Artha Credit

Any SME which needs additional funds for business expansion is eligible for a business term loan.

Typically, business term loans require some form of collateral because they are longer term in nature and considered more risky than other loans which are shorter term and provided against specific receivables or equipment etc. In many cases the assets funded by the loan are used as collateral. In other cases, the lenders would require additional collateral as well depending on the risk appetite and internal guidelines of the lender.

Business loans are provided upto a certain percentage of the cost of business expansion with the understanding that the balance amount is funded by the SME itself. In most cases the maximum amount of business loan is upto 70% of the cost of the project. This gap will be calculated by the Artha loan application portal at the time of loan request submission and also assessed at the time of credit assessment of the borrower (SME).

Typically, business loans are longer term in nature with a minimum tenor being one year and the maximum being 3 to 4 years. The actual tenor approved depends on the borrower’s credit profile, the working capital cycle of the business, the industry requirements and overall health of the business.

Almost every industry whether in manufacturing or in the service industry require such loans. Any SME which requires longer term funding for one off expansion and business growth would be eligible for business loans.

Business loans help entrepreneurs raise longer term funding without divesting of their equity in their business. They are also cheaper in the long run compared to equity financing. The terms of repayment are somewhat flexible, allowing the SME to repay earlier than the maturity date albeit with some charges.

What is a business term loan?

A term loan is a medium term or long-term loan that is given for a stipulated purpose and for a specific period. These loans are offered only to businesses for capital expenditure and business expansion amongst others. They are often tailor-made to suit the financial needs of SME businesses. There are various types of term loan that businesses can choose from. They are often suited to the requirements of borrowers based on factors like - the amount of funding required by the business, the repayment capacity of the borrower and the financial health of the company in terms of cash flow and in-hand availability of cash.

Business Terms Loans are characterised by a fixed tenor, as well as a pre-determined repayment schedule. While the loan interest rate might be fixed or floating, these terms are also agreed upfront between the borrower and lender. Generally, the tenure of these loans goes up to 2-3 years, but occasionally, the mandate for these loans can extend up to 5 years. From the perspective of collateral requirement, these loans typically tend to be secured loans. The lender holds these collaterals to hedge the credit risk involved in a loan.

Why are business term loans needed?

In most cases, these loans are procured by businesses to carry out renovation or repairing of a fixed asset or any other capital outlay. They could be used to buy new machinery, improve operations. or to build a new manufacturing unit or enable product and market expansion. Sometimes business term loans are utilised to cover long-term working capital requirements of a SME.

How does business term loan work?

The borrower can request for a business term loan by submitting a loan application with information about the business expansion project and the use of the requested funds. Based on the assessment criteria of the Artha Credit platform and also the internal guidelines and risk appetite of the lenders, appropriate approvals will be granted to the borrower. SMEs can raise upto a maximum of 70% of the cost of the project.

In most cases, such loans require additional collateral and hence the lending institution will directly communicate to the SME the terms of the approval, the interest rate and the collateral requirements. All documentation for the loan will also be completed bilaterally between the borrower and the lender.

Why is business term loan helpful?

The most significant benefit of availing a business term loan is the ability to secure fund for large one-off expenditures allowing the SME the opportunity to scale and give it a competitive edge. The loan facility offers some more subtle benefits to the SME as under:

• Streamlines the cash flow of the SME and improves liquidity position during times of project expansion.
• Improves the ability of the SME to repay shorter term loans and make payments on time thus improving the credit worthiness and payment track record of the SME.
• Allows the SME to repay over a longer period of time which allows better asset liability management.

Factors on which Business Term Loan depends:

The following are the factors which are taken into consideration for invoice discounting:

• The nature of the business expansion or project outlay
• The financial requirement of the business
• The established credit standing of the SME
• The collateral offered for the loan

Basic documents required to avail Business Term Loan

Here is a list of documents required by the lender to Business Term Loan facility:

• Address Proof of business and business Owner
• Business Registration Proof and ID proof of Owner
• Sales Tax registration certificate
• Filed Sales Tax Returns for 3 years
• Income Tax ID for the business and business owner
• Six months’ bank statement for the business and the business owner
• One to three years’ Audited financial statements of the business
• Documents pertaining to any collateral being offered (if applicable)