What you need to know about term loans before you apply

A term loan is a borrowing option that is offered to businesses for incurring expenditure and for expansion purposes. A common form of borrowing amongst businesses in the country, the loan has a tenure of about five years and is tailor-made to fit the financial needs of the borrowers. The loan is the first choice of many in the country for minimal documentation, repayment flexibility, quick disbursal of funds, and low-interest rate. If you want to apply for a term loan, here are a few things you must know.

1. Type of term loans

There are different types of loans available to suit the needs of the borrower. Based on the same, the interest rate will also vary. You must consider the amount of funds you need, your repayment capacity, and the availability of funds. There are three variants in term loans and they are based on the loan tenure. You can choose a short-term loan that ranges between 12 months to 18 months, an intermediate-term loan that ranges between three years to five years, and a long-term loan that has tenure as high as 25 years.

2. Purpose of the loan

The loan is usually extended for the purpose of buying land, setting up machinery, or constructing buildings. It is also offered for the purchase of commercial vehicles. It is important to note that the loan will only be extended for purposes that involve capital expenditure. You cannot use the funds to meet the working capital requirements.

3. Available for all businesses

The loan is available for all sizes and types of businesses in the industry. It can be extended to manufacturing firms and projects that involve trading activities or services. Hence, no matter the type of business you own or the industry you operate in, the loan will work best for your needs. Some lenders have turnover criteria or net income requirements and you may have to meet the same.

4. Collateral free

You can easily avail a collateral-free term loan for your business. However, it is important to have a high credit score and a business plan in place to enjoy quick approval. Since there is no need for the hypothecation of an asset or valuation of the asset, you will enjoy quick processing and approval of the loan. It also reduces the risk.

5. Documents required

To apply for the loan, you need to provide KYC documents of the partners, proof of address of the business, passport-sized photos, proof of income, a business plan, copy of bank account statement for the last 1 year, copy of credit report, and copy of ITR for the last two years. You will also have to provide an income statement and balance sheet for the last two years.

The interest rate on the loan depends on different factors like the amount of loan, your credit history, tenure, and the risk associated with the project. A term loan is a perfect choice of borrowing for several businesses in the country and it comes with several perks.