To make an informed business decision, it is necessary to understand the types of term loans. They are classified on the basis of tenure, i.e., short-term, medium-term, and long-term loans.

1.    Short term loans:

These loans are fixed for a maximum of 2 years. It is needed for meeting day-to-day business requirements or the working capital of the same. These include loans from commercial banks, factoring, discounting bills of exchange, and trade credit. It helps to prevent a loss thereby boosting the cash flow or making good profits from utilization deals. 

2.    Medium-term loans:

these loans work for a period of 2 to 5 years. These loans are often utilized for the repair or renovation of fixed assets.  The interest charged herein is comparatively higher than the long-term loans, however with a lesser documentation hassle than the latter. 

3.    Long term loans: 

these loans extend beyond 5 years. They have secured loans with a lower rate of interest. These loans are based on credit, so if you have a better credit score, you are likely to get lower interest rates. The EMI is low as the loan tenure is quite long and flexible in terms of payment. 

How does a term loan work?

Term loans are generally offered to small businesses that require cash for purchasing capital, including equipment, new buildings, and fixed assets. These entities apply for term loans by approaching their lender. The borrower has to carry the below-mentioned documents for the loan

  • Self-drafted business plan

  • Duly filled application form along with passport size photographs

  • KYC Documents such as PAN cards, Aadhar Card, Passport, Voter ID cards, Utility Bills, Driving Licenses, etc.

  • Business establishment proof

  • Last 12 months’ bank statement

  • Minimum turnover as per bank requirements 

  • Any other required document by the bank.

They must submit financial instruments to reflect their creditworthiness. The ones who are approved, receive lump sums of cash and are required to repay over certain periods. Such loans carry a fixed or variable interest rate and maturity date. 

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Ruprekha Jena
3rd Year Law Student from KIIT School of Law, Bhubaneswar

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