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A term loan is a loan for a specific amount that has a specified repayment schedule and a fixed or floating interest rate. Term loans usually last between one and thirty years. Term loan are 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 mostly used as small business loans but can also be taken on an individual basis as well. Term loans are very common, and they provide a level of certainty to the borrower and the lender. The borrower usually has access to the full amount of principal upfront, knows when to make payments, and knows how much to pay. The lender knows that the principal will be repaid over time on a regular basis.
Features of Term Loan
- All Term loans are secured loans. While the assets financed by term loans serve as primary security, all the other present and future assets of the company provide collateral / secondary security for the term loan.
- Financial institutions provide both rupee as well as foreign currency term loans.
- Interest payment and Principal repayment – These are definite obligations that are payable irrespective of the financial situation of the entity.
- Interest rate charged is as per credit risk of the project.
- In case of default of payment penal interest is charged
- Besides asset security, the lender of the term loans imposes other restrictive covenants to themselves. Lenders ask the borrowers to maintain a minimum asset base, not to raise additional loans or to repay existing loans etc.
- Commitment fees is charged on the unutilized loan amount.
Eligibility for Term Loan
The Lender checks the credit worthiness of the customer, for this they check reliability and repayment ability of the customer by looking at the past financial history and other business records.
The following are some important things one should ensure before applying
- Must keep a favorable credit score (CIBIL score) i.e between 700-900 points.
- Ensure that you meet the eligibility criteria of the lender , loan requirement and have all the necessary documents ready.
- Must maintain the database of the company ‘s financial situation and past performance along with its cash flow statement.