A Business Term Loan is a fixed amount of money lent by a bank, NBFC or financial institution to a business, to be repaid over a predetermined period (tenure) in fixed instalments (EMIs or otherwise). Unlike overdrafts or working capital loans, which are often revolving or short-term, a term loan is usually used for a specific purpose — e.g. purchasing machinery, land or premises, setting up infrastructure, expansion, etc.
Term loans may be secured (backed by collateral like property, plant & machinery, etc.) or unsecured (no collateral). The cost (interest rate), terms, collateral requirements, documentation and eligibility all depend on factors like loan size, business vintage, creditworthiness, and risk assessment by the lender.
Key Features of Business Term Loans
Here are the major characteristics and components one must understand when seeking a business term loan:
| Feature | Description |
| Loan Amount | Amount depends on business need, lender’s policy, whether collateral is offered. Some banks offer unsecured term loans up to certain limits, while higher amounts usually require security. For example, certain Indian banks/NBFCs offer term loans from small lakhs up to crores. |
| Tenure / Repayment Period | Usually medium to long term. Common tenures range from 1 year up to 5-7 years or more depending on the size of investment and project life. Shorter term loans are also possible depending on purpose. |
| Interest Rate | Fixed or floating. Floating rates may be linked to bank’s benchmark rates (like MCLR, base rate, etc.). Rates vary depending on risk, security, business profile. |
| Collateral / Security | Secured loans require collateral (fixed assets, real estate, etc.). Unsecured term loans may be available for businesses with strong credit and financials, but interest is higher, and amount may be limited. |
| Purpose | Capital expenditure (machinery, plant, office space), infrastructure, business expansion, renovation, purchase of fixed assets, sometimes for turning around operations or investing in new product lines. |
| Repayment Schedule | Usually in regular instalments (monthly or quarterly). The schedule is fixed at the outset, taking into account the usable life of the asset or business cash flow. |
| Fees & Charges | Include processing fees, documentation charges, commissions, legal fees, stamp duty, maybe prepayment / foreclosure fees. Also, possible late payment charges. |
| Prepayment / Foreclosure | Many term loans allow prepayment or partial foreclosure, though terms may include a penalty or charge. Sometimes no foreclosure charges for certain small loan amounts or for MSMEs under specific schemes. |
Why Businesses Use Term Loans
Term loans are popular because they allow businesses to make one-time or long-term investments without diluting ownership and without affecting short-term cash flow (if structured properly). Some of the most common reasons are:
- Buying or upgrading machinery, vehicles, technology
- Building or renovating premises
- Expanding capacity, adding a new factory or branch
- Setting up infrastructure required for new product lines or operations
- Long-term investments that produce returns over several years
Eligibility Criteria – What Lenders Look For
Before approving a term loan, banks/NBFCs typically evaluate several factors. Lal Ghai & Associates helps clients meet and present these well.
| Criterion | What Lenders Examine |
| Business Vintage | How many years the business has been operating. Lenders prefer businesses with at least 2-3 years of stable operations. Some grant unsecured term loans if vintage is good and financials are strong. |
| Turnover / Revenue | Past turnover helps estimate ability to service debt. Lenders look for consistent revenue, trend of growth. |
| Profitability / Cash Flow | Profit & loss statements, margins, operating cash flow are scrutinized. If cash flow is weak, even good turnover may not be sufficient. |
| Credit History / CIBIL / Company Credit Score | Past loans, repayment history, defaults. Clean credit history helps get better interest rates. Sometimes promoters’ personal credit is also checked. |
| Collateral / Security | If collateral is required, value, liquidity, stability of asset matters. Documentation for collateral (title deeds, etc.) must be clean. |
| Purpose & Project Report | Clarity on why money is needed, how it will be used, projections (sales, returns, payback period) especially for larger amounts or project financing. |
| Documentation | Up-to-date KYC, audited financial statements, GST returns, bank statements, business licenses and registrations. |
Interest Rates, Charges & Real Example Figures
To make it concrete, here are some recent real-life indicators from Indian banks/NBFCs (indicative, subject to change, lender policy, credit risk):
- HDFC Bank offers business loans up to ~₹1 crore, often unsecured, with interest rates starting around 10.50% and flexible tenures up to 48 months.
- Axis Bank offers unsecured business term loans with minimal documentation for self-employed traders / manufacturers, with tenures typically from 6 to 60 months.
- Bandhan Bank has “Aspiring Business Loan” for small enterprises, loan amount above ₹3 lakh up to ₹25 lakh, tenure up to 5 years, interest rates ranging from about 13.00% to 21.00% p.a. depending on profile.
Typical costs / fees to watch out for:
- Processing fees: often around 1-2% of loan amount in many banks. HDFC for example charges processing + documentation fees.
- Prepayment / foreclosure charges: Some banks levy charges, especially for floating-rate loans or before certain EMI thresholds.
