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A term loan is a specific amount that has a
specified repayment schedule and floating
Term loan is also called as term finance.
It represents a source of debt finance,
which is generally repayable in more than
one year but less than 10 years.
They are used to finance acquisition of
fixed assets & working capital margin.
Term loan is available from bank for
acquisition of commercial property ,
purchase of fixed assets and business
expansion , including loan against property
This loan is useful for professionals,
proprietors, partnership firms and private
Rate of interest is fixed on term loan and
that is decided by the bank with help of
These term loan are offered by all
commercial, developed and nationalized
bank and state level financial institutions.
Interest on long-term loan is deductible for
The interest & principal repayment are
obligation of company & threaten the
solvency of firm if not paid in time.
Term loans represent secured borrowing. Usually
assets which are financed with the proceeds of
the term loan provide the prime security.
Other assets of company may serve as collateral security.
Term loan are generally secured through first
mortgage or by way of deposit of title dead of
immovable properties or hypothecation of
There are 2 methods of repayment of term loans.
i. One way is to pay installments of principal
amount & interest in such way that the interest
payment is reduced over years, So the
installments will not be equal.
ii. another method is to pay equal installments
including interest & principal in this method as
the interest goes on declining the amount of
principal repayment goes on increasing.
In order to protect their interest, financial institution
generally impose restrictive condition the borrowers. Here,
Restrictive covenants depends on the financial situation of
i. Provide periodic information about its operations.
ii. Undertaking any new project and /expansion or make
any investment in consultation with and to
satisfaction of financial institution.
iii. Seek the consent of financial institutions for
additional borrowings and declaration of dividend at
i. Financial institutions give rupee term
loans as well as foreign currency term
ii. The most significant form of assistance
provided by financial institutions, rupee
term loans are given directly to industrial
concerns for setting up new projects as well as
for expansion, modernization and renovation
iii. These funds are provided for incurring
expenditure on land, building, plant and
machinery, technical know-how ,
miscellaneous fixed assets, preliminary
expenses, preoperative expenses and margin
money for working capital.
iv. Financial institutions provided foreign
currency term loans for meeting the foreign
currency expenditure towards import of plant,
machinery & equipment and payment of
foreign technical know-how fees.
v. The periodic liability for interest and
principal remains in the currency/currencies
of the loan and is translated into rupees at
the prevailing rate of exchange for making
payments to the financial institutions.
i. The cost of term loans is lower than the cost of
equity capital & preference capital.
ii. Lenders do not have the right to vote so term
loans do not result in dilution of control.
iii. Interest payments are tax deductible for
iv. Term loans are generally used for
specified period of time.
v. the company can refund the debt when its
financial position sound.
i. Term loans results in legal obligation of paying
interest & principal if not paid, can force the
company into liquidation.
ii. Term loans contracts carry restrictive covenants
which may reduce managerial freedom Further
they entitle the lenders to put their nominee on
the board of the borrowing company
iii. A Term loans increase the financial risk of
company this tends to raise the cost of equity
i. Term loan earn a fixed rate of interest & have
a definite maturity period.
ii. Term loans represent secured lending.
iii. Term loans carry several restrictive covenants
to protect the interest of lender.
i. Term loans do not carry the right to vote.
ii. Term loans are not represented by negotiable