Term loans and lease financing

Bank term loan

A company can obtain capital through different alternative sources like bonds issue, bank loan etc. obtaining loan directly from bank or financial institutions is known as term loan. Term loan fall in the long term loan instead of short term loan. The maturity period of term loan exceeds one year. Term loan are repaid in different installments. The loans are important source of financing of the equipment, plant and working capital.  Company uses term loan if the cost of issuing the bond or debenture is very high, if the earning is sufficient to amortize loan and the desired increase is relatively long term but not permanent.

Term financing is advantageous to the firm over the long term sources of financing like bond issue and common stock financing. Term loans are privately negotiated, no floatation costs are required like bond issue and common stock financing and no registration is required in the securities board of Nepal.

Revolving credit agreement

Revolving credit agreement is a guaranteed line of credit. Moreover, it is the formal commitment by a bank to lend up to a certain amount of money to a company over a specified period of time. It is guaranteed in the sense that the commercial bank making the arrangement assures the borrower that a specified amount of funds will be made available regardless of the scarcity of money.

When a bank makes a revolving credit commitment, it is legally bound under the loan agreement to have funds available whenever the company wants to borrow. For the guarantee provided, the bank charges a commitment fee on the revolving credit agreement. It is charged on the average unused amount of the agreements.

Advantages

One of he advantages of the revolving credit agreement is guaranteed fund and the bank obliged to provide the fund. Another advantage of the revolving credit agreement is the flexibility of borrowing and payment of loan within the maximum limit. Similarly the revolving agreement is convertible into term loan after certain period of time.

Disadvantages

The disadvantage of the revolving agreement is that the commitment fee should to be paid in the unused portion of the agreement amount.