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

Access to structured capital is essential for businesses aiming to expand operations, upgrade infrastructure, or manage large investments. However, many businesses may not always have adequate internal funds to support capital-intensive projects. In such situations, term loans are a reliable financing option.

In India’s evolving credit ecosystem, regulatory oversight from the Reserve Bank of India has strengthened borrower protection through enhanced transparency norms, including mandatory Key Fact Statements (KFS) and clear disclosure of Annual Percentage Rates (APR). These developments have made term loans more structured and transparent for business borrowers.

What is a Term Loan?

A term loan is a fixed-amount credit facility provided by banks or regulated NBFCs, repaid over a predetermined tenure in regular instalments. These instalments usually take the form of Equated Monthly Instalments (EMIs), comprising both principal and interest components.

Term loans typically finance long-term or capital-intensive business needs, such as:

• Machinery or equipment purchases
• Infrastructure expansion
• Commercial property acquisition
• Technology upgrades
• Business diversification initiatives

Tenures typically range from one to ten years, although infrastructure or project-based loans may extend beyond this period.

Interest rates can be either fixed or floating. Floating rates are generally benchmarked to external factors, such as the RBI's policy repo rate.

Also Read: Project Finance: Definition, Types, Features & Works Stages Process

How Does a Term Loan Work?

The functioning of a term loan usually follows a structured process:

1. Loan Application

Businesses submit financial and operational details for credit assessment.

2. Credit Evaluation

Lenders assess creditworthiness using financial metrics, repayment capacity, and business stability.

3. Loan Sanction and Disbursement

Upon approval, the borrower receives the sanctioned amount, usually as a lump sum.

4. Repayment

Borrowers repay the loan through scheduled EMIs over the agreed tenure.

5. Closure or Foreclosure

The loan ends upon full repayment or early settlement, in accordance with lender guidelines.

Key Features & Benefits of Term Loans

• Lump-sum disbursement: Borrowers receive the entire sanctioned amount upfront to meet 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 categorised 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 be extended for 10–25 years and is generally used for major capital investments, such as real estate.
4. Secured vs Unsecured: Secured loans require collateral, whereas unsecured 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 require a minimum annual turnover (e.g., Rs 50 Lakh) to assess repayment capacity.

Documents Required for Term Loan Application

Businesses are typically required to submit:

Identity and KYC Documents

• PAN card
• Aadhaar card
• Business registration documents

Financial Records

• Audited financial statements
• Income Tax Returns
• Profit and loss statements

Banking Records

• Bank account statements for the previous 12 months

Business Compliance Documents

• GST registration certificate
• MSME or Udyam registration certificate (if applicable)

Interest Rates & Market Trends

Interest rates are influenced by the lender's spread and the borrower's risk profile. In 2026, Hero FinCorp offers competitive interest rates starting from 18% for term loans.

Term Loan vs. Other Business Loans

Factors That Influence Term Loan Approval

Lenders evaluate several parameters before sanctioning term loans:

• Business cash flow consistency
• Industry stability
• Existing debt obligations
• Repayment track record
• Collateral availability
• Financial projections

Strong performance across these factors increases the probability of approval and improves the flexibility of loan structuring.

Advantages and Limitations of Term Loans

Advantages

• Enables structured capital investment
• Supports long-term business expansion
• Provides a predictable repayment structure
• Helps preserve working capital

Limitations

• Long-term repayment commitments
• Interest costs increase the total borrowing expense
• Collateral requirements in secured loans
• Strict credit evaluation standards

When Should Businesses Consider a Term Loan?

Businesses may consider term loans when they need to:

• Expand production capacity
• Upgrade outdated machinery
• Enter new markets
• Invest in commercial infrastructure
• Undertake technology modernisation

Choosing the right loan structure helps businesses align repayment obligations with asset life cycles.

Risks of Poor Term Loan Planning

Improper planning while opting for term loans may result in:

• Cash flow mismatches
• Increased financial leverage
• Reduced creditworthiness
• Higher refinancing dependency

Businesses should carefully evaluate repayment feasibility before borrowing.

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.

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.

Is collateral mandatory for term loans?

Collateral is usually required for secured loans. However, unsecured term loan options may be available, depending on the borrower's creditworthiness.

How long does term loan approval take?

Approval timelines vary across lenders and depend on the completeness of documentation, credit evaluation, and internal policies.

Can term loans be used for working capital?

Term loans are primarily designed for capital expenditure. Businesses typically use working capital loans or credit lines for operational expenses.

Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.