5 important things to know about a term loan

5 important things to know about a term loan

Different types of loan products are available in the industry to meet the changing demand of borrowers. Every business has a unique fund requirement and the best way to meet the same is by applying for a business loan. One of the most common types of loans in the industry- a term loan has a long tenure and a fixed or floating interest rate. The loan amount can be used for any purpose in the business. The lender will not ask you where you want to use the money as there are no restrictions on the end-use. Before you apply for the loan, here are 5 important things you need to be aware of.

  1. Purpose

The loan has a long tenure and a high approval amount. This makes it ideal for acquiring land, buying machinery, or equipment, construction of a building or purchasing commercial vehicles. The loan is usually applied when there is a significant amount of expense to be undertaken. The loan is not an ideal choice if you need funds for a short period of time to meet the gap in the working capital.

  1. Tenure

The loan ranges from medium term to long term in nature and it can also be extended further. Some lenders offer a term loan for a tenure of up to 30 years. In most cases, the tenure ranges from 5 years to 10 years. The loan is extended to projects that are involved in trading activities or services and for manufacturing firms. Before you apply for the loan, it helps to identify the purpose of borrowing and then agree on a tenure. Do not commit to a tenure if you are not sure whether you will be able to make the repayment in time.

  1. Evaluation process

It is important to understand that every lender has a different process of evaluation of the application. Most lenders evaluate the project for economic and technical viability before they grant the term loan. You will have to show that your business is economically viable and will be profitable in the coming years. This can be achieved by preparing a projected income statement and balance sheet. Several lenders require you to provide projections that have been prepared by a professional. The loan will only be extended to you if your business is profitable.

  1. The rate of interest depends on the risk

Every borrower seeks a loan at a low-interest rate. However, in a term loan, there can be a fixed or floating interest rate and it depends on the risk associated with the loan. You cannot assume that you will get the loan at a particular rate of interest only. If the risk on the loan is high, you might have to pay a high-interest rate.

  1. The loan is available in different currencies.

A term loan is offered in rupee and in foreign currency. Irrespective of where your business is based, you can choose the currency in which you want the loan.

A term loan can help your business grow in different ways. However, it is important to be careful and fully aware of the terms and conditions of the loan before you apply for one.



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