Term Loan
Term loan – Loan availed for Long term investment, usually ranging from one to ten years. When it comes to funding business expansion, a term loan is one of the most popular options for businesses in India. In this blog, we will discuss what a term loan is, how to calculate EMI for a term loan, the steps to get a term loan, when it is required in business, its effect on the balance sheet, and the prevailing rate of interest by various companies in India.
The Term Loan: A Powerful Business Loan Facility
A term loan is a long-term loan specifically used for capital expenditure. It provides a predetermined lump sum of money upfront, which you agree to repay in fixed monthly instalments (EMIs) over a set duration.
Because the repayment is spread out—typically ranging from 1 to 10 years—term loans offer the stability and predictability essential for long-term planning. They are the ideal choice when your business is planning an investment that will benefit it for years, such as purchasing heavy machinery, upgrading technology, buying commercial real estate, or setting up a new manufacturing unit.
Types of Term Loans
Term loans can be categorized by their duration and their security requirements:
- Short-Term vs. Long-Term: Short-term term loans are typically used for smaller purchases and have shorter repayment terms, such as six months to a year. Long-term term loans are used for larger capital investments, like real estate, and have repayment terms of five years or more.
- Secured Term Loans: These require you to provide collateral—an asset like property, land, or equipment—to back the loan. If the business cannot repay the debt, the lender has the right to take possession of this asset. Because the risk to the lender is lower, secured term loans often come with lower, more attractive interest rates.
- Unsecured Term Loans: These are business loans that do not require you to pledge physical security like property or inventory. Instead, lenders evaluate your credit score, financial performance, and ability to repay the loan. While they protect your assets, they generally carry slightly higher interest rates.
Before applying for a large term loan, calculate your Debt Service Coverage Ratio. This ratio measures whether your business generates enough cash to cover its current and future loan payments. Formula: Net Operating Income ÷ Total Debt Service. Lenders generally look for a DSCR of 1.25 or higher. Showing a strong DSCR proves to the bank that your business can comfortably absorb a new EMI without straining your daily operations.
Other Types of Term Loan
While a term loan is perfect for long-term expansion, borrowing long-term money for a short-term need is a common financial mistake. Depending on your exact requirement, you may want to consider other types of business loans:
- Working Capital Loans- Dropline Overdraft
A Dropline overdraft loan is a short- Long Term loan designed to help businesses cover their everyday operational expenses. This includes costs like rent, utility bills, inventory purchases, and salaries. It is meant to maintain smooth operations during seasonal dips or while waiting for delayed client payments, rather than funding permanent assets.
- Demand Loans
A demand loan is a highly flexible, short-term finance option where the lender has the right to request repayment at any time. There is no fixed tenure or fixed installment schedule. An overdraft facility is the best example of a demand loan, allowing the borrower to utilize funds as needed and repay them without worrying about prepayment penalties.
- Equipment Financing
Targeted specifically toward acquiring or upgrading vital machinery, equipment financing enables businesses to leverage the latest technology. In this arrangement, the equipment being purchased serves as the collateral for the loan. It ensures operational efficiency without depleting your cash reserves.
- Commercial Term Loans
Commercial loans are debt financing typically utilized by larger corporations to fund significant operating expenses, major acquisitions, or massive real estate purchases. They often require a strong business history, a substantial down payment, and heavy collateral.
Top Government Loan Schemes in India
The Indian Government recognizes the critical role that businesses play in economic development. To encourage growth and ease the burden of collateral, the government has introduced several powerful schemes for entrepreneurs:
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
The biggest hurdle to securing a large term loan is often the lack of collateral. Under the CGTMSE scheme, the government provides a credit guarantee to lenders. This allows banks and NBFCs to offer collateral-free loans up to ₹10 crore for MSMEs, and up to ₹20 crore for recognized startups.
Pradhan Mantri MUDRA Yojana (PMMY)
PMMY is a flagship scheme providing micro-credit with no collateral to non-corporate, small-scale businesses. The loans are categorized by growth stage: Shishu (up to ₹50,000), Kishor (above ₹50,000 to ₹5 Lakhs), and Tarun (above ₹5 Lakhs to ₹10 Lakhs). This progressive model helps grassroots enterprises access formal credit easily.
Stand-Up India Scheme
Launched to promote inclusive entrepreneurship, Stand-Up India facilitates bank loans between ₹10 Lakhs and ₹1 Crore to women entrepreneurs and individuals from SC/ST communities. The loan is exclusively for setting up new (greenfield) enterprises in manufacturing, trading, or services.
SIDBI SMILE Scheme
The Small Industries Development Bank of India (SIDBI) offers the Make in India Loan for Enterprises (SMILE) scheme. It provides affordable financial support through soft term loans with low interest rates and long repayment periods of up to 10 years, promoting technology adoption and modernization.
Other Alternative Solutions Available
If traditional term loans or government schemes do not perfectly align with your current business phase, the modern financial ecosystem offers agile alternatives:
- Multi-Lender Business Loans: If your capital requirement is massive and a single lender cannot take full exposure, a multi-lender loan splits your total loan amount between two or more financial institutions. This shared risk approach provides access to higher loan amounts and better approval chances.
- Invoice Financing: If your cash is trapped in unpaid client invoices, lenders can provide an advance against your accounts receivable, unlocking immediate cash flow without adding traditional, long-term debt.
- No-Doc or Low-Doc Loans: For fast access to funds, NBFCs offer loans based on alternate data like bank statements and business cash flow, rather than requiring extensive audited financials. While approval is swift, be aware that interest rates usually range from 12% to 24% p.a. due to the higher lender risk.
- Business Line of Credit: Similar to a credit card, this allows you to draw funds up to a predetermined limit to manage fluctuating cash flows. You only pay interest on the exact amount you borrow, making it highly cost-effective.
Conclusion
A business loan, particularly a structured term loan, is not a sign of financial distress; it is a catalyst for innovation, expansion, and enduring success. Understanding the fundamental differences between funding daily operations (Working Capital) and long-term asset generation (Term Loans) is the first step to unlocking your company’s true potential.
By maintaining clean financial records, fiercely protecting your credit score, and leveraging government-backed schemes like CGTMSE and MUDRA, you can secure the vital capital needed to scale your enterprise. With careful planning and the right financial partner, debt transforms from a burden into a powerful lever for multiplying your revenue.
——————————————————————————–
Your “Next Steps” Checklist
Ready to take your business to the next level? Follow this actionable checklist to prepare for a seamless loan application:
- [ ] Identify Your Exact Need: Determine precisely how much funding you require and whether it is for a short-term operational need or a long-term capital investment.
- [ ] Check Your Credit Score: Obtain a copy of your credit report. A CIBIL score of 685 or higher significantly improves your chances of approval and favorable interest rates.
- [ ] Organize Your Documentation: Gather your PAN card, Aadhaar, GST registration, bank statements for the last 6-12 months, and Income Tax Returns (ITR) for the last 2-3 years.
- [ ] Calculate Your DSCR: Ensure your business’s net operating income can comfortably absorb your current debts plus the new estimated EMI.
- [ ] Get Udyam Registered: If you haven’t already, register your business on the government’s Udyam portal to officially classify as an MSME, unlocking access to subsidized loan schemes.
- [ ] Explore Government Schemes: When approaching a lender, explicitly ask if your business qualifies for collateral-free funding under the CGTMSE or Stand-Up India schemes.