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A term loan refers to the loan specified for a particular amount with no detailed repayment plan and has a fixed or floating interest rate. Term loans generally last between one to thirty years. The term loan is a good way of quickly increasing capital in order to raise a business resources capability or range. The loan carries a fixed or variable interest rate which will vary with market fluctuations, monthly or quarterly repayment schedule and set maturity date. Term loans are useful for smaller business loans. However, they can even be taken for an individual needs as well. Term loans are quite common, and also gives a level of confidence to the borrower and the lender. The borrower normally has the introduction to the complete amount of principal upfront, knows when the payment is to be made and knows what amount to pay. The lender understands that the principal needs to be repaid over time on a routine basis.
Features of Term Loan
All Term loans are ensured loans. As the assets financed by term loans serve the purpose of acting as primary security, all the other instant and expected assets of the company give collateral / secondary security for the term loan.
Financial institutions gives term loan in terms of both rupees as well as foreign currency.
Interest payment and Principal repayment – These refer to the specific obligations that are payable regardless of the financial situation of the entity.
Interest rate that is charged is according to the credit risk of the project.
In case of a default in payment penal interest is imposed
Apart from the security of the asset, the lender of the term loans inflicts other conditional promises to themselves. Lenders ask the borrowers for maintaining the least asset base, and not raising additional loans or repaying of the existing loans etc.
Commitment fees are charged on the unutilized loan amount.
Eligibility for Term Loan
The Lender checks the worthiness of the credit for the customer, for this purpose they check safety and repayment ability by looking at the past financial history of the customer including other business records.
The following are some notable things one should keep in mind before applying
One must have a favourable credit score (CIBIL score) i.e between 700-900 points.
Make sure that you meet the qualification criteria of the lender, requirement of the loan and have all the important documents ready.
Maintaining the company‘s database and a report of its financial situation along with the past performance and the cash flow statement.