Executive Summary
- Term loans finance fixed assets — land, building, plant and machinery — not operations
- Typical tenure runs 5–10 years, repaid through structured EMIs
- A moratorium period at the start often covers construction or commissioning time
- EMI is calculated on a reducing balance basis, not the original principal
What a Term Loan Finances
A term loan finances capital expenditure — land purchase, building construction, plant and machinery acquisition, or vehicle purchase for business use — assets with a multi-year useful life that generate returns over an extended period. This distinguishes it fundamentally from working capital financing, which funds short-term operational needs that turn over continuously rather than depreciating slowly.
Tenure and Repayment Structure
Typical MSME term loan tenure runs 5 to 10 years, depending on asset type and project economics — machinery loans often sit at the shorter end, while land and building finance can extend longer given the asset's longer useful life. Repayment is structured as Equated Monthly Instalments, though some banks offer Equated Quarterly Instalments for businesses with seasonal cash flow patterns.
Understanding the Moratorium Period
A moratorium is a grace period at the start of the loan during which only interest is paid, with no principal repayment obligation — typically 6 to 24 months for projects that need time to construct, commission, and ramp up to revenue-generating capacity. This is genuinely important for greenfield projects, where forcing full EMI from day one, before the project generates any revenue, would create unnecessary cash flow stress.
How EMI Is Actually Calculated
EMI under the standard Reducing Balance method is calculated on the outstanding principal each month — not the original loan amount — meaning interest cost decreases as principal reduces over the tenure, even though the EMI amount itself typically stays constant. Understanding this matters when comparing loan offers or evaluating prepayment benefit, since early prepayment on a reducing-balance loan saves more interest than the same prepayment later in the tenure.
What Bankers Expect to See
For a term loan proposal, bankers expect a clear means of finance statement, DSCR projections demonstrating repayment capacity across the full tenure (not just the first year), and machinery or construction cost quotations supporting the requested amount. See our DPR and CMA guide for the complete document standard a term loan proposal needs to meet.