It is a form of direct private long-term financing, consisting in a direct business loan of a fixed amount with a maturity between one and 20 years. The specified terms may include also provisions regarding the repayment schedule. The typical term loan is amortised over the life of the loan by equal instalments covering interests and principal, but other arrangements can be made, such as a "balloon" payment (the majority of the capital is paid in a large final payment) or a "bullet" payment (all the capital is paid at the maturity date). The interest rates charged can be floating or fixed. In the latter case, the interest charged is usually higher to reflect the advantages of the borrower. The interest rates on term loans are typically higher than those on equivalent public issues because they are easier to be renegotiated in the event of a default, and they entail lower transaction costs (like distribution costs). The term loans are generally drawn down in instalments and the lender, normally a commercial bank or an insurance company, retains the right to withdraw the loan at short notice in case of overdraft. The lender has also the right of termination if the borrower does not meet all the obligations included in the accompanying documentation, such as information flows to the bank as well as financial ratio constraints.

Arnold G.(2002), Corporate Financial Management, Pearson Education

Editor: Bianca GIANNINI