A term loan is a credit facility that allows you to finance your business in the short term to medium term. The bank or lending institution advances the loan to meet your business’s immediate financing needs. Term loans are usually approved for SMEs that have stable financial statements. The borrower will receive the cash from their loan and repay within a certain repayment period, either via fixed or floating interest rates.

You may use a term loan to purchase equipment or materials necessary for your business’s survival. Term loans are essential in purchasing productive assets such as machinery that will be useful in generating cash flow to repay the credit.

What Is A Term Loan? 

As you already know, a term loan is a credit facility that your lender issues to you to finance capital for your business in the short-term and interim. In short, the loan increases your business liquidity by financing operations and enabling equipment purchases.

The lender sets a repayment schedule for the loan, which comprises monthly installments. The repayment includes the principle and the rate of interest imposed on the loan.

Usually, there are two types of interest rates for term loans. The variable interest rate or floating rate declines depending on the loan’s value.

For instance, if you borrow a $30,000 term loan with a 1% interest rate for ten months, here is a simplified loan repayment schedule;

Notes: All figures in SGD. Loan amount is fixed at $30,000 with a loan tenure of 10 months. Loan interest rate is at 1%/month.

 As you can see, the rate of interest decreases depending on the principal balance. In the case of fixed interest, the interest remains the same throughout the loan tenure as shown in the table below.

Notes: All figures in SGD. Loan amount is fixed at $30,000 with a loan tenure of 10 months. Loan interest rate is at 1%/month.

Fixed interest term loans are more expensive than variable interest. Therefore, when borrowing, it’s essential to ask your lender to explain the terms of the loan.

What Are The Types Of Term Loans Available?

Depending on the duration, a term loan can run for three years to twenty years. It can also be a short-term loan that lasts for twelve months.

Short-term Loan

Banks can also offer you short-term loan facilities to enable you to finance your current operations.

Typically, these loans last less than one year, and you’ll not need to provide collateral to borrow. However, the banks will advance the loan if your business has been running for several years. Additionally, they may ask for guarantors or co-signers to back up your application. Examples of short-term loans include cash loans, spot credit, and overdraft facilities.

Short-term loans usually have higher interest rates and fees than medium and long-term options. Most of these loans have fixed rates of interest.

Despite the cost drawbacks, short-term loans are easy to apply. Most lenders in Singapore have online portals where you can submit your application in easy steps. Indeed, most allow borrowers to apply via their mobile loans.

The approval process is quick and can take less than 24 hours to have money in your business account. However, for you to qualify, you must have an active business account. For a small business, you can use the account to receive payments from debtors and pay your suppliers to maintain a positive cash flow.

Medium-term Loan

A medium-term loan lasts about three years and is typically meant to be repaid from the cash flows your business generates.

Normally, your lender will give you the asset or equipment you want to purchase as the collateral. The financing of the loan is calibrated depending on the needs of the business.

Processing fees and charges vary from one institution to another. In Singapore, most lenders charge an interest rate of less than 1% per month.

Long-term Loan

For long-term term loans, the loan can extend beyond three years. The bank will ask for the company’s collateral to secure the loan. Like the medium-term loan, your business will pay the loan from the cash flows or profits.

Who Will Need A Term Loan?

Term loans are needed by businesses to meet working capital requirements and expand operations. These loans enable you to maintain cash flow even in difficult situations. You can also use the facility to strengthen your business operations and financial stability.

Term loans can help to support your business financially and improve your cash flow. With a healthy cash flow, it will be easier to expand the company or to capture business opportunities.

Why Do Businesses Get Term Loans?

A business needs a term loan to finance short-term and long-term obligations. When borrowing a term loan, your financier will ask for the purpose, which can be:

1. To Buy Equipment And Assets

Businesses can seek a term loan to grow and increase sales. This can be done by purchasing new assets, equipment, vehicles, or machinery.

If you do not have enough cash to cater for these expenses, you can seek a term loan. Also known as asset financing, it helps you in spreading the costs and planning your cash flow, therefore, allowing your business to grow.

2. To Finance Working Capital, Including Buying Inventories

Working capital is the heart of any business; without it, it won’t run. Businesses may borrow short-term loans to finance their working capital. This includes buying stock and handling short-term expenses such as utilities and salaries.

You can also use the loan to hire more staff or move into a new office or premises. If your business has daily running expenses, this loan can be a solution that can keep your operations going. A bank overdraft and debentures are quick ways businesses can raise working capital loans.

3. To Put Up A New Building For Business Processes

If you want to expand your current business, you can seek a long-term loan payable in over ten years. Such a loan can have a variable interest rate because the repayment period is longer. In addition, the bank may ask for business assets such as land and buildings to act as collateral.

The application process for such a loan is longer because other parties, such as valuers and lawyers, are involved in the valuation of buildings and crafting the loan agreement.

4. To Restructure Existing Debts

If your business has existing loans or liabilities hindering growth, you may seek a medium to long-term loan to restructure the debt.

Usually, you’ll need to discuss with your lender on the available options. A debt restructure can dramatically reduce your repayment amount, thereby increasing your cash flow. However, it’s essential to remember that a more extended period doesn’t necessarily mean that the debt burden has been reduced.

On the contrary, it may increase due to restructuring charges. Additionally, if the old debt was running on a variable interest rate and the current on fixed, it can increase the overall cost of the loan.

Summing Up

From the discussion, it’s evident that term loans enable you to acquire financing for your business. Before borrowing, you need to define the need and develop a budget. Most banks and financial institutions may require your business’s information and financial reports before approving your loan.

This credit facility is designed to help businesses in the short term to the medium term. With proper planning, you’ll be able to utilise the funds effectively and grow your business.