Term loan

A term loan is the most familiar form of institutional debt: a bank or NBFC disburses a fixed amount upfront, and the borrower repays principal plus interest in scheduled instalments (EMIs) over an agreed tenure — commonly one to seven years for business purposes, though infrastructure and manufacturing loans can extend longer.

For a startup founder, a term loan answers a specific capital need — purchasing servers, fitting out an office, funding a manufacturing run — rather than covering day-to-day cash shortfalls. Because the end-use is defined and the repayment schedule is predictable, it is easier to model the impact on runway and unit economics than with revolving credit products.

In India, term loans flow through public-sector banks, private banks, and RBI-registered NBFCs. SIDBI offers specialised term-loan products for MSMEs and DPIIT-recognised startups, sometimes at concessional rates linked to government schemes. Lenders underwrite based on projected cash flows, promoter background, and — depending on the ticket size — collateral. Smaller tickets under guarantee schemes can be collateral-free.

The key trade-off is predictability versus flexibility. Monthly EMIs are non-negotiable regardless of revenue performance, so founders must stress-test whether worst-case revenue scenarios still service the debt. Prepayment is usually allowed but may attract a fee. Understanding the effective cost of capital (factoring processing fees and the reducing-balance method) is essential when comparing competing offers.