Small business startup loans are usually given in the form of term loans. Term loans, also referred to as term finance, represent a source of debt finance which is generally repayable in more than one year but less than 10 years. They are employed to finance acquisition of fixed assets and working capital margins. Term loans differ from short-term bank loans, which are employed to finance short-term working capital needs and tend to be self-liquidating over a period of time, usually less than one year.
Term loans typically represent secured borrowing. Usually assets, which are financed with the proceeds of the term loan, provide the prime security. Other assets of the firm may serve as collateral security. All loans provided by financial institutions, along with interest, liquidated damages, commitment charges, and expenses, are secured by the way of equitable mortgage of all immovable properties of the borrower, both present and future. This is followed by hypothecation of all movable properties of the borrower, both present and future, subject to prior charges in favor of commercial banks for obtaining working capital advance in the normal course of business.
The interest on term loans is a statutory obligation that is payable irrespective of the financial situation of the firm. To the general category of borrowers, financial institutions presently charge an interest rate of around 10-14 per cent. Of late, financial institutions are imposing a penalty for defaults. In face of default of payment of installments of principal and/or interest, the borrower is liable to pay by way of liquidated damages additional interest calculated at the rate of 1-2 percent per annum for the period of default on the amount of principal and/or interest in default. Typically, term loans provided by financial institutions are repayable in equal semi-annual installments. It may be noted that the interest burden declines over time, whereas the principal repayment remains constant.
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