Intermediate Loan/Term Loan: The intermediate loan can be define
as “the credit which are extended for the period of more than one year and less
then 10 years known as intermediate loan or term loan. In simply we can say
that the loan having maturity of 1 year to 10 year.
Features Of Intermediate Term Loan: Following are the main features of
term loan which are as under;
1)
Maturity
2)
Amortization
3)
Collateral
4)
Direct Negotiation/Financing
5)
Options
6)
Cost
Now we can
discuss all of them one by one as under;
1) Maturity: The
maturity of term loan extend/ranges from 1 year to 10 year. The term loan is
extended for the longer period of time. Because it gives security to the
borrower to use loan for long period of time.
2) Amortization:
The loan which is paid off in fixed equal installment over the life of loan due
to this reason it known as amortized loan. These installments may be paid
monthly, annually, equally depends on agreement. These installment include not
only interest of the period, but also some portion of principle amount.
3) Collateral:
The assets on which bank has claim at the time of liquidation or borrower
defaults on maturity called collateral.
4) Direct Negotiation/Financing: The term loans are direct business loans because when
business firm needs term loan then it directly meet with lender are there is no
need of middle men or broker as in long term loan.
5) Options:
Another feature of term loan is option, which is given as a sweetness to the
lender by borrower side. Option is the right given by the borrower lender to
buy some specific amount of common shares at stated amount.
6) Cost: The
interest rate on term loan is usually higher then short term loan, interest
rate on term loans can either rate fixed for the duration of the loan or vary
with the changes in prime rate.
Uses Of Term Loan: There are two main purposes of
obtaining term loan.
1) The term loan is used to make
investment in permanent current assets which are always available with the
firm.
2) To make investment in plant machinery,
equipment, keeping in view matching principle i.e. matching of life of assets
with loan.
ADVANTAGES AND DISADVANTAGES OF TERM
LOAN
Advantages: Following are the main advantages of
intermediate term loan or term loan given as under;
1) Easy Procedure:
As we know that the relationship between borrower and lender is one to one. Therefore
it is easy for then to negotiate loan term that requires the special attention
i.e. repayment schedule, annual payment etc.
2) Quick Arrangement: As compare to long term loan like bond issuing etc. the term loan
arrangement can be quickly completed and it can be obtained more quickly.
3) Less Expensive:
The term loan is less expensive as compared to long term loan. In the long term
lone firm must have be registered with security and exchange commission. But in
term loan there is no need of registration.
4) No-Danger Of Re-Newel Of Loan: The term loan is obtained for investment in permanent current
assets then there is no danger of re-newel because loan is for longer period.
5) Flexible: As
we know that, in case of term loan there is only one lender as compared to
mainly of lenders in the case of long term loan. Therefore in term loan it is
possible to modify the loan indenture.
6) Interim Substitute Financing For Long Term Loan: Another advantage of term loan is
that it can be used as interim substitute of financing long term fund.
7) Most Suitable For Private Limited Companies: Private limited companies can’t be
listed at stock exchange. Therefore they are unable to obtain loan from capital
market. So, for such companies term loan is most suitable source of fund.
Disadvantages: Following are the some disadvantages
of term loan given as under;
1) Higher Cost: As
compared to short term loan the cost on term loan is higher, because the lender
is obtained loan for longer period.
2) Higher Cash Draining: In term loan, the cash draining is high because of payment of
fixed-equal installments. While in long term loans the cash drain is nil, that
is why term loan is less advantageous.
3) Too Much Restrictive: It is too much restrictive because borrower must be in strong financial
position and have good current ratio, a low debit equity ratio etc. some
restrictions are becomes major drawbacks.
4) Investigations Cost: It means the cost incused in legal documents obtaining for this purpose.
Then this cost will be paid by borrower of the loan.
