Businesses of all sizes—small, medium or large—require uninterrupted cash flow to operate and expand their presence. While it may seem exciting, the business expansion phase may come with financial challenges.  

Whether you plan to grow your presence, buy new equipment or enhance your production capacity, having sufficient cash flow is important. One of the most commonly used financing options for such business needs is a term loan. But the question is—Is a term loan the right choice for your company’s expansion? Let us explore what a term loan is, its benefits, and whether it is an ideal funding option for your business.

What is a Term Loan?

Term loans are a type of business loan that lending institutions provide for a predetermined period of time. The borrower agrees to repay the loan over an agreed tenure, which might be a few months to several years, in equated monthly instalments. 

These loans are frequently used for the purchase of real estate, equipment, or other long-term capital projects, as well as other large expenses related to corporate development. Term loans are particularly common in the SME lending sector, where small and medium-sized enterprises require capital for expansion or upgradation of their business operations.

Types of Term Loans

Here are the types of term loans:-

Short-Term Loans—These loans are perfect for short-term growth ambitions or working capital needs because they typically have a one—to three-year duration. However, interest rates for short-term loans may be higher than for long-term loans.

Long-Term Loans – Repayment terms for these loans vary from three to five years, providing a balance between immediate and long-term needs. Lending in the long term is appropriate for companies who want to improve their technology or buy new equipment. It can also be utilised for major capital expenditures like large-scale operations expansion or the construction of new facilities. 

Benefits of Term Loans for Business Expansion

Organised Repayment – A term loans offers a clear repayment schedule, simplifying cash flow planning. With fixed monthly instalments, you can manage your resources efficiently without disrupting day to day business operations.

Low Interest Rates – Term loans typically offer lower interest rates compared to options, like credit cards or overdrafts, especially for longer terms, reducing overall borrowing costs.

Flexible Repayment Tenures– Term loans offer flexible repayment terms, allowing you to choose a schedule that fits your budget. Whether you need a long-term loan for substantial growth or a short-term loan for immediate needs, you can find a suitable option.

Tax Benefits – The interest paid on a term loan is tax-deductible as per Indian tax laws, which is an added advantage. This benefit can help reduce the overall tax liability for your business, making it an attractive financing option.

Is a Term Loan the Best Option for Your Business?

Here are a few factors to consider when deciding if a term loan is right for your business expansion:-

Loan Amount – If your business expansion requires a higher amount of capital, a term loan may be the ideal option. However, if the fund requirement is relatively small, other options, such as working capital loans or business lines of credit, might be more suitable.

Repayment Capacity – Before opting for a term loan, assess your business’s ability to repay the loan over the selected tenure. If you’re unsure about consistent cash flow, committing to fixed monthly payments can strain your finances.

Business Plan – A solid business plan is essential for securing a term loan, as lenders will evaluate your expansion strategy and projected revenue growth. If your business plan is strong and shows potential for growth, a term loan can be an excellent option for business expansion.

Good Credit Score – If your credit score is excellent, you can get favourable loan terms, making a term loan the best financing option for your business needs. A good credit score can help you get the best interest rates, flexible repayment tenure and ample loan amount.

Conclusion

For SMEs, a term loan can be a cost-effective funding option for growth. With structured repayment plans, flexible terms, and competitive interest rates, term loans provide the stability and cash needed for long-term expansion. However, before applying for a term loan, it’s important to check your loan eligibility, assess your repayment capacity, and, most importantly, identify your business’s needs.

New-age NBFCs like Hero FinCorp can help you get a term loan with an easy to fulfil eligibility criteria. You can borrow up to Rs 40 Lakh at attractive interest rates and flexible repayment tenure of up to 60 months.