What Is a Term Loan?

Ashwika Goswami

Ashwika Goswami

Last updated 02 May, 2024

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 pre-specified term? The catch here is that term loans are usually provided to and taken up by business owners, with the intention to cover any business-based expenses. In fact, with their fixed interest rates, straightforward terms, and large loan amounts, term loans are just about a business owner’s dream mode of financing. 

Table of contents:


What is a term loan?

A term loan refers to a singular amount of money provided upfront that follows a fixed repayment schedule over a specified period of time. Term loans are repaid in accordance with interest rates set by the lender, and are usually offered to business owners who require financial support in developing their business. 

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How does a term loan work?

Similar to home mortgages, term loans can be provided with fixed or floating interest rates as well. The monthly repayments are then calculated based on the loan amount and interest rate, and are repaid over the duration of the tenure.

Assuming that a business owner takes up the OCBC Business Term Loan and borrows S$500,000 for a period of five years at a 7% interest rate per annum, he would have to pay back monthly instalments of S$3,960.24.

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What are the different types of term loans?

There are three main types of business term loans, which are based on the duration of their respective tenures.

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 thousands of dollars and they are often a go-to cash solution for firms and small businesses that do not meet the requirements for a line of credit. 

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. Monthly instalment from a company’s cash flow is the most common method of payment as well.

Long-term loans

As the name suggests, long-term loans can be repaid over a period of up to 25 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 a relatively low interest rate. However,  Borrowers of long-term loans can expect to be  required to pledge a collateral and make monthly or quarterly repayments. 

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Who usually gets term loans?

The most common borrowers of term loans are small business owners, although larger businesses are known to take up term loans as well. Term loans are typically used to fund new business ventures or to acquire more resources.

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Why do people or businesses get term loans?

The predictable schedule of repayment makes term loans a popular financing choice among business owners. These term loans are often used to fund new business endeavours and remain competitive in their respective markets. Such endeavours could include hiring new manpower, launching new promotions and products, consolidating debt, revamping existing technology, funding research, and more.

Even Google, in its early days, was financed by a term loan that helped its founders purchase a garage to work in 

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Pros and cons of term loans:

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 in a lucrative field such as  business, where planning your finances is an essential task. 

Term loans available with floating interest rates, while uncommon, are available as well, should you wish to take up one of them.

Helps build business credit: Paying off your monthly instalments on time while under a term loan can significantly boost your business’ 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.

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 actually secure a term loan of any kind. In such cases, providing a collateral or reports of consistent profitability may help.

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Are there any risks involved in term loans?

Term loans are, for the most part, relatively risk-free. An article by Business News Daily even claims that ‘term loans are among the most trustworthy financing options available.’ However, the few risks you may encounter include getting your collateral seized (if you are required to pledge one) or, in rare cases, receiving a prepayment penalty should you pay off your loan early.

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How do I apply for a term loan?

Before applying for a term loan, it is important to consider whether you want a secured or unsecured loan, and whether you would prefer fixed or floating interest rates. You may also wish to consider checking if you meet the eligibility criteria of your preferred term loan.

Common eligibility requirements across most banks in Singapore include:

  • A minimum annual income of at least S$20,000
  • At least 30% local shareholding
  • Age 21 to65
  • Singapore Citizens or Singapore Permanent Residents

After that, the application process is fairly simple. Banks, online lenders, and even certain fintech companies provide term loans. You may choose to apply online or in person at the branch of your chosen lender. Most banks in Singapore offer a quick and hassle-free online application process provided that you apply for your term loan with MyInfo, MyInfo Business, or Corp Pass.

Documentation required when applying may include:

  • Past bank statements
  • Entity’s past profit and loss statements and balance sheets
  • Credit history of all directors
  • Latest Notice of Assessments of all directors

Do take note that the process of actually receiving your loan may take anywhere between a few hours to several days.

Best Personal Loan With Low-Interest Rates (S$30,000 Loan on a 3-year tenure)

Personal loan

Flat Annual Interest Rate (p.a.)

Effective Interest Rate (p.a.)

Processing Fees

Estimated Monthly Payment

HSBC Personal Loan

2.92%

5.50%

S$0

S$920.00

SCB CashOne Personal Loan

2.88%

5.84%

S$0

S$905.33

CIMB Personal loan

2.80%

5.28%

S$0

S$904.00

UOB Personal Loan

2.88%

5.43%

S$0

S$905.33

DBS/POSB Personal Loan

2.68%

5.43%

1% (S$300)

S$905.33

Citi Quick Cash Loan

3.45%

6.5%

S$0

S$919.47

OCBC Extra Cash Loan

5.43%

11.47%

S$100

S$1,145.71

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Frequently Asked Questions (FAQs)

Q: What are the three main types of term loans?

The 3 main types or term loans are short-term, intermediate-term, and long-term loans. The key difference among these loans is their tenurewith each term having a typical maximum tenure of 1.5 years, 3 years, and 25 years respectively.

Q: What is the difference between a bank loan and a term loan?

A business term loan is a specific kind of bank loan that follows a fixed repayment schedule and is usually offered to businesses of any kind. 

Other types of bank loans include mortgages, personal loans, and revolving lines of credit. Mortgages and term loans also follow a fixed repayment schedule and help finances property purchases and personal endeavours respectively. Revolving lines of credit operate slightly differently and instead provide the borrower with a specified credit limit. The available credit replenishes as the borrowed amount is repaid.

Q: Who is eligible for a term loan?

Term loans are usually made available to business owners. As mentioned previously, commonly seen eligibility criteria include:

  • A minimum annual income of at least S$20,000
  • At least 30% local shareholding
  • Age 21-65
  • Singapore Citizens or Singapore Permanent Residents

Read these next:

What Is A Short Term Loan And Where To Get One

Best Short-Term Personal Loans in Singapore

How to Calculate Loan Repayments

How Much Loan Can I Get from a Bank in Singapore?

How to Calculate Loan Interest Rates

FINANCIAL TIP:

Use a personal loan to consolidate your outstanding debt at a lower interest rate!

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