Sources Of Term Loan: Sources are the ways, method through
which we obtain something. i.e. loan or fund etc. Following are the various
sources of obtaining term loan which are given below;
1)
Commercial Banks
2)
Insurance Companies
3)
Finance Companies
4)
Government Agencies
5)
Loan for supplier and Manufacturer
Now we can
discuss in detail the above mentioned sources one by one as under;
Ø Commercial Banks: Commercial banks are the primary lender of term loans. Commercial banks
advances term loans for the purpose of earning interest, because the bank
operation for profit motive.
·
Features: Following are the some main features
of intermediate term loan given as under;
·
Reasons: There are three reasons for which
commercial bank extends loan.
1) Firstly for investment in permanent
current assets.
2) Secondly commercial bank extend loan
for interim financing.
3) Thirdly for purchase of machinery
equipment and plant.
·
Maturity: Commercial bank extend loan having
maturity of 3 to 5 years.
·
Collateral: Bank weeds some collateral mean any
asset against the loan from borrower.
·
Cost Of Loan/Interest Rate: Usually bank charges higher interest
rate then short term loan due to longer period.
·
Protective Provision: When firm obtain term loan then bank
includes many restrictive provisions in loan agreement keeping in view the
status of firm usually bank imposes in following provision.
1) Maintaining of specified current
ratio like 2 year 2:1 or 3 to 1 or3 ½ to 1 depending on the borrower line
business.
2) To prevent disposing of assets with
out approval of the bank.
3) Limiting the cash outflow like
limiting cash dividends etc.
4) No major charges in management personnel.
5) Pre-payment clause.
Ø Insurance Companies: Insurance companies extend term loan to business firm for longer
maturity and payable on a mortised bases mean on equal installment.
·
Features: Following are the some features of
extending term loan from insurance companies.
1) Maturity:
Maturity of insurance companies is 1 to 10 year or more than 10 year up to 15
years.
2) Joint Financing: Another feature of insurance companies is joint financing with
commercial bank (joint financing) mean that bank and insurance companies can
extends loan for 15 year or more. Bank takes the notes maturity for first 5
year and insurance company takes remaining year procedure is that bank takes the
term loan notes maturity in the first 5 years, while insurance company takes
the balance usually at high interest rate then first 5 years.
3) Maintaining Line Of Credit: In order to make its position safe, sometimes insurance
companies requires that borrower must keep certain amount of installments as
line of credit with well represent bank.
4) Interest Rate/Cost Of Loan: Interest rate of insurance companies is higher then the rate
of commercial banks because it is for longer time period.
5) Pre-Payment Penalty: Insurance company charge penalty on pre-payment of loan before maturity.
6) Provision: The
provision included in the agreement with the insurance companies will be same
of bank.
Ø Finance Companies: Finance companies extends loans to business firms having maturity of one
to 10 year, depends on marketability and economic useful life of collateral.
·
Features:
Following are the some important features of finance companies given as under;
1) Interest Rate:
Cost of term loan from finance companies is higher as compared to commercial
banks.
2) Reason/Purpose:
Finance companies mostly extend term loans to finance, equipment machinery etc.
3) Granting Criteria: It considers earning power of equipment for granting term loan rather
than overall financial position and earning.
4) Methods: It
extends loan for equipment in two ways.
1) Extends loan against presently owned
equipment and ask customer to pledge.
2) Extends loans for the purchase of new
equipment and ask customer to repay installments.
Ø Government Agencies: Government agencies also extends term loans to business firm.
·
Features: It has three main features given as
under;
1) Interest Rate:
Interest rate is usually low than market rate. In other words element of
subsidy is involved.
2) Secured: These
loans are protected by secured.
3) Maturity: It
is a source of term loan some maturity may be 1 to 10 years.
Ø Loan From Supplier And Manufacturer: Supplier and manufacturer also provide term loan to
retailors in different forms because they are in strong financial position as
compared to retailors.
·
Example: Shell oil company provides term loan
to the petrol pumps for the purchase of equipment.