Are you looking for a term loan for your business venture? Here in this article, we will cover the types of term loans, features, documentation required, and the process of getting term loans.
Table of Contents
What is a Term Loan?
Business owners while starting and running a business, generally avail of two types of loans. One is a term loan and the other is a working capital loan.
The term loan is a type of loan, which has to be paid in regular installments over time. Term loans are a type of business loan sanctioned for acquiring or constructing or installing capital assets like building the plant, and machinery.
Term loans are typically business loans for a short period of time. This type of loan is offered to a business owner for a period of 5 years.
Features of Term Loans
1) Banks or Financial institutions granting term loans are creditors and not the owners of the company. They only lend the funds to the company.
2) Basically, they are required to be repaid during the lifetime of the company at a pre-decided interval.
3) Generally, term loans are either secured or unsecured.
4) Return on term loans is paid in the form of interest. This interest is still paid even if there is a nonavailability of profits.
5) This source of raising funds is very risky from the company’s point of view.
6) Term Loans are less risky on the part of banks and financial institutions.
7) Finally, term loans are a cheap source of funds from the company’s point of view.
What is the Tenure of Term Loan:
Tenure of a term loan refers to the period of which the term loan can be repaid. Typically, you can repay the term loans over 3-10 years based on the project and projected financials.
What is the Rate of Interest for a Term Loan?
Generally, banks charge the rate of interest for a term loan on the basis of the borrower’s profile and creditworthiness. Usually, term loan interest rates come as a set fixed percentage over the bank’s base lending rate.
What are the Factors that Determine the Eligibility for a Term Loan?
Banks and financial institutions take into account several factors before sanctioning term loans to fund seekers. Some of the aspects are mentioned below:
- Promoters background
- Business model
- Operational performance
- Collateral security
- Present financial performance
- Projected financial performance
- Credit repayment track record
- External credit rating
The credit decision is taken on a composite of the above factors.
What are the Documents Required for Getting Term Loan:
Below find the list of documents financial companies look for before disbursing term loans:
- Audited Financial Statement of last 3 years along with Income Tax Return Acknowledgement.
- Provisional Balance Sheet for the current year.
- Projection of Sales, Purchase, Stock & Raw Material Consumption for the next year.
- Quotation of Machinery that you will purchase.
- Installed Capacity, Licensed Capacity – existing & proposed, Envisaged Capacity Utilization.
- Details of Raw Material requirement, calculation, how desired? Source of supply and supply position. The cost of ram material is supported by the current quotation.
- Catalog / Brochure of Machine (In case of machinery purchase)
- Maintenance arrangement & costs thereof.
- Detailed project report and Project implementation schedule.
- Additionally, you have to mention the cost already incurred.
- Sources of such expenditure.
- Finally, the request letter.
Sanction & Disbursement
- On approval/sanction, the sanction letter is issued specifying the terms and conditions for the disbursement of the loan. Then the bank takes the acceptance of the terms of sanction from the Applicant.
- Additionally, you have to pay the processing charges as specified by the bank to proceed further with the disbursement procedure.
- The documentation procedure takes place such as the Legal opinion of various property documents, valuation reports, submission of title deeds, etc.
After depositing all the necessary documents as specified by the legal department term loan is generally disbursed.