A term loan is generally used to finance diversification, modernization or expansion of projects and is sometimes also called project financing. These loans are provided by banks and other financial institutions and are to be repaid like a regular loan.
Term loan features
Term loan is designed for a particular category of borrowers who want to expand their businesses. Major features of this loan include:
- These are secured loans offered against the assets being financed by the loan (primary security) as well as other company assets (collateral).
- Available in tenures ranging from 5 years to 10 years.
- Restrictive clauses may be included in the loan such as maintenance of minimum base of assets, no additional loans etc.
- These loans can be converted to equity.
Term loan benefits
There are several benefits associated with term loans for borrowers and lenders alike. Some of the major benefits include:
- Tax benefits applicable on interest repayments.
- Flexible terms as per negotiations.
- Equity shareholders don’t get affected due to the debt financing nature of these loans.
- Cheap financing source for medium term requirements.
Risks associated with term loans
Term loans contain some amount of risk for both borrowers and lenders. These are:
- Defaults in repayments puts questions on the actual liquidity ensured by the borrower.
- Financial risk for the company if the assets acquired through term loans fail to perform better than the actual cost of capital paid.
- If equities are transferred, the lender stands to have a say in the working of the company, adversely affecting the borrower.
All in all, term loans are a great way of getting mid-term financing so that you could grow and sustain your business without worrying about financial requirements. Always read the terms of a loan before applying for the same through any lender.