What is a Term Loan? Features, Types & Business Benefits

When organisations need funds for their growth, asset procurement or for significant projects, a term loan can be one of the most reliable offers. The term loan offers a lump sum of funds paid back in instalments over a set tenure. It is structured, planned and predictable. While a short-term line of credit or bank overdraft is used to meet short term monetary needs, a term loan is used to fund medium to long term goals.

In this blog, we will define what a term loan is, how they work, the types of term loans, their features and their benefits for businesses. This blog intends to create awareness for entrepreneurs and SMEs to assess if a term loan is the right funding alternative for their financing needs.

What is a Term Loan?

A term loan is essentially a Business Loan. The borrower is lent a specific sum of money from a lender, and this amount is paid back through instalments over a period. The repayment will include the principal amount and interest amount and is usually in form of Equated Monthly Instalments (EMIs).

The loan amount, tenure and interest rate are all established when the offer is sanctioned. Term loans can be offered on a fixed rate of interest base (constant EMI) or on a floating rate base (EMI fluctuates with market).

Businesses use term loans for purposes such as:

1. Setting up infrastructure
2. Purchasing machinery or property
3. Expanding operations
4. Refinancing existing debt

While short-term loans meet immediate needs, term loans are better suited for capital-intensive and long-duration projects.

How Does a Term Loan Work?

The working of a term loan is straightforward but systematic. Here is a step-by-step look:

1. Application – Businesses submit details of loan amount, purpose and repayment ability.
2. Evaluation – Lenders assess credit history, financial statements and collateral (if needed).
3. Approval & Disbursement – Once approved, the loan is disbursed as a lump sum.
4. Repayment – Borrowers pay monthly EMIs, which cover both principal and interest.

Closure – At the end of tenure, the loan account is closed and collateral (if pledged) is released.

This transparent structure makes term loans easy to plan and manage.

Types of Term Loans

Term loans are categorised by duration to pay back the loan.

Short-term loan: You can repay the amount in 1 year or less. Most businesses borrow money through short-term loans to purchase urgently required items such as raw materials, small equipment or to fill a short cash lapse. A short-term loan is best for businesses that need to meet urgent needs without damaging their working capital too much.

Intermediate-term loan: It lasts from 1 to 3 years. Intermediate-term loans are suitable for compelling businesses to fund medium projects such as new machinery, product lines or day-to-day functions. The repayment period is beneficial for businesses, as it is neither too long to be burdensome nor too short to cause hardship.

Long-term loans: It has a repayment tenure of 10–15 years, depending on the lender. The company looks to take a long-term loan for major investments such as construction projects, large asset purchases or property purchases. Since these loans involve higher amounts of money, the lender may request collateral. It is usually provided at low-interest rate along with a longer repayment term.

Secured vs. Unsecured Term Loans

Term loans can also be classified as secured or unsecured. A secured term loan is backed by collateral such as property, machinery or fixed deposits. Because the lender has security, these loans usually come with larger limits and lower interest rates. On the other hand, an unsecured term loan does not require collateral. While this makes them easier to access for smaller needs, they generally carry higher interest rates.

By understanding these different options, businesses can choose a loan structure that matches both their short-term requirements and long-term growth plans.

Also Read: Can Self-Employed Get Affordable Housing Loans Easily

Key Features of Term Loans

Some common features of term loans include:

1. Fixed Loan Amount – Borrowers receive a lump sum at disbursement.
2. Defined Repayment Schedule – Loan is repaid through EMIs over a fixed tenure.
3. Interest Options – Choice of fixed or floating rates.
4. Collateral – Usually required for large loans; small amounts may be unsecured.
5. Loan Purpose – Primarily used for capital investment and expansion.
6. Tenure Flexibility – Ranges from months to over a decade.

These features make term loans one of the most structured and predictable financing options in India.

Benefits of Term Loans

For businesses, term loans offer several advantages:

1. Predictability – Fixed EMIs make budgeting easier.
2. Affordability – Generally lower interest rates compared to short-term unsecured loans.
3. Cash Flow Management – Allows repayment in manageable instalments instead of lump sums.
4. Large Funding Access – Helps finance significant projects that cannot be covered through internal reserves.
5. Credit Score Boost – Timely repayments improve the borrower’s credit profile.
6. Long-Term Growth Support – Enables businesses to invest in expansion without disturbing day-to-day liquidity.

