Bank and finance companies are not only the source of
term loan other number of alternatives like pension fund, employee provident
fund, insurance companies etc. are available in the term of financing. But
these alternatives may have different maturity periods and interest rates on
the loan. ‘Insurance companies’ loan has longer maturity period as well as
higher interest rate charge over the bank loan. Insurance company term loans
are termed as complementary rather than the competitive of bank loan.
Term loan have a number of features (characteristic).
These are maturity, direct negotiation, security, restrictive covenants,
convertibility and repayment schedule. The term to maturity period of the term
loan is longer than one year and can exceed above five years. Term loan can be
obtained through the direct negotiation with the institutions instead of
following a long process like issue of bonds or preferred stocks. This process
can reduce the issuing cost, underwriting fees etc. Next characteristic of term
loan is, it is always secured and the asset that is financed by the loan is
used as security. Term loan may includes a restrictive covenant of additional
borrowing, to maintain minimum current assets level, current ratio, sale of
assets in the approval of the lender etc. Term loans are repaid in different
equal installments.
0 comments:
Post a Comment