What Is A Term Loan, And How Does It Function In India's 2026 Financial Landscape?

When it comes to running a business, having access to sufficient capital is essential for growth. However, not all companies have the necessary funds to cover capital expenditures such as equipment purchases or expansion plans. This is where a term loan can be a valuable tool for business owners.

By taking out different types of term loans, businesses receive a lump sum amount used for specific capital growth, with the flexibility to repay the loan over a fixed period via Equated Monthly Instalments (EMIs). According to the RBI’s Fair Practices Code (2025), lenders must ensure transparency in the disclosure of all-inclusive interest rates and the Annual Percentage Rate (APR).

What is a Term Loan?

The term loan refers to a specific amount of credit provided by a bank or a regulated NBFC that is repaid in regular intervals over a set duration. These typically last between one and ten years, though infrastructure-linked loans may extend further. A term loan typically involves a fixed or floating interest rate, where the latter is often benchmarked against the RBI’s Repo Rate (currently 5.25% as of December 2025).

Features & Benefits of Term Loans

• Lump Sum Disbursement: Borrowers receive the entire sanctioned amount upfront for immediate high-cost requirements.
• Predictable Repayment: Fixed EMIs allow businesses to plan monthly cash flows with precision.
• Competitive Interest Rates: Compared to credit cards, term loans offer cost-effective rates, particularly for MSMEs.
• Credit Building: Timely repayment significantly improves the business's CIBIL score, which is now updated every 15 days under new 2025 regulations.
• Tenure Flexibility: Choose a repayment period that aligns with your specific project timelines.

Different Types of Term Loans

Types of term loan structures are categorized primarily by their duration:

1. Short-Term Loan: Typically ranging from 12 to 18 months, used for immediate working capital gaps.
2. Intermediate/Medium-Term Loan: Usually running for 1 to 5 years, ideal for acquiring machinery or moderate expansion.
3. Long-Term Loan: Can extend up to 10–25 years, generally used for major capital investments like real estate.
4. Secured vs. Unsecured: Secured loans require collateral, whereas unsecured different types of term loans depend entirely on the borrower's creditworthiness.

Eligibility Criteria for Term Loans in 2025

To secure funding, businesses must typically meet the following benchmarks:

• Age: Applicant must be between 21 and 65 years old.
• Business Vintage: A stable operating history of at least two to three years is preferred.
• Credit Health: A CIBIL score of 700–750+ is ideal for accessing competitive rates
• Financial Stability: Lenders evaluate the Debt-Service Coverage Ratio (DSCR), with a preferred ratio of 1.25:1 or higher.
• Turnover: Many lenders look for a minimum annual turnover (e.g., ₹50 lakhs) to ensure repayment capacity.

Documents Required to Apply

• KYC: Aadhaar card and PAN card of all directors/partners.
• Financial Proof: Audited Balance Sheets and ITR for the last two years.
• Banking: Bank statements of the primary account for the last 12 months.
• Business Proof: GST registration or MSME/Udyam certificate.

Interest Rates & Market Trends

Interest rates are influenced by the lender's spread and the borrower's risk profile. In 2025, regulated NBFCs like Hero FinCorp offer structures starting from 19% to 30% p.a. for unsecured business facilities. Under new RBI rules, borrowers with high credit scores can often negotiate lower spreads during interest rate reset cycles.

Term Loan vs. Other Business Loans

Frequently Asked Questions

Can a startup apply for a term loan?

Yes, but most lenders require a minimum vintage of 2 years. Startups may explore the CGTMSE scheme for collateral-free options up to ₹10 crore as per the 2025 Budget updates [Source: MSME Ministry].

Are there prepayment penalties?

As a regulated NBFC, Hero FinCorp and others may charge foreclosure fees (typically 5% + GST) after a 12-month lock-in period, depending on the specific product agreement.

Disclaimer: Investment in credit products involves financial risk. The information provided here is for educational purposes only and does not constitute financial or legal advice. Interest rates, tenures, and eligibility criteria are subject to the internal policies of the lender and prevailing RBI guidelines. Please read the Key Fact Statement (KFS) and loan agreement carefully before signing. All external links provided are for reference to official regulatory bodies like the Reserve Bank of India (RBI) and CIBIL.