borrower agrees to a certain repayment schedule with a fixed or floating interest rate. These loans may require considerable down payments to reduce the payment amounts and are majorly opted by small businesses that are in need of funds for development or expansion.

‍

Types of term loan:

In terms of the tenure of the loan, term loans come in many forms. 

‍

• Short-term loan

A short-term loan is usually offered to companies that don't qualify for a line of credit. It generally runs for less than a year and in some cases, a maximum of 18 months.

‍

• Mid-term loan

A mid-term loan generally runs between 1 to 3 years and is paid in monthly instalments from a company’s cash flow.

‍

• Long-term loan

A long-term loan generally spans from 3 to 25 years and utilises company assets such as security and necessitates monthly or quarterly payments sourced from their cash flow.

‍

Advantages of term loan

‍

• Low interest rates

Long-term loans have drastically low interest rates when compared to other traditional loans.  Moreover, the interest rates are fixed, and do not vary during the loan’s entire lifetime.

‍

• Great flexibility

From the duration of the loan to the interest rate, there’s scope for quite a lot of flexibility in term loans. Also, the higher your credit score, the higher benefits you can avail from the lenders in terms of flexibility and negotiation.

‍

• Quick approvals

Both short term and long term loans are approved in seemingly swift periods of time. Generally ,short-term loans take less than 2 days for approval while long-term loans may take a bit more time for approvals.

‍

• Smooth cash flows

A term loan frees cash flow of a business tremendously by enabling them to use their existing funds in primary areas while the loan amount takes care of the funding required for large specific investments. For example, a company can take a term loan to invest in the training of new hires before they can actually start contributing to the firm.

‍

Who should get a term loan?

‍

• A term loan comes with several benefits such as lower interest rates, longer tenures, predictable payments and sometimes, tax benefits making it a viable option for both small and large businesses alike for quick access to funds.

‍

• A term loan is generally opted by business for the accumulation of equipment, real estate, or working capital. It is paid off anywhere between 1 and 25 years completely based on the type of term loan. 

‍

• A small business often uses a term loan to purchase assets, such as equipment or a new building, either for expansion or further production. Some businesses choose a term-loan when they are met with working capital needs from time to time.

‍

• Despite having good track records of success, established companies might also opt for term loans for various reasons, such as business expansion, research and development, crisis management or restructuring.

‍

The DSCR formula for term loan:

Several lenders use the DSCR formula to validate whether a business has enough net operating income to pay back the loans they are being given. The debt-service coverage ratio or DSCR measures a firm's available cash flow to pay their debt obligations. This is majorly used as an indicator to measure a company's financial health, especially those who are highly supported with debt. 

‍

A decent DSCR depends on the company’s competitors and growth. An emerging company that generates cash flow might face lower DSCR ratios compared to a well-established organisation. In general, a DSCR above 1.25 is often considered strong. Management can use DSCR data from its competitors to analyse how they are performing, thus analysing how efficient other companies may be in using loans to drive growth. 

‍

Conclusion:

With a fixed interest rate, monthly or quarterly repayment schedules, and a set maturity date, term loans can be a practical option for businesses in pursuit of finding funding options to expand in their respective domains. Term loans are an excellent way to counter unexpected or fluctuating expenses, however, if you are looking for alternate options to raise capital for your business, you can do it with just a tap. Get in touch with experts from TapCapital and craft a curated plan to get the thrust your business deserves. Try TapCapital today!

‍

FAQs:

1. What are the types of term loans?

Term loans in India can be categorised based on various parameters such as purpose (business term loans, personal term loans), repayment tenure (short-term, medium-term, long-term), security (secured, unsecured), and interest rate (fixed, floating).

‍

2. Am I eligible for a term loan?

In India, eligibility criteria vary depending on the lender and the type of loan. Generally, lenders consider factors such as income, credit history, age, employment status, and collateral while evaluating loan applications.

‍

3. What are flexi term loans?

A Flexi Term Loan is a unique variant of term loans that allows you to withdraw only the required funds from your sanctioned loan limit as many times as you require and prepay it once you have extra funds.

‍

4. Can I prepay a term loan in India?

Yes, borrowers can prepay or foreclose their term loans in India. However, even though most lenders do not charge prepayment penalties or foreclosure charges, however, exceptions exist depending on the terms of the loan agreement.

‍