Educational guide · Published October 2026 · Illustrative examples in Indian rupees
What is a term loan used for?
A term loan generally finances identifiable capital expenditure such as eligible equipment, construction or expansion, subject to the bank’s product rules. Working capital requirements should be separately identified rather than hidden in fixed-asset estimates.
Estimate the total project cost
Suppose a manufacturing unit proposes a capacity expansion (₹ lakh):
| Cost component | ₹ lakh |
|---|---|
| Plant and machinery | 60 |
| Installation and electrical work | 8 |
| Building improvements | 12 |
| Contingency | 5 |
| Total project cost | 85 |
Check estimates, taxes, implementation schedule and whether each item is eligible under the proposed loan product.
Prepare the means of finance
| Funding source | ₹ lakh |
|---|---|
| Promoter contribution | 25 |
| Proposed term loan | 60 |
| Total | 85 |
Promoter contribution is ₹25 ÷ ₹85 = 29.41% of total project cost. This is an illustration, not a mandatory margin for every scheme.
Assess commercial viability
Review technical capacity, market demand, achievable selling prices, input availability, statutory permissions, implementation risks and expected operating costs. A project can be technically feasible yet financially unviable if utilization or margins are overstated.
Check repayment capacity
Assume annual cash available for debt service is ₹18 lakh. If annual principal due is ₹10 lakh and relevant interest is ₹3 lakh, illustrative DSCR = 18 ÷ (10 + 3) = 1.38 times. The actual DSCR calculation depends on the bank’s definition and projected cash flow. Assess year-wise coverage, not just an average.
Moratorium and repayment schedule
A moratorium may postpone principal installments while interest can still accrue or fall due according to loan terms. Repayment should align with construction, commissioning, stabilization and the business cash-generation cycle. Longer tenors reduce installment pressure but can increase total interest cost.
Security, documentation and monitoring
- Verify ownership, invoices, estimates and disbursement conditions.
- Assess collateral or guarantee eligibility under applicable scheme rules.
- Monitor promoter contribution and end use of funds.
- Track installation, commissioning and performance against projections.
Frequently asked questions
Does collateral alone ensure a term-loan sanction?
No. Repayment capacity, viability, conduct and policy compliance remain important.
Can a term loan finance all project costs?
That depends on the product, eligibility, margin requirements and the bank’s assessment.
Official reference portals
For up-to-date rules and scheme details, refer to Reserve Bank of India, SIDBI and CGTMSE. These links are general reference portals, not endorsements of this article.