One of the biggest challenge facing bank borrowers is understanding what credit structure they or their business requires from the bank. Some banks are also guilty of wrongly structured credits. This article is the second and concluding part of our attempt to explain and differentiate between a Term Loan and an Overdraft, when you need them and why it is the best for your business at a period of time.
What are Term Loans
A Term Loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. Wikipedia
A Term loan from a bank for a specific amount that has a specified scheduled repayment which can either be equated or non equated installments. Repayment can be monthly, quarterly, biannual, annual or as may be structured to fit into the cash flow of the repayment source.
Term Loans can either be secured or unsecured, if secured it comes with lower interest rates otherwise the interest rate will be higher. A secured term loan goes through a rigorous loan appraisal process when compared with unsecured loan types. Term Loans can be granted to both individuals and corporate organization.
Type of Term Loans:
- Individuals (Consumer Loan): Personal Loan, Asset Acquisition Loan, Auto Loan and Home Loan/Mortgage Finance, Home Equity Refinance and so on.
- Corporate organizations: Equipment Finance, Operational Vehicle Finance, Commercial Mortgage, Project Finance, Asset Finance and so on
Why And When You Need A Term Loan?
• You need a TL because you are investing in activities with a long time gestation period.
• You also need a TL because your cash flow from daily activities may be distorted if you utilize your working capital or you pull out funds from you cash flow.
• You will need a TL if the payback period for the investment you are venturing into is longer then 1 year and you can only afford to pay rental from your margins every month, quarter or as may be convenient for you.
• You will also need TL if want to invest in capital expenditure and you want to buy a new equipment or machinery,
• You need TL to buy a new property of renovate existing one and You need to buy new vehicles for your business use.
• You need TL because you cannot afford all the fund/cash needed to finance the purchase of an item or equipment or machinery but you have a steady flow of income that can pay back over a period of time.
• You need a Term Loan because you are establishing a new production line that requires funds to be tied down for a long period of time while production is going on.
• You need a TL if you are starting up a new business and you require huge funds as start ups
• As a salary earner you need a Term Loan to buy your dream home, to buy you new car or your choice electronics and pay in installments over a period of time.
• Term Loans are needed when the application of the funds is for business activities that will not produce immediate return on the investment.
Generally Term Loans are used to finance business capital expenditures and not cash flow or working capital.