A term loan is often appropriate for an established small business with sound financial statements and the ability to make a substantial down payment to minimize payment amounts and the total cost of the loan.
The interest rate for the term loan will be based on the credit worthiness of the borrower and is usually a fixed spread over the banks base lending rate.

KEY TAKEAWAYS

• A term loan is a loan issued by a bank for a fixed amount and fixed repayment schedule with either a fixed or floating interest rate.
• Companies often use a term loan's proceeds to purchase fixed assets, such as equipment or a new building for its production process.
• Term loans can be long-term facilities with fixed payments, while short and intermediate-term loans might require balloon Payment.

Types of Term Loans

Term loans come in several varieties, usually reflecting the lifespan of the loan.

• A short-term loan, usually offered to firms that don't qualify for a line of credit, generally runs less than a year, though it can also refer to a loan of up to 18 months or so.
• An intermediate-term loan generally runs more than one – but less than three – years and is paid in monthly instalments from a company’s cash flow.
• A long-term loan runs for three to 25 years, uses company assets as collateral and requires monthly or quarterly payments from profits or cash flow. The loan limits other financial commitments the company may take on, including other debts, dividends or principals’ salaries and can require an amount of profit set aside for loan repayment.

Both intermediate-term loans and shorter long-term loans may also be balloon loans and come with balloon payments – so-called because the final instalment swells or "balloons" into a much larger amount than any of the previous ones (no principal or a smaller amount of principal may have been paid along the way).

Term loans: Pros and cons

PROS:

• You can borrow large amounts of money to finance expansion or growth
• Long repayment terms can make big investments more affordable
• Repaying term loans on time may help you build business credit
• Loans at online lenders can be approved and funded quickly, usually within a few days to a week
• Qualification requirements for online lenders may be looser than those for traditional banks

CONS:

• Less flexibility than lines of credit, as payments begin immediately after funding
• Shorter term loans may carry high costs and frequent repayments, although this depends on the lender
• SBA loans are low-cost, but carry strict requirements and can take a while to fund
• Collateral may be required — this would be an asset, such as equipment or real estate, that the lender can sell if you can’t make payments

How a Term Loan Works

In corporate borrowing, a term loan is usually for equipment, real estate or working capital paid off between one and 25 years. Often, a small business uses the cash from a term loan to purchase fixed assets, such as equipment or a new building for its production process. Some businesses borrow the cash they need to operate from month to month. Many banks have established term-loan programs specifically to help companies in this way.
The term loan carries a fixed or variable interest rate – based on a benchmark rate like the U.S. prime rate or the London Inter Bank Offered Rate (LIBOR) – a monthly or quarterly repayment schedule and a set maturity date. If the money is being used to finance the purchase of an asset, the useful life of that asset has a hand in the repayment schedule. The loan requires collateral and a rigorous approval process to reduce the risk of default. However, term loans generally carry no penalties if they are paid off ahead of schedule.
[Important: While the principal of a term loan is not technically due until maturity, most term loans operate on a specified schedule requiring a specific payment size at certain intervals.]

Term Loan Syndication

Term loan are provided for acquiring or constructing or installing or establishing capital assets, which will provide returns over a period of time. Term loans will also be repaid in regular payments over a period of time, as the asset generates returns. Term loans are usually provided for acquiring or constructing building and acquiring or installing plant and machinery.
ConsultAvenuee.com can help your business apply and obtain sanction of term loans from banks. Once we obtain an understanding or your business or proposed business, our Financial Experts will then advice you suitably on the proposed quantum of loan, repayment type, repayment tenure and schemes available. Consult Avenue can also help you prepare a project report, apply to banks and obtain sanction of term loans for your business.