What Is The Length Of Average Business Loan Terms?

A loan is considered an important ingredient for running a business. This is true even if one has the option to totally self-finance one’s venture or to induct an external shareholder and thereby does not necessarily need to borrow.

A loan can be taken for various reasons such as creating a business credit history and indeed to improve it. It can also be availed to take advantage of the tax-deductible nature of the interest component of a business loan, or to take advantage of special loan schemes that come with low interest rates to finance operations and so on and so forth.

These loans can be for various purposes. It can be availed with a short-term objective of meeting working capital needs for paying to some vendor or for paying lease rent on the office premises or the factory or even to pay salaries to employees in the case of delayed customer payments.

On the other hand, a business may also avail a long-term loan for a larger business expansion. This could be for purchasing or building a factory, setting up multiple centers or buying an expensive machinery and even acquiring another company to expand and so on.

Lenders offer different types of loans for various business objectives and use cases. This does not just impact the interest rate they charge and the process for availing them but also the tenure of the business loan.

Types Of Business Loan

1. Unsecured:

This is the more common form of a business loan that is availed by micro, small and medium-sized businesses. It does not entail any security or collateral. As a result, lenders tend to put a ceiling on the amount of loan one can avail and also the duration of the loan.
In general, lenders give up to Rs 50 lakh in an unsecured business loan though this can vary. The amount can be much smaller for meeting the needs of a micro-sized enterprise. These loans are advanced by looking at the cash flows and income of the enterprise but equally importantly, on the credit history and thereby credit score of the business owner.
Lenders, in effect, look at the credit behaviour of the entrepreneur to see how he or she may behave with respect to the loan taken for the business too.

2. Secured:

This is another type of loan that is availed by businesses of all sizes. Large firms almost always take such loans where some of the asset or the shares held by the promoters are pledged. Even small and medium-sized companies take secured loans if they have certain assets that can be pledged.
More often than not, these loans involve pledging ownership of a property on which the firm has its office or its manufacturing plant. The size of these loans can be much higher than what one can avail through an unsecured loan.

Average Tenure Of Business Loans

As stated previously, the length and terms of a business loan depends on the type and the size of the loan.

Usually, an unsecured business loan can be availed for up to five years. This is the maximum repayment period for collateral-free business loans. The upper limit of the tenure is utilised by enterprises when they take a large sum, say Rs 30-50 lakh.

However, mostly, these loans are taken for a tenure of two-three years. Since majority of businesses in the country are micro and small in size and such firms usually have not scaled up enough to create a surplus and have an asset worth pledging for a collateral-backed loan, they avail unsecured business loans. More often than not, these loans are in the range of Rs 5-20 lakh and depending on the cash flows, the entrepreneur would like to pay it off quickly to incur lower interest outgo.

Secured business loans, in contrast, are usually taken for a longer period. Typically, the quantum is also higher. For large corporations, these loans can be in hundreds and indeed thousands of crores.

A secured SME loan is usually availed for a period of around two-three years even as a small business can repay such a loan over a ten-year period. There are also specialised business loans that are offered with a fixed tenure of up to one-two years.

Conclusion

Business loans can come in various shapes and sizes and accordingly have different repayment tenures or tenors. In general, unsecured business loans that do not require any collateral and have a ceiling of around Rs 50 lakh for the maximum one can borrow is to be repaid within five years. In contrast, secured business loans, whose size could run into crores based on the value of the asset being pledged, need to be repaid within 10 years. However, typical unsecured loans are availed for two-three years and a term loan is availed for five-seven years.

IIFL Finance has a suite of debt products, with competitive interest rates for businesses of all sizes. It offers unsecured loans of up to Rs 30 lakh with tenor of up to five years while it offers secured business loans of up to Rs 10 crore that can be paid back within 10 years.