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How To Pick The Right Financing Term For A Business Loan

mahindra-finance-author

by Mahindra Finance

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April 10, 2024

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4 mins read

Starting or expanding a business requires financial support, and securing a business loan is often the best option. However, choosing the ideal business loan term can be challenging for small business owners. In this article, you will find ways to select the right financing term that aligns with your business needs.

1. Understanding business loan terms

Business loans are designed to help entrepreneurs start or grow their businesses by providing essential funding. The loan terms, also known as repayment periods, determine for how long you have to repay the loan with accrued interest.

  • Short-term business loans: A short-term business loan has a repayment period of up to one year and is typically used for immediate capital needs.
  • Medium-term business loans: With repayment periods ranging from one to five years, these loans are suitable for larger budget requirements such as buying machinery or increasing working capital.
  • Long-term business loans: Unlike short-term business loans repayment of long-term business loans can extend from five to 30 years, making them ideal for significant investments like purchasing commercial properties or expanding operations.

2. Factors to consider when choosing a business loan term

When assessing different financing options, it's important to consider various factors that can impact your financial stability and growth potential.

a. Interest rates:

While business loan interest rates are crucial, they shouldn't be the sole determining factor when selecting a loan term.

b. Business assessment:

Before finalising a loan term, thoroughly evaluate your business and understand how lenders assess your creditworthiness. Consider factors such as your debt-to-equity ratio and credit score.

Consider your future business requirements while choosing a loan term. Anticipate the resources your company may need in the coming months or years to ensure that the loan aligns with your future goals.

c. Cash flow:

Maintaining a healthy cash flow is crucial for any business. When selecting a loan term, it's important to analyse your cash inflows and outflows to ensure you meet repayment obligations without negatively impacting your operations.

d. CIBIL score:

Your CIBIL score is important in determining the likelihood of obtaining a loan with favourable terms. Lenders use this credit score to assess your creditworthiness before approving any loan application.

To improve your chances of securing an optimal loan term and interest rate, try to maintain a good CIBIL score. Paying off debts, loans, and credit card bills on time can help establish a positive repayment history and ensure a strong credit profile.

3. Choosing the right loan term for different business needs

The optimal loan term for your business depends on various factors such as industry, growth projections, and the purpose of the loan. Also, take the help of a business term loan EMI calculator before you take a loan. Here are some scenarios where specific loan terms work best:

a. Short-term loans:

Short-term loans are ideal for businesses with immediate funding needs that can be quickly repaid. 

b. Medium-term loans:

Medium-term loans are suitable for businesses that require funding for asset purchases or equipment upgrades that have a longer lifespan.

c. Long-term loans:

Long-term loans are beneficial for businesses making significant investments with extended payback periods.

Conclusion

Choosing the right financing term for a business loan is crucial to ensure financial stability and growth. Consider factors such as interest rates, business assessment, cash flow, and your CIBIL score when making a decision. Evaluate your business needs carefully, and if you need assistance while selecting the right loan term, Mahindra Finance is here to help you choose the right business loan term. When it comes to selecting the right financing term for your business loan, whether it is a short-term business loan or a long-term business loan, they can guide you towards the optimal solution for your business's success.

FAQs

Q: How do I calculate my monthly EMIs for a business loan?

A: You can use a business term loan EMI calculator to determine your monthly instalment amount based on the loan amount, interest rate, and repayment period.

Q: What is the average business loan term in India?

A: The average business loan term in India varies depending on factors such as the type of loan, lender policies, and borrower requirements. It can range from one year for short-term loans to up to thirty years for long-term loans.

Q: Should I opt for a short-term or long-term business loan?

A: The choice between short-term and long-term loans depends on your specific business needs. Short-term loans are ideal for immediate capital requirements with quick repayment capabilities, while long-term loans are more suitable for significant investments with extended payback periods.

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