Term Loan

A term loan is a financing product that businesses—especially small and medium enterprises—use to obtain funds for activities such as acquiring equipment, expanding operations, or strengthening working capital. These loans run for a fixed duration, often ranging from one to several years, and are repaid in scheduled installments that include both principal and interest. The interest rate may be fixed for the entire term or may fluctuate depending on market conditions. Term loans may be secured or unsecured. Secured loans require the borrower to pledge assets such as machinery, real estate, or inventory. Unsecured loans do not involve collateral but typically carry higher interest rates due to increased lender risk. Banks, NBFCs, and other financial institutions frequently offer these loan products.

Example: Consider a manufacturing unit that needs a machine costing ₹20 lakh. The business applies for a five-year term loan. After reviewing the applicant’s financial health, the bank may approve the loan using the machine itself as security. The borrower then repays the amount through monthly installments covering principal and interest. If the business has a weaker credit profile, the lender might offer an unsecured term loan instead, but at a higher interest rate.