Term Loan is a loan borrowed for fixed amount over the fixed period of repayment and floating rate of interest. The borrower is offered a predefined schedule of repayment by the lending institution comprising of principal amount and interest thereon. Term loan is secured by a collateral security. Term loan facilitates the borrower to raise a stipulated amount one time and plan the business expenditure or investment or purchases on his or her own. Term loan is normally preferred by small and medium scale businesses to meet the needs of working capital or to buy assets or infrastructure which is required to run the business on day to day basis. It may include purchase of machinery or buying an office or workshop premises the maturity period or term is between 1 – 10 years.
The Term Loan Can Be Availed To :
Purchase Of Fixed Assets :
The term loan can be used to purchase fixed assets like premises, plant & machinery etc. The usage or performance of assets increases the business performance and hence the profit and makes the repayment of the loan easier. Even the term loan is settled the assets procured continue the productivity as asset life span is certainly longer than the term loan span. If a premises is purchased then the value of premises is always appreciated and in that case the business leverage higher value of premises which further can be used to raise funds for business expansion or diversification.
Switching Of Higher Interest Loans :
Many a time’s business owners opt to raise business loans at higher rate of interest. Such loans are processes and sanctioned faster but result in heavy burden interest. This interest payment becomes a fixed monthly expenses and starts leaking the profit. To arrest the growing rate of interest and penalties the higher interest loan can be switched to lower rate of interest loans or term loans. This way a borrower reduces the growing burden of interest on business loan and can save a considerable amount of money. It also benefits in maintaining the credit rating as the borrower closes one loan liability and opens another in form of term loan with lower rate of interest and easier repayment conditions.
Mortgage Term Loan :
A term loan can be availed by mortgaging a kind of security like home, office premises etc. This type of loan is borrowed for longer period of time that is 10, 15 or 20 years. The repayment of the principal amount and interest may be fixed in nature or it may vary over the course of repayment. The borrower may avail the revised rate of interest later and may be benefited by saving in interest.