To start any business, we require four pillars – Capital, Land, Machinery, and Labor. The foremost requirement is capital to establish a business, as the rest can be acquired when you have capital in your hand.
Arranging capital for small businesses is a hassle but we can fulfill the requirement of any business by applying for loans. A term loan is the best suited for established small businesses. Loans are needed to purchase equipment, fixed assets, daily working capital needs, and many more. Loans could be taken through banks, vendors, investors, or from personal relations.
The “term” means a fixed or specific period. Similarly, a term loan is taken for a definite period. It is a secured loan that is taken for short term, intermediate and long term. Term loan ranges from 1 year to 10 years, but in some cases, they could be extended to 30 years. The rate of interest charged may be fixed or floating rates. In a fixed rate of interest, the rate is “locked-in” over the entire tenure of the loan. On the other hand, the floating rate of interest implies that the rate is revised every quarter till the loan is repaid.
To reduce the problem of your cash crunch while operating a business, a term loan is secured borrowing. The businesses should provide sound financial documents to the lender that proves their creditworthiness and goodwill to easily avail of the loan. Once the loan is approved, you obtain a lump sum of cash and the payment is made over some time.
TYPES OF TERM LOAN: According to your financial requirements, a term loan’s duration can be categorized into three forms –
1. Short-term: These are usually taken for less than 12 to 18 months. This loan meets your business’s day-to-day activities like working capital requirements and maintaining cash flow. The repayment period is shorter but the rate of interest is generally high.
2. Intermediate-term: This range between 2 to 5 years. This type of loan is a combination of short-term and long-term loans. Availing a medium-term loan for renovation or repairing a fixed asset is more favorable than cashing out the expense in full.
3. Long-term: This refers to loans that are taken for more than 5 years. It is generally taken for the purchase of fixed assets or equipment and is secured in nature. When you take a long-term loan, it is credit-based. Having a good credit score could help you in getting a term loan easily.
For further guidance related to the term loan, you can reach out to our Capital9 team of finance professionals.