Curious about the phrase “term loan”? If you are a business owner, a term loan might just be what you are looking for.

Term loans are a rather self-explanatory term (pun intended!) After all, what else could they be apart from a loan that is repaid over a predetermined term? Some examples of term loans available in Singapore include housing, car and education loans. Business loans are another type of popular term loan, used by business owners to cover any business-based expenses. Thanks to their fixed interest rates, straightforward terms, and large loan amounts, term loans are just about a business owner’s dream mode of financing. 

A term loan provides the lendee with a lump sum of cash upfront, which the lendee must then repay over a fixed repayment schedule over a specified period of time. Term loans are repaid in accordance with interest rates set by the lender. Business term loans are offered to business owners who require financial support in developing their business. SME owners hoping to scale up their business may choose to apply for a term loan with DBS Bank for a loan sum of S$500,000 — to be repaid over 5 years.

Outside of repayment terms, business term loans may also come with other criteria. For example, a sustainability-linked term loan may require an organisation to make commitments related to minimising environmental impact.  

There are three main types of business term loans, which are based on the duration of their respective tenures. Note that some loans, such as the DBS Business Loan and OCBC's Business First Loan, allow organisations to customise their tenures according to their preference. 

Short-term loans

Short-term loans typically have a tenure of less than a year with either monthly or weekly instalments, although certain short-term loans can run for up to 18 months as well. The principal for such loans is usually within the six-figure ballpark and they are often a go-to cash solution for firms and small businesses who wish to avoid the higher interest rates associated with revolving loans.

Intermediate-term loans

Intermediate-term loans, or medium-term loans, can run for anywhere between around one to five years, depending on the loan provider. Typically offered with a fixed maturity date and repayment terms, intermediate-term loans are often used to provide funding for current or other short-term assets. Business loan tenures in Singapore typically average around 5 years. 

Long-term loans

As the name suggests, long-term loans can be repaid over a period of up to 30 years. Similar to intermediate-term loans, these loans also come with fixed maturity dates and repayment terms. Long-term loans also give the borrower the opportunity to borrow large sums of money at relatively low interest rates. Some examples of long-term business loans include OCBC's Commercial Property Loan, which has a tenure of 5-30 years, and SME Fixed Assets Loan supported by Enterprise Singapore, which has a tenure of 15 years.

Term loans are available and utilised by just about everybody, from the graduate student taking out a loan to pay off their university tuition fees, to the business owner borrowing to fund the overseas expansion of their organisation.

The most common borrowers of business term loans are SME owners, although larger businesses are known to take up term loans as well. Such loans are typically used to fund new business ventures, equipment, or complete drawn-out mergers and acquisition processes. 

People usually take up term loans for financial support after making big ticket purchases. Housing, renovation or education loans are essential for helping people stay afloat as they navigate new life milestones and big financial commitments.

As for business owners, term loans present a low-risk way to finance new business endeavours and remain competitive in their respective markets. This can include funding the purchase of new equipment, revamping existing technology, renovation and construction, or optimising daily cashflow needs.

Pros

Fixed interest rates: Term loans are usually offered with fixed interest rates, meaning that the interest rate remains constant throughout the tenure of the loan. With fixed interest rates, you can calculate the total cost of the loan in advance and allocate funds accordingly. This is especially beneficial for businesses, where planning your finances is essential for managing your cash flow. 

Business loans available with flexible loan quantums, while uncommon, are available as well, should you wish to take up one of them. One example of this is OCBC's Revolving Term Loan, a short-term loan that allows businesses to draw down, repay and redraw funds at their convenience. 

Helps build business credit: Paying off your monthly instalments on time while under a term loan can significantly boost your organisation’s credit. A good business credit score can help secure larger loans or financing in the future, and is also a great way to optimise your cash flow.

Cons

May require collateral: Depending on the nature of your business or your lender, you may be asked to pledge a business or personal asset as a collateral. This puts the asset in question at risk, as the bank may seize the collateral should you choose to default the loan. One example of this is Standard Chartered's Business Working Capital loan, which accepts properties, cash and stand-by letters of credit as collaterals. 

Difficult to qualify for: Although qualification requirements vary with the duration of the term loan, it may still be difficult for relatively new small businesses, or businesses with a low credit score to secure a term loan of any kind. In such cases, looking for loans specifically catered to your business type may help. For instance, UOB Bank's Bizmoney loan and OCBC Bank's Business First loan are both designed to cater to startups and young business in operation for at least 6-12 months.

• Term loans feature fixed or variable interest rates, with monthly or quarterly repayments.

• They have a set maturity date, influenced by the financed asset's useful life.

• Collateral may be required for some loans, and approval involves a rigorous process to mitigate default risk.

• While there are generally no penalties for early repayment, there are exceptions. A fee may be applicable for DBS SME Banking customers who have made prepayment made within the first 2 years of their business term loan's disbursement.

• Credit score: This helps financial institutions determine if an individual or business is creditworthy, which in turn directly affects the interest rate and loan sum offered.

• Financial health: The income stability of lendees are assessed, to ensure they are able to make monthly payments if the loan is approved. For individuals, this involves analysing one's payment behaviour and bankruptcy status. For businesses, this may involve reviewing financial statements.

• Purpose of loan: Unlike personal loans, which can be utilised for any purpose, term loans are centred on a specific purpose. Whether it's a green loan for businesses that require commitment to waste reduction, or a car loan taken out by an individual that is specially meant to finance the purchase of a new vehicle, a valid reason is needed for approval of a term loan.

That's all we have for term loans. We hope this guide was useful for understanding the differences between term loans for individuals and businesses. Here at SingSaver, our goal is to make personal finance accessible and easy to understand. For more on loans, check out our guide to education loans, loans for bad credit or learn what debt consolidation loans are all about.

Learn about different types of loans available in Singapore, for both individuals and businesses. Effortlessly review loan terms across top lenders.