The whole skill in a term loan is choosing the tenure. Too short and the EMI strangles the cash flow the project was meant to improve; too long and you are still paying for something you replaced two years ago.
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A term loan is simple: one amount, one schedule, one end date. Almost every way it goes wrong comes down to a single decision — how long to take it for. Too short strangles the cash flow the project was supposed to create; too long leaves you paying for equipment you have already replaced.
Spending that happens once and pays back over years: a second outlet, a plant expansion, a fit-out, a vehicle, a large one-time order that needs funding up front.
What it is not for is a recurring cycle. If the same need returns every quarter, a term loan leaves you paying interest for years on money you only needed for weeks — and stacking a new loan each cycle until four EMIs are running at once. That is what a working capital limit exists to solve.
Two rules, and they pull against each other.
Rule one: never run the loan past the working life of what it bought. A seven-year loan on a machine that will be obsolete in four means three years of paying for something you have already replaced — while also paying for its replacement.
Rule two: the EMI must be serviceable in a bad quarter, not an average one. Shortening the tenure to save interest is a false economy if the resulting instalment consumes the working capital the business runs on. A term loan that forces you to draw down the overdraft every month has not saved you anything.
Where the two rules conflict — the asset lasts four years but a four-year EMI is too heavy — the honest conclusion is usually that the purchase is too large for the business right now, not that the tenure should be stretched. Use the EMI calculator to see both the instalment and the total interest at each tenure before deciding.
A moratorium is an initial period — commonly three to twelve months — during which you pay interest only, or in some structures nothing at all, before principal repayment begins.
It exists for a good reason. A new plant does not produce revenue on the day the loan is disbursed. There is installation, commissioning, hiring, a ramp-up. Starting full EMIs immediately means servicing the loan out of the existing business while the new one is still consuming cash — which is exactly when projects fail.
Ask for it, and match it to your genuine ramp-up. Be aware of the cost: interest usually continues to accrue during the moratorium, so the total repaid rises. That is normally a price worth paying for surviving the first year.
Check the foreclosure terms before you sign, not later
A term loan taken today may be worth refinancing in two years — after a better ITR, an improved CMR, or a fall in rates. Whether that is possible is decided now, by the foreclosure clause. A 4% charge with an eighteen-month lock-in can wipe out the entire benefit of refinancing. It costs nothing to negotiate this at sanction stage, when the lender wants your business, and it cannot be negotiated afterwards.
Term loans run both ways. Unsecured is faster and available up to around ₹2 crore for strong files, at unsecured pricing. Secured — against property, or against the asset being financed — is cheaper, larger and longer.
Where the loan is buying an identifiable asset, financing it as equipment finance is usually better than a plain unsecured term loan: the asset itself becomes the security, so the rate falls without anything additional being pledged.
Q1. What is the difference between a term loan and working capital finance?
A term loan is a fixed sum for a one-off purpose, repaid on a schedule with a defined end. Working capital finance funds the recurring operating cycle and usually revolves, with interest only on what is drawn. Using one for the other's purpose is the most expensive common mistake in business borrowing.
Q2. What tenure should I choose?
No longer than the working life of what you are financing, and no shorter than your cash flow can comfortably service in a weak quarter. Where those two conflict, the purchase is probably too large for the business at present.
Q3. Can I get a moratorium?
Frequently, especially for expansion or new plant, typically three to twelve months. Interest usually continues to accrue during it, so the total cost rises — generally a worthwhile trade when the project needs time to generate revenue.
Q4. Is prepayment allowed?
Usually, subject to a foreclosure charge of roughly 2% to 5% of the outstanding and sometimes a lock-in period. Since early instalments are mostly interest, prepaying early saves considerably more than prepaying late — check the charge against the interest saved before deciding.
Q5. What is the maximum term loan for a business?
Up to about ₹2 crore unsecured for a strong file. Secured against property there is no practical ceiling short of what the security and the cash flow support — the property valuation and your serviceability set the limit rather than any product cap.
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