Term Loan

How Does a Term Loan Work?

Term loans are usually secured, meaning the borrower must provide collateral. These loans can have either a fixed or floating interest rate. For example, if a business borrows ₹10 lakhs at a fixed interest rate of 10% per annum for 3 years, the total interest paid over the period would be ₹3 lakhs, bringing the total repayment amount to ₹13 lakhs.

Key Features of Term Loans

• Principal: The original amount borrowed.

• Interest Rate: The rate charged on the loan, which can be either fixed (stays the same) or floating (changes with market rates).

• Repayment Schedule: Regular payments are made, typically monthly or quarterly.

• Collateral: The loan is usually secured against assets such as property, equipment, or inventory.

Benefits of Term Loans

• Predictable Payments: Fixed repayment amounts make it easier for businesses to budget and manage cash flow.

• Lower Interest Rates: Term loans often have lower interest rates compared to other financing options, such as credit cards or unsecured loans.

• Flexibility: Term loans can be structured in various lengths, including short, intermediate, or long terms, depending on the business’s needs.

Challenges of Term Loans

• Rigid Repayment: Fixed schedules can sometimes strain a business’s cash flow, especially if there are fluctuations in revenue.

• Interest Costs: The total interest paid can be higher over the long term, especially if the loan term is extended.

• Eligibility Requirements: Term loans often have strict approval criteria, requiring businesses to meet certain financial metrics or provide substantial collateral.

Conclusion

Term loans are a useful tool for businesses looking for predictable financing with lower interest rates. However, it is essential to carefully consider the repayment schedule and eligibility requirements before committing to a term loan. In 2025, businesses can continue to use term loans to manage capital needs while keeping track of cash flow and minimizing borrowing costs.