A term loan pays for things that last for years: a new plant, an expansion or new machinery. This guide explains how banks decide the amount, what they expect the promoter to bring, and which terms to settle early.
Types of term loans
- Project finance. For a new plant (greenfield) or a large expansion (brownfield). The loan is repaid from the cash the project will earn.
- Machinery loan. For buying plant and machinery, with the machine as the main security.
- General purpose term loan. For wider needs, such as expansion or repaying costlier debt, usually against property.
- Loan against property (LAP). A loan against your residential or commercial property for business use.
How the loan amount is worked out
Start with the total project cost. Take away what the promoter puts in, usually 25% to 30% for a manufacturing project. The rest is the loan. On a ₹100 crore project, that means a loan of ₹70 crore to ₹75 crore.
The bank then checks whether the project can repay it. The main test is the debt service coverage ratio (DSCR): the cash the project earns in a year, divided by the instalments and interest due that year. Most lenders want an average of 1.25 to 1.50 over the loan period, and they also set a minimum for each year.
The weakest year is usually the first or second after the plant starts. Production is still building up, but full instalments have already begun.
Why “three times EBITDA” can mislead
A common rule of thumb says you can borrow three times your yearly EBITDA. It ignores the interest rate and the loan period, and both matter a lot.
Say your EBITDA is ₹10 crore and you borrow ₹30 crore. Over seven years at 9%, the yearly repayment including interest is about ₹6 crore. Over five years at 13%, it is about ₹8.5 crore. Same loan, very different pressure on cash.
What you can change
- Loan period. A longer period lowers each instalment. On a ₹20 crore loan at 10%, moving from five years to seven cuts the yearly payment from about ₹5.3 crore to about ₹4.1 crore.
- Moratorium. A gap before repayments start, matched to when the plant begins production. Interest is usually still charged in this period, or added to the loan.
- Step-up repayment. Smaller instalments early on and larger ones as the plant reaches full output.
Security and conditions to expect
Expect a first charge on the project assets, a second charge on current assets and personal guarantees from the promoters. Lenders also usually want the value of fixed assets to stay at about 1.25 to 1.40 times the loan, and set limits such as total debt to net worth and a minimum DSCR.
Negotiate these when the term sheet is agreed. Once the loan documents are being drafted, very little can change.
Work out your own figure
Our debt capacity calculator shows how much your cash flow can support. The DSCR guide explains the calculation step by step.
Common questions
Usually 25% to 30% for a manufacturing project. Some lenders accept part of it as promoter loans, provided those loans stay in the business until the bank is repaid. This has to be agreed with the lender upfront.
DSCR shows how many times your cash flow covers your loan repayments. Most lenders want an average of 1.25 to 1.50 over the loan period, with no single year falling too low. The projections behind it must be realistic.
Typically four to six months from start to first disbursement. Most of that time goes into the project study and the bank's appraisal.
Yes, but it is harder. Lenders usually ask for a higher promoter contribution or more collateral. If the promoter group already runs a profitable business, that helps a lot.
This article is general information, not lending, tax or legal advice. Statutory positions and lender practice change. See our terms of use, and talk to our team for advice on your own situation.