Meaning Of Term Loan
A term loan is a loan from financial institutions having an initial maturity of more than one year. Term loan is a contract under which a borrower agrees to make a series of interest and principal payments in an interval of specific period. Generally, term-loans have maturities of 5 to 10 years. However, term loans may have maturities of 2 years or more. Funds raised from term loan is typically used to finance permanent working capital, to pay for fixed assets or to discharge other loans.
A formal term loan agreement is signed between the borrower and lender. It specifies various terms and conditions such as maturity period, payment date, interest rate, restrictive provisions, collateral etc.
Advantages Of Term Loans
Term loans have some specific advantages over public offerings. It can be raised in relatively short period, because term loans are negotiated directly between the lender and the borrower, and documentation is minimized.But public offering of long-term securities involves lengthy process. Another advantage of term loan is flexibility. Terms and conditions of term loan can be revised on by mutual agreement between the lender and borrower. Another advantage of term loan is lower issuance costs. Firms can avoid flotation costs such as underwriting fee, commission, printing charges of certificate, advertisement cost etc.