Term Loan for Business
It is often seen that a businessman goes to the bank manager and says that he needs a working capital loan of ₹50 lakh or ₹1 crore because he wants to expand his business and increase his production. For this, he also needs to purchase machinery and enhance and expand his existing setup or workshop. So here the manager says that I can give you a loan of ₹50 lakh, but I cannot give the entire amount as working capital. Based on your turnover, we can provide 20% as cash credit, and for the machinery you are purchasing and the expansion of your business setup or workshop, I can give you a term loan.
Working Capital Loan
Generally, businessmen prefer working capital loans more because they know that they only have to pay interest for the number of days they utilize the money. But when it comes to expanding the business, it is not easy to repay the money at that time. So once they receive the funds, they use them and repay later, paying interest only for that duration. However, in working capital, especially cash credit, you can get a maximum of only 20% based on your total turnover. If you want to purchase any fixed asset or machinery, then in that case you will have to take a term loan.
What is Term Loan
A loan that is given for a fixed period of time is called a term loan. These term loans can be for 12 months, 3–4 years, or even up to 10 years.
Types of Term Loan for business
These can be short-term loans, as mentioned earlier, for 12 months, 24 months, or 36 months, which are called short-term loans. And for a longer duration, say 8–10 years, they are called long-term loans. Term loans can be unsecured as well as secured. Generally, unsecured term loans are popularly known as business loans, while secured term loans are commonly referred to as term loans that are given for purchasing assets.
Term Loan vs Cash Credit
See, as I explained, term loans can be given for 12 months and even up to 10 years. But cash credit loans are always given for a period of less than 12 months and are meant for short-term use. Term loans are given for purchasing fixed assets, whereas cash credit loans are provided for day-to-day expenses or working costs to run the business.
In a term loan, you can get around 75% to 80% of the asset cost, whereas in a cash credit loan, you get only up to 20% of your total turnover.
Generally, the interest rate of a term loan is slightly lower compared to cash credit. In a term loan, you have to pay a fixed amount every month or quarterly or half-yearly. But in a cash credit loan, you have to pay interest based on how much money you utilize every month. However, in a term loan, you have to repay both the principal amount and the interest from time to time.
Purpose of Term Loan
You can take a term loan to purchase machinery, to buy a vehicle, or if you are buying a factory, constructing a factory, or purchasing a warehouse, in such cases also you can take Term Loan for business.
Term Loan Installment
The installment of a term loan can be paid monthly; it can also be quarterly or half-yearly. In most cases, it is monthly, and it is called EMI. Here, you have to pay both the principal portion and the interest portion. In the beginning, the interest portion is higher and the principal portion is lower. As your EMI tenure progresses, the principal portion increases and the interest keeps decreasing. However, you always have to pay a fixed amount.
Margin Money
If you are purchasing machinery or property, in that case, you may have to pay 15% to 20% as margin money. In most cases, if you take a loan from a PSU bank for purchasing machinery, they may ask you to invest 15% to 20% from your side. But in NBFCs, where loans are approved faster, they may require at least 25% investment, and they will provide a maximum of up to 75% loan.
Interest Rate
Interest rates can be fixed or floating, but you should always remember that both principal and interest have to be paid together in a fixed amount.
Documents Required for Term Loan
What documents do you need?
Normally, the same documents required for a business loan are needed here as well, such as:
- Proof of Identity
- Proof of Business and Residential Address
- Proof of Business Registration
- Proof of Income
- Proof of Existing Facility
- Original Quotation of the Machinery
If you are taking a term loan for machinery, then you must also submit the original quotation.
Let’s understand these in detail:
Proof of Identity
If it is a proprietorship company, then the proprietor has to provide ID proof. In a partnership company, partners need to provide ID proof, and in a private limited company, directors need to provide ID proof.
You need to submit a PAN card. In a partnership firm, a partnership deed and company PAN card are required. In a private limited company, PAN card, MOA, AOA, and Certificate of Incorporation must also be provided.
Proof of Business and Residential Address
All directors, partners, or proprietors must provide address proof. You can submit Aadhaar card, voter ID card, driving license, or passport. If you do not have any document with your current address, then you can submit an electricity bill or property tax receipt in your name.
Proof of Business Registration
This is a very important document. You need to provide documents like trade license, PT registration, and Udyam registration certificate.
Proof of Income
You need to submit the last 6 months’ bank account statement. Some banks may ask for 1 year statement.
You also need to submit income tax returns. Generally, 3 years of ITR are required, though some banks may accept 2 years. These should be audited or at least CA-attested and must include a UDIN number.
The ITR file should include profit & loss account, balance sheet, and computation.
If GST is applicable to your business, then you must submit the GST registration certificate and GST returns for at least 1 year.
Proof of Existing Facilities
If you already have an existing loan, then in that case you need to submit the sanction letter of that loan along with the loan account statement. If you have recently closed any loan, then you must also provide a No Due Certificate.
Original Quotation of the Machinery
As mentioned earlier, if you are taking a term loan to purchase machinery, then you must submit the original quotation. The quotation should be valid, up-to-date, and must contain all the necessary details.
If you are purchasing any asset such as a factory, warehouse, or office, then you need to submit the legal and technical documents of that property.
In some cases, if you are purchasing costly machinery, the bank may ask for additional collateral. If you are providing your house or flat as collateral, then you must submit all the legal and technical documents so that the bank can verify and evaluate the property.
How to Get a Term Loan Quickly
Before applying for a term loan, first understand the eligibility criteria of the bank you are applying to and check what documents are required. Prepare all documents in advance because if any document is missing after application, the process may get delayed significantly. So always keep everything ready before applying.
Credit Score and Credit History
Whenever you apply for any loan, your CIBIL score is checked. In case of a term loan, both your individual CIBIL score and company credit rank are evaluated. The company’s credit score, also known as CIBIL rank, should be between 1 to 5 for PSU banks to approve the loan.
If there are any errors in your credit report or your score is low, first get it corrected before applying. A poor CIBIL score can lead to loan rejection. You may not be able to reapply to the same bank immediately. If there is any error or low score, you should rectify it first. If needed, you can also seek advice over the phone.