Term Loans are loans offered to businesses for their expansion, capital expenditure and for fixed assets. These are generally short-term loans, having a tenure of up to 5 years. These short-term finance options are structured in a way that it meets your business finance needs. Depending on the lender, your repayments can be scheduled to match your available cash flow.
Term loans can also be sanctioned for the project or non-project loan. Project loans are sanctioned for setting up a new unit or for expansion of existing units whereas non-project loans are those extended for the acquisition of fixed assets, like a machinery, factory, etc.
Benefits of term loan
• Low-cost credit
• Financing as per cash-flow
• Customized products to meet your requirements
• Products offered across leading lenders
• Short-term finance, having a tenure up to 5 years
• Flexible loan offering, repayment can be scheduled as per cash-flow
• Hassle-free documentation and quick turnaround time
Advantages of Term Loan
- Interest on debt is tax-deductible, whereas the equity or preference dividends are paid out of profit after tax.
- There is no dilution of control of the management, since, in the debt financing, the lenders have no right to vote.
- The lenders are not entitled to the profits of the firm as they are only paid the principal and the interest amount.
- An issue cost of debt is less expensive as compared to the preference and equity capital.
- The maturity of the debt instrument can be altered with respect to the funds requirements in the firm.
- Generally, it is easier for the management of the firm to communicate the proprietary details to the private lenders than to a public capital market.
Disadvantages of Term Loan
- The firm is legally obliged to pay the fixed interest and principal amount to the lenders, the failure of which could lead to its bankruptcy.
- The debt financing, especially the term loans, raises the financial leverage of the firm, which in turn raises the cost of equity to the firm.
- If the inflation rate touches the extremely low levels, then the real cost of debt will be more than expected