What is a Business Term Loan?

Managing and running a business in India requires a lot of effort. Business owners must be a step ahead of every roadblock to have a successful business. But one constant reason for concern among big and small business owners is managing continuous cash flow.

Arranging funding might be easy for big business owners. But small businesses and MSMEs look for a secure way to get funding. To help businesses of all kinds, business term loans are the way.
 

It is a business loan that helps businesses expand and grow. Here, we will discover the term loan meaning and how it helps MSMEs and other businesses.

Understanding Business Term Loans

A business term loan is provided by a financial institution to a business that requires a lump sum amount to meet its capital requirements. Businesses generally use this loan to manage their cash flow gap while running business activities.
 

After analysing the business requirements and the finances of a business, financial institutions decide the repayment tenure and interest of a term loan for a business.

This loan is also termed an instalment loan, since the lender pays a loan amount in one go while the policyholder pays back the institution in monthly, quarterly or annual instalments. The purpose of introducing instalments is to help businesses of different scales of operation.

Types of Business Term Loan

Business term loans are classified into two types based on their usage:
 

• Depending on the Repayment Tenure
• Depending on Security
   

Depending on the Repayment Tenure

This business term loan is classified based on the condition of repayment tenure. Let us understand each type in detail.
 

• Short-Term Loan -

   Short-term business loans are loans provided by financial institutions to businesses with a repayment tenure of 1 to 2 years. This short-term small business loan suits businesses facing issues in arranging cash on an urgent basis.
  
  However, the interest rate for this type of loan is usually high, and businesses need to provide frequent repayment instalments to financial institutions based on their agreement.
  
  

• Intermediate-term Loan 

  - Another type of business term loan is an intermediate-term loan with a tenure period between 1 to 5 years. It is utilised by the business that needs urgent cash to manage business activities such as buying inventory, etc.
  
  However, the repayment instalment cycle on this business term loan is a monthly or bi-weekly payment.
  
  

• Long-Term Loan

   - This business type of loan is popular among business owners due to its favourable interest rates. It is a loan provided to businesses with a repayment tenure period ranging from 6 to 25 years.
  
  However, this loan is only offered to businesses with good credit history because of the higher risk for financial institutions.
   

Depending on Security

Another type of business term loan depends on the security the business offers. Depending on business types and needs, this type of loan is further classified into two types:
 

• Secured Term Loans

   - A secured term loan is a term loan type where a business provides collateral such as an asset or property with a value equivalent to a loan amount or more than that to get the loan approved. Businesses provide reassurance to pay back loans within a tenure period. Since the collateral is involved, financial institutions have less risk in providing loans.
  
  

• Unsecured Term Loans

   - Unsecured term loans are usually for small or mid-size, or micro businesses with no asset or property to provide as collateral. A financial institution offers this business loan after analysing the credibility and credit score of the borrower.

What Kind of Businesses can Acquire a Term Loan?

The businesses that are eligible for acquiring business term loans are:
 

• Self-employed
• Startups
• Micro business
• Enterprises
• Limited liability companies
• Artisans
• Sole proprietorship firms
• NGOs
• Co-operative societies
• Private limited companies
• Partnership firms
• Public limited companies
   

These are just some common types of businesses that can get business-term loans.

Eligibility Criteria For Getting Business Term Loan

To get a business term loan, all businesses need to meet the eligibility criteria set by the financial institution. Below are some significant eligibility criteria necessary to get a loan on time.
 

• The age criteria for getting a business term loan is at least 21 years at the time of applying for loan and a maximum of 65 years at the time of loan maturity.
• The applicant should be a citizen of India.
• The applicant should have a good source of regular income.
• The DSCR or Debt-Service Coverage Ratio of applicants should be within 1.75:1.
• Besides this, the performance of business with respect to profit, turnover and sales would be good.
• If there is a negative variance, then its value should be within 10%.

Documents for Getting a Business Term Loan

Most of the businesses' loan applications get rejected due to incomplete paperwork. Proper documentation is a must while acquiring any loan. The documents that are needed by financial institutions for business term loans are:
 

• Coloured passport-size photos of applicants.
• Other verification documents for KYC include an Aadhaar card, voter ID, passport, utility bills, etc.
• A filled application form for acquiring a loan from the lending institution.
• A legitimate address copy of the business such as rent agreement, lease, property papers, etc.
• Proof of income, such as the balance sheet of the business, etc.
• Besides this, you need to submit the bank statement of your business account for the last 12 months.
• Moreover, a copy of the filed income tax return for last year.
• A curated business plan.
• Lastly, applicants must provide credit reports for themselves and their business.

Benefits of Business Term Loan

Some of the significant benefits of acquiring business term loans.

• Lump Sum Amount - The first benefit of acquiring a business term loan is the lump sum amount offered by a financial institution in one go. If you have a high-cost business and need urgent cash upfront for business activities, then term loans are a good option. However, ensure that you are eligible for getting it.
  
  
• Favourable Interest Rates - Another advantage of business term loans is their favourable interest rates. Since long-term business loans are for a longer time and have less risk, the interest rate for this loan is low compared to other loans.
  
  
• Predictable Repayment Tenure -Since these loans have a pre-decided repayment tenure, it is easy for businesses to set money aside for repayment instalments. The repayment instalment cycle for this kind of loan is monthly, quarterly or annually.
  
  
• Better Business Credit Score - A business taking out business term loans usually pays on time due to its flexible repayment tenure. The timely payment of loan instalments helps in improving a credit score of business.
  
  
• Good Cash Flow - A business with limited cash can affect its business activity. Business term loans help manage good cash flow without missing out on business opportunities.

Conclusion

By now, we have answered, ‘What is MSME,’ and discussed what are business term loans. Businesses put major business activities, such as buying new machinery, assets, etc., on hold due to financial problems. It affects not only the business's performance but also its revenue. But by having business term loans, businesses can grow without worrying about cash flow. It suits all kinds of businesses, from MSMEs to big firms.