What is Term Loan? A loan or a credit facility is defined as “TERM LOAN ‘when its repayment schedule is decided by a fixed period or term with a fixed amount of repayment or in other words EMI (Equated Monthly Installment).

The loan for business in its letter & spirit is sanctioned by the Banks /lending Institutes for funding the CAPEX expenditure like Plant & machinery, Equipment, and acquiring of Capital Assets of the Company.

Such Term Loan is allowed with a fixed payment schedule, Amount in either Fixed or Floating Interest regime by the Borrower –Banker agreed upon terms.

The loan so approved for business can be for Short Term (1 -5yrs) , Mid Term (5- 10 Yrs.) Long Term (10-20+ yrs.).

Term Loan Eligibility:

The Eligibility for the Term Loan is assessed on the basis of the merit & viability of the Project new or for expansion, business performance of the promoters, credit history & above all repayment capacity.

 Also, the lenders arrive at the eligibility of the borrower for availing the Term on the basis of the capacity to offer additional security which is called Collateral security other than the assets acquired & mortgaged as primary security.

It means The assets funded by the lenders become the primary security and additional assets already in the possession of the borrower in the form of Immovable properties like Land & Buildings becomes the Collateral Security, the quantum & value of which is ascertained by the Banks/lenders while giving Term Loan.    

Documents for Term Loan:

All the financial statements like-

• Profit & Loss A/C,
• Balance Sheet preferably audited,
• MOA & AOA ,Co. Resolution ( in case of Pvt./Public Limited Cos).
• Cash Flow statements.
• DPR, for New as well as expansion of the existing one.
• Techno –commercial Feasibility report.
• Details of Collateral securities to be offered.
• Machinery /Equipment Manufacturers-OEM or Licensed /suppliers  as the case may be.
• Report of Technological Tie Up with any entity if any.
• Govt,/Specified Authorities  Clearance.
• Approval if applicable.
• Last One year Bank Statement.
• Property Documents.

 

Besides personal Balance Sheet & Local Licenses like Trade, other licenses & the KYC documents of the Owners/Promoters/Directors.

Point to be noted that, Lenders may require any Statement, Documents, Agreement, and Affidavit etc. as would be required by them for approving the Term Loan.

Term Loan Process:

Briefly the Bankers /Lenders generally go through the following process in addition to practice some other process unique to any particular Lender while processing the Term Loan.

Assessment of Financial Parameters through the examination of a set of tools & ratios to gauge the financial strength of the Business proposed to avail the Loan.

For Example DSCR is a pointed ratio to understand numerically about the capability of the borrower to service the loan over a period say 5-10 yrs. The Debt Service Coverage ratio along with other ratio like Current Ratio, Turnover Ratio, Profitability ratio etc. demonstrate the financial health of the Company/Firm.

Other mathematical tools like DCF & PCF further helps the lender to quantify the Term Loan & viability of the particular project for which the loan is applied for.

Once the DPR matches with the initial assessment of the lenders ,then the process of valuation of Primary & Collateral starts to finally quote the ROI , TENURE,MARGIN( of Borrower) & the Amount of finance.

A very important matter in case of Term Loan is that the sanctioned amount is directly paid to the Companies supplying, erecting Plant & machineries, Equipment etc. taking the requisite margin from the borrower.

Example: If the value of a SORTEX plant in a rice Mill unit is approved by the lenders as 50 lacs , & if Bank fund 85% of value of the Machinery ,then Bank shall directly remit  this 50 lacs to  say the supplier XYZ , after collecting 7.5 lacs as Margin from the borrower( 42.5 lacs Bank+7.5 lacs borrower = 50 lacs).

Term Loan Interest Rate:  

Term Loan interest charged to the borrower is based on every Banks MCLR. Banks takes spread over and above of their MCLR to keep the loan product attractive for the eligible borrower.

 But MCLR regime is not applicable to the Term Loan with fixed rate of Interest for Tenor of more than 3 years.

This MCLR is banks internal benchmark rate decided upon 4 factors-

1. Marginal Cost Of Lending.
2. Negative carry on account of CRR.
3. Premium on Tenor &
4. Operating Cost.

 

However Variation of Rate of Interest on Term Loan among the lending Institutes are becoming thinner due to completion to find a suitable borrower who satisfy the Banks rate.

 More so the rate for Term Loan also depends on the strength of the borrower i.e better the Balance Sheet & security coverage lower is the rate for Term Loan.

Lenders can’t go below the MCLR but can increase /decrease the spread on case to case to basis. 

Overdraft VS Term Loan:

Term Loan has certain features:

• It has a fixed tenor

• Fixed EMI

• Amortization after fixed term

• Interest may be Floating or fixed

• Used for acquiring capital Assets

• Tenor may be from 1 to more than 20 years

• Covered by Collateral security & considered vas Secured advance

• Detailed project analysis carried out for the Term Loan.

Overdraft has the following features:

Current Account holder is allowed to withdraw more than the credit balance in the a/c.

Used for Short term requirement generally for not more than one year

Generally no EMI.

Interest Charged on the actual use of fund at the EOD on monthly product basis.

Generally not covered by any collateral security

Can be used for immediate requirement of the borrower

Approved on the basis of satisfactory conduct of the a/c & the credit profile of the a/c holder & Less Cumbersome unlike Term Loan.

Term Loan Example:

In a project suppose the entire cost comes to 100 lacs.  Out of which say 50 lacs to be invested for acquiring Plant & machinery 20 lacs for land & building. Rest 30 lacs is for operational expenses.

Bank may consider 85% of 60lacs as Term Loan for Plant & machinery & construction of Building excluding the cost of acquiring the Land say 10 lacs .

So the Loan would be in this case 85% of 60 lacs = 51 lacs . Remaining 15 & shall be the margin of the owner.

Now this Loan may be approved for say a period of 84 months payable by EMI with generally floating rate of Interest.

The calculation thus arrived as EMI= 87324/-

Total Interest = 2235225/-

Total payment = 7335225/-

How to get Term Loan Quickly:

To get Term loan quickly the borrower must demonstrate the following

1. Readiness, Merit & viability of the Project.

     2. Repayment capacity sound enough to service the debt

     3. Adequate Collateral security offered to the Bank.

     4. Satisfactory conduct of account& credential of the borrower.

     5. Execution of Documentation as desired by the Lenders at the earliest to get the Term Loan quickly.

Read also-

• How to get MSME Loan
• Dropline Overdraft Facility