For SMEs, start-ups, and established companies, term loans provide a reliable path to financial growth.

Eligibility Criteria for Term Loans

While criteria vary by lender, the following are common requirements:

1. Business Profile – Start-ups, SMEs, and established enterprises can apply.
2. Operational History – Most lenders prefer businesses running for at least 2–3 years.
3. Turnover – A minimum annual turnover of ₹25–50 lakh, depending on lender.
4. Credit Score – A healthy score of 650 or above increases approval chances.
5. Collateral – Required for large-value loans; small unsecured loans are available.

Eligibility is designed to ensure that borrowers have repayment capacity. For SMEs, even if turnover is modest, strong cash flow management and repayment history improve prospects.

Also Read: Mudra Loan Full Form

Documents Required for Term Loans

Applicants generally need to provide:

1. KYC Proofs – Aadhaar, PAN, Voter ID
2. Business Proof – GST registration, incorporation certificate, trade licence
3. Financial Records – Balance sheet, profit and loss statement, ITR for 2–3 years
4. Bank Statements – Typically for the past 6–12 months
5. Collateral Papers – Property or asset details (for secured loans)

Submitting accurate and updated documents helps speed up processing and boosts approval chances.

How to Apply for a Term Loan

Online Process

1. Visit the lender’s official website.
2. Fill in loan details such loan amount, tenure, purpose.
3. Upload scanned documents.
4. Submit and track status online.

Offline Process

1. Visit the bank or NBFC such as Godrej Capital’s branch.
2. Collect and complete the loan form.
3. Attach required documents.
4. Submit at the branch for verification.

Today, most lenders combine digital approvals with minimal paperwork, reducing turnaround time and making the process more convenient for businesses.

Also Read: Things to know about SME Loan Agreement

Common Terms and Conditions

Businesses should carefully review loan terms, which usually include:

1. Processing Fees – Generally 1–3% of loan amount.
2. Prepayment Rules – Some lenders levy penalties if the loan is repaid before the lock-in period.
3. Late Payment Penalties – Extra charges for missed EMIs.
4. Collateral Clauses – Mandatory for larger loans; terms vary by bank.
5. Repayment Flexibility – Choice of tenure and EMI structure in some cases.

Reading terms thoroughly ensures there are no surprises during repayment.

Term Loans vs Other Financing Options

This table shows term loans are best suited for long-term investments, while working capital and overdraft facilities address short-term liquidity needs.

Final Thoughts

A term loan still represents one of the most reliable ways for businesses in India to access growth capital. Term loans involve structured repayments, they are generally competitively priced versus other funding options, and they offer higher loan amounts. Term loans allow companies to invest in expansion, infrastructure, or asset purchases with confidence.

For SMEs or start-ups, finding the ideal financial partner is imperative. With offerings like Godrej Capital Term Loans, businesses can benefit from quick processing, flexible repayment options, and transparent terms.

Apply now for a Business Loan.

FAQs

Q.1. What is the maximum duration of a term loan?

A. It varies according to lender and purpose, but under normal circumstances, it is between 1 and 15 years. Infrastructure loans may be longer.

Q.2. Do start-ups qualify for term loans?

A. Yes, start-ups can qualify, but the lender may request a set of financial projections or collateral, due to limited business history.

Q.3. Are all term loans secured loans?

A. No. Smaller loans can be unsecured loans, but loans with higher values will most likely require collateral, in the form of property or equipment or a personal guarantee.

Q.4. Can I prepay a term loan with no penalty?

A. In most cases, partial or full prepayment can be permitted under some lenders. However, lenders may charge a small fee if you are still in the lock-in period.

Q.5. How much loan can an SME expect to receive?

A. Lenders typically provide ₹5 lakh - ₹5 crore depending on turnover, credit rating, collateral, etc.

Q.6. Are EMIs fixed for the tenure of the loan?

A. EMIs remain constant if the loan has fixed rate interest; however, with floating rates EMIs may change as per market movement.

Q.7. Do term loans improve my credit score?

A. Yes, repay your loans on time, and they will go a long way towards your credit history. Good credit history gives a much higher chance of getting approved for a loan in the future.

Q.8. How do term loans compare with business credit cards?

A. Business credit cards are ideal for small or frequently occurring expenses, while term loans are more suited for large one-time, or planned investments.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.