“You need money to grow money” is an old adage, especially true for enterprises. Firms need money to set shop, for day to day functioning, and expansion and growth. Term loans are commercial lending tools that are primarily used to fund various business activities. Both start-ups and established firms have numerous other options when it comes to funding their business, such as overdrafts, bill discounting, line of credit, letter of credit, borrowing money against shares or property.
Term Credit is essentially used to finance different types of assets, which include land and building, building construction, infrastructure creation, renovation, purchase of equipment, machinery and vehicles. Going by its name, it has a specific term. It is generally divided into two categories, Intermediate/short term and long-term credit facility. The maximum tenure for the former is 3 years, while the maximum tenure for the latter is 10-15 years. Because of the various advantages over other types of financing, it is one of the most preferred options today.
- Flexibility – Such credit grants are highly flexible because the terms and conditions are flexible and are decided upon by a mutual agreement between the borrower and the lender. Also, they can be revised later, on mutual agreement. The interest rate could be flexible as well as fixed. The tenure is decided according to the amount and repayment ability of the borrower. The repayment of the principal amount and interest is obligatory and can be made via monthly or quarterly payments.
- Secured and Non-secured Loans – Generally, such loans are secure. In case of purchase of assets, such as equipment or machinery, the item to be purchased acts as the primary collateral, while there may also be another collateral. Such type of financing can also be gained against residential and commercial property. Secured loans have much lower interest rates. This facility could especially prove to be beneficial for start-ups, who do not have a credible amount of invoice or who do not want to liquidate their shares.
- Ownership Does Not Get Affected – Unlike other methods of raising fund, where firms have to liquidate a certain percentage of shares, term loans do not affect the ownership rights. However, equity may be liquidated and transferred in some cases, especially when you default on repayment.
- Tax Benefits – The interest paid on such loans are is eligible for tax exemption under the Income Tax Act of 1961.