What are Term Loans?
There are two kinds of loans, short term loan and long term loan. Generally loans that are repayable within 12 months are classified as short term. Loans that are repayable in tenor beyond 12 months are classified as long term loans.
Term loans are common in both personal and commercial segments. However, the difference is that in personal segment, the present incomes decides the repayment and corresponding loan quantum. Whereas in commercial loans, the future income potential of the asset(s) decides the repayment and corresponding loan quantum.
Term Loans for Business
A term loan in business segment creates long term assets like building and plant and machinery. This may aid in the process of manufacturing or helps the business.
The requirement for capital assets is different for different businesses. For example, a phone manufacturer will have significant requirement for building and plant and machinery. Conversely, a retail trader of phones may have a smaller requirement. The requirement for building and plant and machinery also varies as per the size of the business. Usually, the bigger the business the more the requirement.
Uses of Term Loans
A term loan aids the purchase of these long term assets. A depreciation is charged every year. This is as an allowance for wear and tear of the asset used in the business sales. Generally business term loans are provided for a tenor of up to five or seven years based on the income generating potential of the asset being acquired. There may be significant deviations between the future potential of the project as assessed by the bank and as projected by the promoters as banks prefer a cautious approach thereby limiting the quantum of finance available for the project.
Interest Rates for Term Loans
Term loans for commercial projects carry differential rate of interest based on the tenor of the project and the rate of interest may be fixed or floating. By computing the debt service coverage ratio (DSCR) and security margin coverage, we arrive at the eligibility for the term loan for commercial projects. Arrival at acceptable cash flows for the tenor of the loan calculates these ratios.
While DSCR ratio indicates the repayment capacity of the unit vis a vis the profitability and cash flows and the security margin coverage ratio indicates the available security against the loan balance outstanding at each stage of the loan tenor. The bank may reduce the scope of the project or insists for more margin from the promoters in case it differs on the profitability prospects of the project.
To check your eligibility for term loans, please feel free to contact us for more information. As the Best Licensed Moneylender Singapore, we will be able to provide you with sound advice. Or you may pay us a visit.