Term Loan Explained: What It Is and How It Helps Your Business

Among the various types of business financing options, term loans are one of the most popular loan options for businesses. They are simple, structured, and suitable for both small and large businesses.

In this blog, we’ll explain what is a term loan, and how it works.

What is a Term Loan?

A term loan is a type of loan that is given for a fixed period and is paid back in regular instalments over time. The repayment duration could be short-term, a few months, medium-term that is 3 years, or long-term, that is more than 3 years.

The loan comes with a fixed or floating interest rate, depending on the agreement. Businesses usually use this type of loan to fund capital expenses like purchasing new equipment, expanding operations, or starting a new project.

If you’re wondering what a business term loan is, it’s simply a term loan taken specifically for business needs, usually secured against assets or cash flow.

What is Term Lending

Now that we know what is a term loan, let’s look at what is term lending.

Term lending is the process by which lenders provide funds to businesses or individuals with a set repayment schedule. The key feature here is that the repayment is structured either monthly, quarterly, or annually, depending on the loan agreement.

In India, term lending is a go-to option for Micro, Small, and Medium Enterprises (MSMEs) and startups that need funding but want to repay it in a disciplined, time-bound manner. Unlike overdrafts or revolving credit, a term loan provides a lump sum upfront, which is then repaid over the agreed term.

Common Types of Term Loans for Businesses

There are different types of term loans based on tenure and repayment terms. Here are the main types:

1. Short-Term Loans

• Duration: Up to 12 months
• Use: For immediate needs like working capital, buying raw materials, or clearing vendor dues
• Ideal for: Small businesses or startups with urgent cash needs

2. Medium-Term Loans

• Duration: 1 to 3 years
• Use: Upgrading machinery, improving infrastructure, or hiring staff
• Ideal for: Growing businesses looking to invest without long-term debt

3. Long-Term Loans

• Duration: 3 to 10+ years
• Use: Buying property, constructing a factory, or entering new markets
• Ideal for: Established businesses planning major expansions

Each type has its pros and cons, but all follow a common principle: you get a fixed amount, use it for your business, and repay it over time.

Why Do Indian Businesses Choose Term Loans?

If you're a business owner, you might wonder: Why go for a term loan? Here are the key reasons:

Predictable Repayments

Since the loan is repaid in fixed instalments, it helps businesses plan their finances better without surprises.

Larger Loan Amounts

Term loans usually allow for higher loan amounts compared to other financing options, making them perfect for capital-intensive needs.

Structured Growth

When businesses have clarity on repayments and timelines, they can focus on growth and expansion without stress.

Suitable for All Business Sizes

From small shops to manufacturing units, a term loan can be tailored for various business needs and stages.

Real-World Example: How a Term Loan Works

Let’s say you own a small garment manufacturing unit in Ludhiana. You want to expand your operations by buying new sewing machines and renting a bigger warehouse.

Here’s how a term loan would work:

• You apply for a ₹10 lakh business term loan
• The lender approves the loan for 5 years at 12% interest
• You receive the full ₹10 lakh upfront
• You repay the loan in monthly EMIs over 5 years
• By the end of the term, your loan is fully repaid, and your business has grown

Final Thoughts: Is a Term Loan Right for Your Business?

Whether you're a new entrepreneur or running a growing business, understanding what is term lending and how a term loan works can help you make smart financing decisions.

Before taking a term loan, always assess your repayment capacity, choose the right loan tenure, and use the funds wisely. This way, your business can grow without financial strain.