How to Calculate the Ideal Loan Tenure for Your Business Loan

Calculating an ideal Business Loan tenure involves understanding the impact of loan tenure, accounting for certain factors like the purpose of the loan and its tax implications and then deciding what works best for you. This blog goes through the basics of tenures in India and the considerations for calculating an ideal tenure that aligns with your requirements. Read on!

Understanding Business Loan Tenures

Business Loan tenures in India typically range from 12 months to 10 years, depending on the lender and loan type. The tenure options available for your business will depend on factors such as loan amount, your credit profile, and the lender’s policies. But these tenures are further divided into minimum and maximum tenure options:

Minimum Tenure: Usually ranges between 6 and 12 months. This is suitable for businesses with strong cash flows that prefer to minimise interest costs.

Maximum Tenure: Can extend up to 10 years for larger loan amounts, especially for term loans that are used for business expansion or equipment purchase. The longer tenures are beneficial for businesses that need to preserve working capital for operations.

Also Read: How to Use Your First Business Loan Effectively?

Factors That Determine Loan Tenure for Business Loans

Understanding these factors helps you determine what sort of tenure would be best for your business requirements without compromising your repayment capacity or daily operations. Let’s take a look at what you need to know and understand before choosing a tenure:

Lender Policies

Each financial institution has its internal policies and risk assessment frameworks that influence the maximum and minimum loan tenures they offer, based on the business profile and loan type. Speak with your lender in detail to first understand what flexibility can be given to you.

Cash Flow Pattern

Your business’s monthly cash flow is the greatest factor that determines appropriate tenure. Review your average monthly revenues, expenditures, and net cash flow to establish how much

you can afford to spend on loan repayment without disrupting operations. Remember to prioritise your working capital requirements; risking a loan default while running low on operational funds is a situation you must avoid.

Business Cycle

Consider your business’ seasonal variations and cyclical patterns. If your business experiences fluctuating cash flows, a longer tenure with lower EMIs might provide necessary breathing room during lean periods.

Purpose of the Loan

Working capital loans typically have shorter tenures, while expansion or equipment financing loans can have longer repayment periods. The loan’s purpose should align with the asset’s useful life or revenue generation period.

Interest Rate Structure

Fixed interest rates make tenure planning easier, as EMIs remain constant throughout the loan term. Variable rates may influence your tenure choice based on interest rate projections and your risk tolerance.

Tax Implications

Longer tenures mean extended periods of interest deduction benefits under Section 36(1)(iii) of the Income Tax Act. However, the total interest outgo increases, so evaluate the net tax benefit carefully.

Future Growth Plans

If you anticipate significant revenue growth, you might opt for a shorter tenure to reduce total interest costs. Conversely, if growth will require substantial reinvestment, opt for a longer tenure to preserve capital.

Also Read: What is Permanent Working Capital?

How to Calculate Ideal Loan Tenure for Business Loans

Now that you have an understanding of the things to keep in mind, here are some steps to help you figure out a loan tenure:

● Determine Optimal EMI Amount: Based on your cash flow analysis, decide the maximum monthly amount you can allocate towards loan repayment while maintaining operational liquidity.

● Finalise Other Aspects: Decide upon the loan amount you want to borrow, keeping in mind what your ideal EMI amount would be. ● Use an Online EMI Calculator: Manually adjust the figures of the EMI calculator to discover the various potential situations of repayment. Note down the tenure you have to input to arrive at your desired monthly EMI amount and see if it works well for you.

● Compare Total Cost Scenarios: Calculate the total interest payable for different tenure options. While longer tenures reduce EMI burden, they significantly increase the total cost of borrowing.

● Factor in Prepayment Options: Consider your ability to make prepayments during the loan tenure. If you anticipate surplus cash flows, you might choose a longer tenure for flexibility while planning partial prepayments to reduce interest burden.

● Evaluate Break-even Timeline: For business expansion loans, ensure the tenure doesn’t extend too far beyond the expected payback period of your investment. This maintains a balance between cash generation and loan repayment.

If the process seems too daunting or if you are left unsure, it’s advisable to seek financial counsel and to prepare a plan before you make any commitments.

Also Read: Business Loan vs. Business Line of Credit: Which One Should You Choose?

To Conclude

Calculating the ideal loan tenure means balancing immediate cash flow needs with long-term financial efficiency. The shorter tenures minimise interest costs, but on the other hand, longer tenures provide operational flexibility during uncertain times. The key is finding a term that supports your business’s growth while maintaining healthy cash flows.

Frequently Asked Questions

Can I change the loan tenure after the loan approval?
Whether you can change your loan tenure or not depends on your lender. It also depends on other factors such as loan type and repayment history. If the loan tenure change is approved, borrowers may need to submit a formal request, possibly undergo credit evaluation, and agree to revised EMI terms.

How do interest rate changes affect my chosen tenure?
If interest rates increase, your EMIs are also likely to increase, or the tenure may get extended. On the other hand, if the interest rate decreases, your EMIs will also decrease, and the tenure may be shortened. This is why choosing between fixed and variable terms is important.

Can I get tax benefits throughout the entire loan tenure?
Yes, interest paid on Business Loans is tax-deductible under Section 36(1)(iii) of the Income Tax Act throughout the loan tenure. However, ensure the loan is used for legitimate business purposes and maintain proper documentation for claiming these deductions.

Is it better to choose the maximum tenure available?
It’s not always advisable to choose the maximum tenure available. While maximum tenure reduces EMI burden, it significantly increases the total interest paid. Choose a tenure based on your cash flow capacity and total cost considerations rather than simply opting for the longest period available