What Is Term Loan? - Meaning, Types & Features

If you run a business, chances are you will need extra funds from time to time for a smooth sail. You might need it to buy equipment or expand your business. In any case, capital is the backbone of a business. So does that mean you are stuck if you don’t have the funds at hand? Wrong, the most reliable way to get the funds is through a term loan. But, what is a Term loan? Let’s learn right here. 

What is a Term Loan?

The term loan meaning is simple: a term loan offers borrowers a one-time payment in return for predetermined borrowing conditions. Term loans are often intended for small, well-established companies with stable financial records. The borrower consents to a specific repayment schedule with a fixed or variable interest rate in exchange for a predetermined sum of money. Large down payments may be necessary for term loans in order to lower the loan's total cost and monthly amounts.

Key points:

• A term loan gives people a big sum of cash up front in exchange for agreeing to certain terms of borrowing.
• People who borrow money agree to pay back their loans a set amount of money over a set amount of time. The interest rate can be fixed or fluctuating.
• Term loans are generally used by small businesses to buy permanent assets like a new building or tools.
• Borrowers prefer term loans due to their lower interest rates and greater flexibility.
• Long-term facilities have set payments, although short- and intermediate-term loans could have balloon payments.

Key Features of a Term Loan

Now that you know what is a term loan. Now let’s learn its key features. There are various features that come with a term loan. They are:

1. Repayment Period

A term loan has a set amount of time to pay it back, which is agreed upon when the loan application is sent in. These loans are broken up into short-term loans, mid-term loans, and long-term loans groups based on how long you have to pay them back.

2. Loan Category

Term loans come in two types: secured and unsecured. Secured loans, like an unsecured personal loan or a secured loan backed by real estate, require you to keep something as collateral. Unsecured loans don't need any kind of protection.

3. Interest Rate

Both the borrower and the lender agree on the fixed term loan interest rate associated with the term loan. Different lenders offer different rates, usually 10% to 25% per year. 

Benefits of Taking a Term Loan from My Mudra

Taking a Term Loan from My Mudra comes with its own set of benefits. They are:

1. Fast Approval

Delays in approvals make a lot of businessmen suffer losses, which is why at My Mudra, we have streamlined the entire loan approval process, making sure that your loans get approved quickly and on time in a few hours, so that you can access the funds when you need them.

2. Instant Short-Term Loan Options

Are you in urgent need of some funds? Here at My Mudra, we have urgent short-term loan options, which don’t require any approval. They are made to cater to immediate needs for funds, like managing cash flow or unexpected expenses. So, if you’re looking for a short-term loan in India, My Mudra is an excellent choice.

3. Competitive Interest Rates

No one likes high-interest rates, which is why here at My Mudra, we make sure to provide interest rates that are competitive with the market. It starts from as low as 10.5% per annum, and this affordability is what makes it easier for businesses to manage their costs without stretching their pockets too much.

4. Minimal Paperwork

Here at My Mudra, our application process is really simple. So much so, it doesn’t require much paperwork at all. This helps business owners save time and effort on unnecessary paperwork and focus on running the business more efficiently.

At My Mudra, we bring you multiple reputed banks, like HDFC Bank and SBI, so you have the best loan options. 

Term Loan Eligibility Criteria

But how do you get a term loan in the first place? In order to get a term loan, you have to meet the eligibility criteria first. The eligibility criteria are:

• Nationality: The applicant must be an Indian citizen.
• Age Requirements: The minimum age of the applicant should be 21, and the maximum age should be 65.
• Business duration: The business for which the loan is being taken must have been operational for at least 6 months to 1 year, which ensures that the business is stable and has been continuing its operations.
• Business Type: Certain business types are eligible for a term loan; they are:
  • Proprietorships
  • Partnership firms
  • Private limited companies
  • Limited liability partnerships (LLPs)
  • Self-employed professionals (e.g., doctors, consultants)
• Business Sector: If you own a business, the business must be from one of the following sectors: 
  • Manufacturing
  • Trading
  • Services
  • Agri-allied activities
• Financial Stability: The applicant needs to have a constant source of income from the business. This, paired with a good credit score, can guarantee an approval, under the condition that you have no history of payment defaulting by any financial institution.
• Documentation: Some documents are essential for processing the loan; they are:
  • Identity proof: PAN card, Aadhaar card
  • Address proof: Utility bills, rental agreement
  • Business proof: GST registration, trade license
  • Bank statements: Last 6 months
  • Financial documents: Income tax returns, profit & loss statements
• Collateral: My Mudra offers both secured and unsecured loans. In case of a secured loan, you would need collateral like a property or equipment. In case of an Unsecured Loan, you do not need collateral, but they have stricter eligibility criteria. 

Term Loan Interest Rates & Charges

The interest rates can vary based on the business type, your credit score, and the type of business you have. The table below gives you a general idea:

• Starting from 10.5% annual interest, My Mudra provides attractive interest rates according to the applicant's credit history, loan size, and kind of business. 
• There is a minor processing charge, ranging from ₹500 to 2.5% of the loan amount. Minimum charges like ₹500 for documentation and ₹200 for the amortisation schedule could apply. 
• Tenures for flexible repayment choices go from three months to sixty months. 
• Every charge is clearly mentioned up front, so there are no hidden charges.

Who Should Apply for a Term Loan?

Term loans are beneficial for business owners in order to manage working capital, expand their business, or purchase equipment or machinery. In this case, small business owners and MSMEs can benefit a lot. Startups that are looking to invest money in Research and Development, marketing, and setting up infrastructure can also benefit from term loans.

Be it a trader that needs funds for stock inventory, self-employed professionals like doctors, CAs, and consultants needing money to renovate their offices, or businesses that need funds for short-term urgent expenses. All of these people can apply for a term loan.

Secured vs. Unsecured Term Loan

A little while back, we discussed the concept of secured and unsecured loans. But what are they? 

• Secured Loans: Secured loans generally have a lower interest rate, and you can get a higher loan amount on this. The condition being that you have to provide collateral, be it gold, property, or any other assets.
• Unsecured Loans: Unsecured Loans do not need any collateral, but they come with higher interest rates, and the amount here is generally lower. People prefer these for instant short-term loans.

Example: a shopkeeper would take a secured loan to open a second shop, but take an unsecured short-term loan online to expand inventory.

Term Loans vs Other Loan Options

Now, how does a term loan stand in comparison to other loan options? The table below explains it clearly:

Wrapping Up

Term loans are a perfect option for business owners of startups. If you are seeking one today, let My Mudra, one of the top fintech companies, streamline the process for you. We help you find top lenders with competitive interest rates, quick approvals and easy documentation.

You can complete documentation online on the portal and track the status of your loan through the My Mudra portal. Let’s get started!

Also Read:
- Get Working Capital Loans for Small Business
- MSME LOAN: Eligibility, Interest Rate, Documents Required