A term loan is usually raised by companies to finance the purchase of fixed assets and working capital margin. A term loan is an ideal form of borrowing and is to be repaid in regular installments over the tenure. If your business needs funds, a term loan will be an ideal source of borrowing. It has friendly terms of repayment and a high approval amount. Let us take a look at the pros and cons of the loan.
Pros of a term loan
- Secured loan– A term loan is a secured loan which means that the risk for the lender will be low. You will have to provide security in exchange for the funds and the loan amount will be based on the market value of the security you hypothecate. Hence, estimate the amount of funds you need and then choose an asset to hypothecate.
- Low interest- The main reason why lenders prefer a term loan over any other type of business loan is the low-interest rate. With a low-interest rate, the EMI amount will be low and it will be easy and convenient for you to make the repayment on time.
- Long tenure- Term loans have a long tenure of up to 10 years and in some long term loans, the tenure can be as high as 30 years.
- Quick approval- You can get a term loan approval in 2-3 working days and some lenders also approve the loan in 24 hours. Once you make a loan application, it will be processed without any delay and you will be able to get access to funds. This means you can make the most of a business opportunity without worrying about funds.
- Suitable for all types of businesses- A term loan is suitable for all types of businesses. Irrespective of the type of business you own or the industry you operate in, you are eligible to apply for the loan. There is basic eligibility criteria for the loan.
Cons of a term loan
- Risk– Since a term loan is a secured loan, there is a certain amount of risk associated with it. If you fail to make the repayment of the loan in due time, the lender has a right to gain possession of the asset and auction it to recover outstanding dues. Hence, you need to ensure that the EMIs are paid on time and you do not default. Prepare a repayment schedule to achieve the same.
- Processing fees- The processing fees in case of a term loan are significantly high and it can lead to an increase in the overall cost of borrowing. Consider the fees and compare the same with different lenders to make an ideal decision.
The pros outweigh cons in a term loan which is why it is one of the most preferred choice of borrowing for business owners in the country. A huge advantage of the loan is that you can use it for any purpose in the business. You can invest in a new business, purchase equipment, hire personnel, introduce new products, or meet the working capital requirements. The loan will ensure that your business goals are met and you have adequate funds to grow.
