A term loan is a financial loan that is reimbursed in regular installments over a set duration of time.
Term loan is usually for one to ten years but in some cases lasts for 30 years. Interest rate is not fixed in term loan in most of the cases which adds extra balance to be reimbursed.
New enterprises and small businesses prefer term loan because of the reasonable offer of repaying it back over a larger period of time. General assumption is that profit increases with time, so the small companies go for term loan as it gets easier for them to repay. It can also be used with a personal loan or a payday loan. However in this article we will talk about SME loans. With time increases capital which ultimately broadens the horizons of the company leading to increased profits. Term loans provide the easiest way of starting a new enterprise.
One should have to consider while taking term loan is that the interest rate is floating or fixed. Fixed interest rate means that there will be the same cost of borrowing which is paid as first instalment. There will be no increase in interest payment in case of fixed interest rate.
Floating interest rate means that interest payment will change with the changing market condition. Fluctuating interest rate will change with respect to national economy. Another important consideration in term loan is the compound interest rate meaning that interest rate will be charged on the principal plus the previous interest. And if there is compounding then one should get to know whether there will be some penalty if one pays the amount earlier.
There are legal licensed money lenders which provide various schemes of loan and its repayment. You can choose to pay the amount in even instalments or you can have the amount increased with increase in time. One should be wise while making the decision. If one is confident that his newly established enterprise will expand spectacularly, he should choose the increment method which would save him interest amount. However if one’s unsure of his enterprise, he must not go for increment in payments.
While choosing a long term small business loan, it is advisable to consult a financial advisor. The loaning institutes have their advisors and you can consult them on the loaning option as to which option is optimal for you and your business. Term loan might be the best for you and your business buck lack of knowledge might make you take a bad decision which would hurt you extremely bad. Extravagantly long term periods might not be suitable for your enterprise because more the time more will be the interest accrued on the principal amount and ultimately you will have to suffer.
The pros of the term loan is that it is not to be paid on demand. There is some fixed period after which you have to repay the principal amount which is very beneficial for the enterprises unless someone breaches the terms of the loan. This loan can be very useful by getting any asset. When companies takes asset they usually take loan and buy asset and loan will be spread over the life of as asset. Another benefit of this kind of loan is that you do not have to give any share of your profit to the lender or share of your company to the lender. Interest rate may be fixed throughout the period of the loan so you have a clear picture of cost of borrowing. You can easily arrange the amount that you have to give to the lender as an interest. There might be an arrangement fee that should be paid at the start of loan. In case of on demand loan it is paid at the start of each year so in term loan it is only payable at once.
Now the cons of this loan is that it has terms and condition which you have to full fill in order to take loan. If bank asks for quarterly report of you financial asset then you have to give the report to the bank to take loan. The biggest disadvantage is that your information can be leaked out. Loan is not very flexible you have to pay the interest on the funds that you are not using. Lenders have nothing to do with the fact that you are using your loan effectively or not you have to give interest payments on time. You could have cash flow problems to pay the monthly payments of interest. The lengthier the period the more will be the uncertainty. Sometimes loans are issued on some security like some asset of the company or your personal possessions e.g. your home. If you take loan by giving your asset as a security than your asset will be at stake. If you are not able to pay the interest your asset will be overtaken by the lender. There may be an extra amount charge if you are willing to pay the principal amount earlier then the agreed time specially in case of fixed interest payments.
There are different types of term loans with respect to time. Intermediate loan is one which is from one year to three year time period. Long term loan is that which comprises of more than three years.it is usually of ten to twenty years.
Grace period is also linked with the term loan. Grace period is the period given by the lender to the loan taker to avoid penalties. Few days after the maturing date will be given to loan taker to make principal payment.
Now the question is that should one get the term loan or not? To answer this question one should keep everything in mind before taking any loan. Loan will be taken in case of need. The advantage of getting loan and the cost of borrowing should be taken into account. If the profit is higher than the cost of borrowing only then loan should be taken. All other things which is described earlier should be considered as well before taking any kind of loan e.g. interest rate grace period and terms and conditions tied with the loan.