Introduction to term loan
Term loans are immediate, up front financing sources for local and small businesses that extend over a long time. These loans are long-term debts raised by companies that come with a schedule for payments and interests paid in installments at fixed or floating rates. However, these loans are not granted to businesses without sound financial statements and promise of creditworthiness.
Understanding Term Loans
Term loans are beneficial by virtue of their duration for repayment of loan with interest. Short-term loans wind up the principal from the borrower in under a year, but term loans provide them the time to arrange funds and pay in measured installments. Term loans are often taken at the time of purchasing fixed assets like machinery or buildings, and at the start of projects, which require total money and time to avail the returns on such investments. Term loans facilitate that.
Term loans can be allowed for one year or prolonged for 25 years. It reduces cash crunch in businesses. They are secured borrowings, and assets are often put up as security or collateral against payment to ensure that payments are being made when scheduled. These loans are preferred sources of funding for many entities as they do not dilute the management like equity or bonds or debt financing.
Highlights of Term Loans
Term loans are of three kinds: short term loans, intermediate term loans and long term loans.
Proper payments at scheduled times in installments boost the credit scores and creditworthiness of businesses.
Term loans are beneficial in terms of obtaining immediate money while beginning a new project or vying to reach an immediate goal.
However, they require rigorous approval and require proper primary security (often the new project itself) or an asset as collateral security to absolve on defaulting the payment on maturity in order to reduce the risk.
However, term loans can be paid off before schedule and carry no penalties either.
