Introduction to Business Term Loans

A business is always in need of money. Getting a loan from a bank is a quick solution for them but it is not as easy as it sounds. The business needs to determine the type of loan it requires considering their need and then apply for the specific loan. Banks provide numerous types of business term loans having a different rate of interest, tenure and qualification. So every business must carefully study the different loan products before applying for any loan.

What is a Term Loan?

A term loan, which can range from short to long duration, is provided by banks to businesses. This loan is typically used by companies to support their working capital needs, acquire assets, or for expansion purposes. The duration and interest rate of a term loan vary based on the specific loan product chosen by the business.

Term loans are also known as instalments loans. Instalment loans are the credit facility in which bank makes full payment to the business. The repayment is in form of monthly, quarterly, half-yearly or on annual instalments depending upon the kind of agreement. The instalment loans help to meet all type of business expenses. The rates of interest on these loans vary depending on the period of the loan.

Types of Term Loan

The different types of Business Term Loans are:

• Classified As Per Facility
  • Line-Of-Credit:
    • This type of loan is generally availed by the small business owners. The line of credit loan helps businesses to meet the working capital requirements like the purchase of inventory, daily expenses, etc. These loans carry a low rate of interest. Every business must make this type of loan arrangement with banks so that they always have funds to meet their routine expenses. Interest payment for this type of term loan is on monthly basis. However, the principal payment can be made as per the suitability. But it is wiser to make timely principal payments.
  • Letter of Credit:
    • Letter of credit facility is given to businesses indulging in international transactions. Letter of credit ensures payment to the supplier in another country. In the case of non-payment by the buyer to the bank in the home country, the bank holds the right to seize buyer’s asset and sell it in open market to recover the amount. Though it is not a direct form of term loan yet it acts like a loan to business organisations.
• Classified As Per Duration/Tenor
  • Long-Term Loan:
    • As the name suggests, the long-term loan is for a longer duration of time. This type of loan is suitable for those businesses that are expanding the business, acquiring another business, refinancing, etc. A business having goodwill and a better track record in relation to the repayment of loans can easily obtain a long-term loan. The loan instalments are on monthly basis. The rate of interest is lower than the short-term loans.
  • Short-Term Loan:
    • Short- term loans are for a period of less than one year. This type of loan is useful for those businesses which are seasonal in nature where the main business period is confined to the limited period of time in a year. This loan is utilised by the business to meet its working capital requirements. The rate of interest is generally higher. The loan payment is to be made in full at the end of agreed term rather than paying in form of monthly instalments.
  • Interim Loan:
    • Interim loan is useful for businesses that run out of cash and need to make urgent payments. Banks grant loan only to those borrowers who are reliable and timely pay off the loan amount. The bank keeps assets like building, machinery, etc. as a mortgage while granting the interim loan. This short-term business financing arrangement is best if you wish to buy commercial property or during construction of the commercial property.
• Classified As Per Security
  • Secured and Unsecured Loan:
  • Interim loan is useful for businesses that run out of cash and need to make urgent payments. Banks grant loan only to those borrowers who are reliable and timely pay off the loan amount. The bank keeps assets like building, machinery, etc. as a mortgage while granting the interim loan. This short-term business financing arrangement is best if you wish to buy commercial property or during construction of the commercial propertySecured loans are those loans on which the banks demand a collateral security in exchange. The collateral security can be any asset of the business. The bank has the right to sell off the asset and recover the money in case of non-payment of the loan amount. The period of secured loans is more than 12 months. The rate of interest is comparatively lower than the unsecured loans. On the other hand, unsecured loans do not have any collateral security in exchange for a loan. Banks grant unsecured loans only when they are sure of the repaying ability of the borrower.
  • Term loans are easily available to SMEs. Banks offer credit services to the small and medium enterprises having a turnover of up to Rs. 250 crores. SME term loan is suitable for businesses that need funds for imports of capital goods, construction projects, project finance, etc.
  • The demands of businesses are increasing. They want to grow at a rapid pace and for that, they need constant funds. Axis Bank provides structured credit solutions to meet your business requirements. Right from financing a project to purchasing an asset, Axis Bank provides a wide range of short-term and long-term loan products. What makes these loan products attractive is the affordable rate of interest and schedule of repayment.
  • Reach our nearest branch to avail advisory services from our representative and take the loan that suits your business needs. You can reach us via call or e-mail.