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What are the loan tenure options available for Online Business Loan

Tenure of the loan is a crucial aspect of business loans. Every business would want a flexible tenure and ideally time the EMI repayment with the cash flow cycle. This would enable ease of repayment as the liquidity situation can be comfortably managed in case of this kind of synchronization. Fintech players extend business loans with tenures varying from 6months to 36 months. Further, lenders offer considerable flexibility to change the repayment frequency from monthly or quarterly as per the revenue model. It must be remembered that a lower tenure lowers the lending risk of the lender. However, a long tenure is suitable in case of a loan to finance capital expenditure. As per matching concept in accounting, the interest could be charged off as a business expenditure against the revenues generated from the fixed assets. However, a short term of 6-12 months is preferred in case of the working capital loan, else it is a very expensive option.

NBFCs offer unsecured business loans for meeting both short term working capital and long tenure term loans. We shall evaluate the best business loans based on the following criteria which influence the loan tenure, which are as follows:

  1. Proof of a working Business Plan: Often lenders prefer to lend to a borrower who has a long-term business plan as to utilization and repayment of the business loans. This is especially common in project finance. Thus, it is prudent to approach a financial expert and prepare a plan with forwarding estimates of the cash inflows and outflows. In case of absence of such estimates and forward-looking documents, the lender may compensate for the risk by allowing strict payment tenure. Most lenders would insist on a viable working plan before extending a business loan ranging from over 12 months to 36 months. This also reflects the sustainability of the business model.
  2. Nature of business: Certain sectors are classified as complex or seasonal, being prone to fluctuations in revenue streams. Some examples include the diamond industry, export-focused business, seasonal business-like commodities, and real estate industry.  The lender would generally include strict clauses as to the loan tenure.
  3. Creditworthiness: Ultimately, the lender is concerned with the repayment of the business loan. Thus, the credit score of the business, as well as the owner, is scrutinized to evaluate any past incident of credit risk. A high credit score of over 750 can help obtain favorable terms with flexible tenure options. Many times, lenders also extend loans with facilities that comprise a no EMI payment for select limited tenures. This is customized as per borrower business needs.
  4. Period of operations: The operating period of the business plays a major role in deciding the loan tenure. In case of a business enterprise with a track record of continuous operations and stable revenues over a long period of time, the lenders would factor in the positives and enhance the loan period. Extension of the loan period in case of a loan taken to acquire a capital asset is convenient for the borrower as it can be deducted as business expenditure in the long run against the revenues generated from the fixed asset.
  5. Turnover condition: Fintech companies generally lend to a borrower with a minimum revenue of Rs 40 lakhs. A healthy, regular revenue stream is vital to enjoying convenient tenures. A shortened tenure of fewer than 12 months is extended to high-risk borrower profiles.
  6. Economic conditions: A situation of excess money supply in the economy as decided by RBI would automatically influence the loan tenure period. The tenure would generally be favorable to the borrower in such a case. Alternatively, in case of credit tightening, the loan tenure would be more restrictive.
  7. Demand and Supply Forces: The fundamental economic forces of demand and supply play a major role in determining the loan tenure on business loans. In case of heavy demand for credit and extensive borrowing by Government enterprises as well, the loan tenure might be inconvenient to the borrower. However, the business can go in for another loan after settling the existing business loan.

Loan tenure is an important consideration for a small business. This is because a small unit has limited cash flows and the interest servicing capability is largely dependent on the loan period. A loan stretched out over a long period would invariably involve lower EMI amounts as repayment and is most suitable in case of funding capital expenditure.

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