Term Loan for Small Business Owners – Basic Guide

Term loan is a type of loan, which has to be paid in regular installments over time. Term loans are typically sanctioned for a acquiring or constructing or installing capital assets like building, plant and machinery.

TERM LOAN FEATURES

1) Banks or Financial institutions granting term loans are creditors and not the owners of the company. They only lend the funds to the company.

2) They are required to be repaid during the lifetime of the company at a pre decided interval.

3) The term loans are either secured or unsecured.

4) Return on term loans is paid in the form of interest. This interest is still paid even if there is non availability of profits.

5) This source of raising funds is very risky from company’s point of view.

6) Term Loans are less risky on the part of banks and financial institution.

7) They are cheap source of funds from company’s point of view.

WHAT IS TENURE OF TERM LOAN:

Tenure of a term loan refers to the period over which the term loan can be repaid. Typically term loans can be repaid over 3-10 years based on the project and projected financials.

RATE OF INTEREST FOR TERM LOAN:

The rate of interest for a term loan will be based on the borrower’s profile and credit worthiness. Usually term loan interest rates are fixed as a set percentage over the banks base lending rate.

DETERMINING FACTORS OF TERM LOAN ELIGIBILITY:

● Promoters background

● Business model

● Operational performance

● infrastructure

● Cost

● Location

● Collateral security

● Present financial performance

● Projected financial performance

● Credit repayment track record

● External credit rating

The credit decision is taken on a composite of the above factors.

REQUIRED DOCUMENTS FOR TERM LOAN:

1. Audited Financial Statement of last 3 years along with Income Tax Return Acknowledgement.

2. Provisional Balance Sheet for the current year.

3. Projection of Sales , Purchase, Stock & Raw Material Consumption for the next year.

4. Quotation of Machinery to be purchased.

5. Installed Capacity, Licensed Capacity – existing & proposed, Envisaged Capacity Utilization.

6. Details of Raw Material requirement, calculation, how desired? Source of supply and supply position. Cost of ram material supported by current quotation.

7. Catalogue / Brochure of Machine (In case of machinery purchase)

8. Maintenance arrangement & costs thereof.

9. Detailed project report and Project implement schedule.

10. Cost already incurred.

11. Sources of such expenditure.

12. Request letter.

TERM LOAN SANCTION & DISBURSEMENT:

1. On approval/sanction, the sanction letter, is issued specifying the terms and conditions for the disbursement of the loan. The acceptance to the terms of sanction is taken From the Applicant.

2. The processing charges as specified by the bank have to be paid to proceed further with the disbursement procedure.

3. The documentation procedure takes place such as Legal opinion of various property documents, valuation reports, submission of title deed etc.

4. After depositing all the necessary documents as specified by the legal department term loan is generally disbursed.