Term loan is a type of loan whose repayment takes place in more than one year but less than 10 year. Term loan are extended under a formal agreement between the borrower and lender. The repayment of term loans normally takes place quarterly, semi- annually and annually. The repayment includes interest on the whole loan and some portion of original debt and principle amount. The interest rate on the term loan is higher than the short-term loans. These interest rates are either fix or variable. In rising inflation we take fix and in stable economy we take variable. All the expenses of the loan agreement are paid by borrower.
Benefits of Term Loan
Following are the benefits of term loan;
- In today’s competitive financial market the borrower has the option to tailor the term loan to their specific needs by negotiating with the lender institution.
- The term loan normally has flexible terms and conditions and the borrower are provided with options to revise the terms of the loan in future.
- The term loans are more readily available due to which this source of financing is more depending as compare to capital market.
Important clauses of the Term Loan
A term loan agreement is legal agreements. Both the lender and borrowers are bound by the terms and conditions of the agreement. An important condition in the term loan agreement is covenants.
Covenants are a restriction on a borrower imposed by a lender e.g. the condition of maintaining a minimum level of working capital. The main advantage of covenant to borrower is that during the adverse development the lender remains informed and warned. The covenants fall into two categories.
These general provisions are part of all the loan agreements. These are variable. General provisions include:
- Working capital requirement
- The lender company may Impose restriction on payment of cash dividends and repurchase of common stock
- Restriction on capital expenditure
- Restriction on other debt.
Routine Provisions are the part of most of the loan agreements. These provisions are not variable. Routine provisions include:
- Furnishing of financial statements to lender
- Must not sell a significant portion of its assets to pay its liability
- The borrower during the time of term loan cannot sell or discount its account receivable.
- During the period of term loan the borrower cannot incur any contingent liability.
December 07, 2018