Term loans are provided to the industrial sector by commercial banks, development financial institutions, state level financial institutions and investment institutions.
Terms loans are secured or unsecured loans obtained by the company. The company has to pay interest on these term loans. The shareholders do not lose ownership control of the company by obtaining term loans.
Term loans represent long- term debt with a maturity of more than one year. Term loan is one of the most common methods of financing by companies in India.
Feature of Term Loans
- Term Loan is normally extended for the acquisition of Land, Building and machinery, purchase of vehicles etc. and also along with working capital finance as composite loans.
- Term Loan is given both for industrial and non-industrial borrowers i.e. both for projects/activities involved in manufacture/processing/repairing and business/trading activities etc. The project needs to establish technical feasibility and economic viability.
- Term loan is extended in different forms such as all rupee loans, foreign currency loans and Deferred Payment Guarantees (DPG) / acceptance facilities (other than foreign currency loans obtained from the foreign banks or branches of Indian Banks abroad without the back-up of DPGs issued by Banks in India).
- Repayment schedule for term loans would be stipulated based upon Debt Service Coverage Ratio, cash generation and repayment capacity. Repayment would be by way of periodic instalments with an appropriate repayment holiday during the implementation of the project.
- Rate of interest on term loans depends upon various factors like nature of the project, quantum of loan, risk rating, repayment period and structure of the debt. • Securities for term loans per se would be as per general lending norms of the banks and also depends on the risk perception of the individual account.