TERM LOAN FINANCING

Group Members:

Harshit Parekh

Priyankar Chakraborty

Sangita Karar

AGENDA Modes of Financing

Purpose of Term Loans

Types and Features of Term Loans

Procedures Associated with Term Loans

Pros and Cons of Term Loans

Appraisal of Project

Repayment Schedule

Syndicated Loans

Reinvestment

of Profits

Loans from

CBs/ FIs

Public Deposits

Risk Capital Issue of Shares

Issue of Debentures

MODES OF FINANCING

PURPOSE OF TERM LOANS

Capital Expendit

ure

New Industrial Undertak

ing

Expansion of

Existing One

Acquisition

of Movable Assets

DIFFERENT TYPES OF TERM LOANS

Long Term Loans

Intermediate Term Loans

Short Term Loans

FEATURES OF TERM LOANS

• Currency- Financial Institutions provide both rupee as well as foreign currency term loans

• Security- Term loans typically represent secured borrowing

• Interest Payment and Principal Repayment- These are definite obligations that are payable irrespective of the financial situation of the firm

• Restrictive Covenants- In order to protect their interests, FIs impose restrictive conditions on the borrowers

PROCEDURES ASSOCIATED WITH TERM LOANS

Submission of Loan

Application

Initial Processing of

Loan Application

Appraisal of the Proposed

Project

Issue of Letter of Sanction

Acceptance of T&Cs

Execution of Loan

Agreement

Creation of Security

Disbursement of Loans

Monitoring

• Flexibility – Term loans are more flexible as it better accommodates changes to a person’s budget due to unexpected life or business changes

• Interest – Term loans usually have a fixed interest rate, but it varies from bank to bank

• Penalty Agreements

• Predictability

• Assumption of Assets – Term loans is used to get the capital needed, to generate additional funds that will pay off the loan

Pros and Cons of Term Loans

APPRAISAL OF PROJECT

Analysis of Fundament

als

Technical Feasibility

Economic Viability

Financial Viability

Managerial Competence

TECHNICAL FEASIBILITY

• It should attempt to determine whether technical requirements of the project can be met or not

• It should cover whether the projected product mix can be manufactured or not

• The involvement of the appraisers would depend on the technology used

• It is an assessment of the projection of the firm’s sales

• It has a bearing on the earning capacity of the project

• A bank prefers loans where there is a large gap between the supply and the current demand

• The prime attention is that the project survives the three stages of business

ECONOMIC VIABILITY

• It involves financial evaluation

• It involves judging financial soundness

• Sensitivity Analysis

• SWOT Analysis

FINANCIAL VIABILITY

• Proposed organisation set-up

• Experience of the promoters

• Details of the key personnel to be associated with the project

• Existing/Proposed BOD

MANEGERIAL COMPETENCE

REPAYMENT SCHEDULE

• Term loans by FIs are generally repayable in equal semi-annual, quarterly or annual installments

• The interest burden may decline over time but the principal repayment may remain the same

• The DSCR is the determining factor in fixing the repayment period and quantum of periodical installments

REPAYMENT SCHEDULEThe firm negotiates a Rs. 3 crore loan at 14% for eight years

Year Loan at the beginning Principal Repayment Interest Loan at the end

  of the year     of the year

1 30,000 3,750 4,200 26,250

2 26,250 3,750 3,675 22,500

3 22,500 3,750 3,150 18,750

4 18,750 3,750 2,625 15,000

5 15,000 3,750 2,100 11,250

6 11,250 3,750 1,575 7,500

7 7,500 3,750 1,050 3,750

8 3,750 3,750 525 -

SYNDICATED LOANS

Lead bank/Manager

Bank CBank BBank A

Borrower

Under writer

THANK YOU