- Late payment / default fees.
Advantages & Limitations of Business Term Loans
Every financial product has pros and cons. Good to understand both so you can choose wisely or negotiate well.
Advantages:
- Predictability: Fixed repayment schedule helps with planning cash flows.
- Growth enablement: Funds allow expansion, buying fixed assets etc., which otherwise might remain out of reach.
- Possibly lower cost than repeated short-term financing if interest rates are favorable.
- Ownership remains with business owners (unlike raising equity).
Limitations:
- Obligations: Regular repayment regardless of business fluctuations can be burdensome during downturns.
- Collateral risk: If secured, risk to pledged assets in case of default.
- Interest cost: If interest rates are high, total interest over long tenure can be large.
- Prepayment penalties / hidden costs if not carefully reviewed.
How the Process Works – Step by Step
Here’s the general end-to-end process when a business applies for a term loan. Lal Ghai & Associates can help at each stage.
- Assessment of Requirement
Determine how much money is needed, for what purpose, how soon, and what repayment capacity the business has. - Identify Suitable Lenders & Loan Product
Based on business size, collateral availability, risk profile, choose among banks / NBFCs which product fits best (secured / unsecured, tenure, etc.). - Prepare Documents and Project Plan
Collate KYC, business registration, financial statements (profit & loss, balance sheet), GST returns, bank statements. If the loan is for a large fixed asset or expansion, draw up a project report / feasibility study indicating expected returns and payback. - Loan Application Submission
Fill out loan forms, submit documents, sometimes meet bank/NBFC officials. - Credit Appraisal
The lender evaluates risk: credit history, ability to repay, value and validity of collateral if any, quality of project plan. - Sanction & Offer Letter
Once approved, lender sends offer including amount, rate, tenure, EMI schedule, fees, security (if any), prepayment options etc. - Disbursement
Once documentation & legal formalities are completed, funds are disbursed. - Repayment & Monitoring
Business repays as per schedule. Maintain discipline in payments. Sometimes lender may require periodic financial reporting, especially for large or secured loans.
Term Loans in Indian Context & Government Schemes
In India, there are specific contexts and schemes that affect term loans:
- MSME-related schemes: Many MSME loan programs allow term loans for capital expenditure with favorable terms. Businesses under MSME categories may get collateral-free or lower-interest schemes.
- Loan guarantee schemes like Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) help small businesses get loans even without strong collateral by giving guarantee cover.
- Bank / NBFC competition keeps features like minimal documentation, fast disbursement, flexible tenures improving. For smaller term loans, many lenders allow collateral-free (subject to risk). E.g. Axis, HDFC etc.
What Businesses Should Ask / Negotiate Before Taking a Term Loan
When considering a term loan, here are key things to check or negotiate. Lal Ghai & Associates helps clients with this part:
- Interest type: Fixed vs Floating — Understand how interest may change, especially if floating.
- Prepayment / Foreclosure terms — Can you pay off early without penalty? Partial prepayment? What is charge if any?
- Processing & other fees — Up front costs, hidden charges, documentation costs.
- Grace period (if applicable) — Sometimes loans allow grace period before repayment begins, especially for fixed assets.
- Security / Collateral terms — If collateral is required, check valuation method, documentation, what happens in case of default.
- EMI schedule — Monthly, quarterly? Align it with cash flows.
- Default or late payment penalties — What happens if a payment is delayed.
How Lal Ghai & Associates Supports Business Term Loans
Here’s how Lal Ghai & Associates can help your business get the best from a term loan:
- Loan-Need Assessment: We help you quantify how much capital is needed, the optimal tenure, and repayment capacity.
- Lender Matching: Based on your business profile (size, vintage, collateral), we suggest banks/NBFCs offering favorable interest, flexible terms, minimal documentation.
- Documentation & Project Reports: Assist in preparing accurate financial statements, GST/IT returns, project reports / feasibility if needed. We help ensure your paperwork aligns with what lenders require to avoid unnecessary delays.
- Loan Application & Negotiation: We guide you through filling applications, ensuring eligibility, negotiating for lower interest rates, better terms (prepayment, foreclosure, etc.).
- Compliance & Post-Sanction Monitoring: Ensure that after disbursement you meet lender covenants or reporting requirements, avoid defaults or penalties, maintain good credit history.
Conclusion
A business term loan can be a powerful tool in your growth strategy. It gives you the financial firepower to make big investments—machinery, infrastructure, capacity expansion—without having to compromise equity or ownership. But it also comes with responsibilities: careful planning, timely repayments, and choosing the right lender and terms.
If you are thinking of taking a term loan, do it with clarity. Understand what you need, what the costs are, what you’re committing to, and how the repayments fit into your cash flow. And having a partner like Lal Ghai & Associates can make a big difference — helping you choose the right loan, negotiate better terms, avoid unnecessary costs, and get through the entire process smoothly.