c




 



A bank loan to a company, with a fixed maturity and often featuring
amortization of principal. If this loan is in the form of a line of credit, the
funds are drawn down shortly after the agreement is signed. Otherwise,
the borrower usually uses the funds from the loan soon after they
become available. Bank term loans are very a common kind of lending.

 






 Term loans are the basic vanilla commercial
loan. They typically carry fixed interest rates, and monthly or quarterly
repayment schedules

and include a set maturity date. Bankers tend to classify term loans into
two categories:

@V ë
 

 Usually running less than three years,
these loans are generally repaid in monthly installments
(sometimes with balloon payments) from a business's cash flow.
According to the American Bankers Association, repayment is
often tied directly to the useful life of the asset being financed.
@V



 These loans are commonly set for more than
three years. Most are between three and 10 years, and some run for
as long as 20 years. Long-term loans are collateralized by a
business's assets and typically require quarterly or monthly
payments derived from profits or cash flow. These loans usually
carry wording that limits the amount of additional financial
commitments the business may take on (including other debts but
also dividends or principals' salaries), and they sometimes require
that a certain amount of profit be set-aside to repay the loan.


 
 Established small businesses that can leverage sound
financial statements and substantial down payments to minimize
monthly payments and total loan costs. Repayment is typically linked in
some way to the item financed. Term loans require collateral and a
relatively rigorous approval process but can help reduce risk by
minimizing costs. Before deciding to finance equipment, borrowers
should be sure they can they make full use of ownership-related benefits,
such as depreciation, and should compare the cost with that leasing.

Π Abundant but highly differentiated. The degree of financial

strength required to receive loan approval can vary tremendously from
bank to bank, depending on the level of risk the bank is willing to take
on.

c Construction; major capital improvements; large capital

investments, such as machinery; working capital; purchases of existing
businesses.


 Inexpensive if the borrower can pass the financial litmus tests.
Rates vary, making it worthwhile to shop, but generally run around 2.5
points over prime for loans of less than seven years and 3.0 points over
prime for longer loans. Fees totaling up to 1 percent are common
(though this varies greatly, too), with higher fees on construction loans.

 
 

 Challenging but sometimes a moderate challenge
when smaller amounts are involved. However, for loans more than
$100,000 (sometimes up to $200,000), you need a complete set of
financial statements and must undergo a complete financial analysis by
the lending institution.




    $25,000 and greater.

Œ
What do banks look for when making decisions about term loans? Well,
the "five C's" continue to be of utmost importance.

@V !   How have you managed other loans (business and

personal)? What is your business experience? "If a corporate
 executive wants to open a restaurant, then he'd better have
restaurant experience," says Rob Fazzini, senior vice president at
Busey Bank in Illinois.
@V    The bank will conduct a full credit analysis,
including a detailed review of financial statements and personal
finances to assess your ability to repay.
@V 
   This is the primary source of repayment. Expect the
bank to want this source to be larger than the amount you're
borrowing.
@V    What assets do you own that can be quickly turned into
cash if necessary? The bank wants to know what you own outside
of the business-bonds, stocks, apartment buildings-that might be an
alternate repayment source. If there is a loss, your assets are tapped
first, not the bank's. Or, as one astute businessman puts it, "Banks
like to lend to people who already have money." You will most
likely have to add a personal guarantee to all of that, too.
@V 

"


#!! 

 How accurate are
the revenue and expense projections? Expect the bank to make a
detailed judgment. What is the condition of the economy and the
industry: "Are you selling buggy whips or computers?" Fazzini
asks.

Use the following guidelines when selecting a business bank:

@V Ask friends where they bank and if they are satisfied.

@V Forge a relationship with a bank long before you will need a loan.
You'll find out how they treat you. Get to know some folks at the
bank on a first-name basis. Start building a relationship. Believe it
or not, banks want to talk to you even if they cannot lend you
money.
@V Scan your newspaper for evidence of who is making the kinds of
loans you are seeking. Not all banks can be the best at everything.
Some are better at business loans; some are better with consumer
deals.
 @V åisit two to four banks to find your fit. Be upfront; tell them you
are considering a loan and that you are talking with other banks.
Then listen to their pitch.
@V Think about working through the SBA or other economic-
development groups to secure better terms. They are not only for
businesses that cannot get funding any other way.

Term loan refers to the fixed-term business loan with a maturity of more
than one year, providing an organization with working capital to acquire
assets or inventory, or to finance plant and equipment generating cash
flow. Maturities range from one year to 15 years, although most term
loans are made for one- to five-year periods. Term loans are paid back
from profits of the business, according to a fixed amortization schedule.
Term loans may be secured or unsecured, and carry a rate based on the
lender's cost of funds. Loan interest normally is payable monthly,
quarterly, semiannually, or annually.

Most business loans contain both affirmative and restrictive Covenants

that impose certain conditions on the borrower that permit acceleration
of the maturity if the loan conditions are violated. The lender may, for
example, restrict cash dividends paid and loans taken out by corporate
officers, and usually will require the borrower to maintain the business
in good order, keep adequate insurance, and file quarterly financial
statements with the financial institution. Larger borrowings often are
financed by several financial institutions through a Syndication
arrangement.

Term loan process

 Prospective client search. (appropriate marketing)

IDLC¶s sales executives are always looking for prospective clients for
the term loan. They do research on the market prospect and the
conditions of possible clients¶ business. Based on their research they try
to identify the trend of the economy and based on this trend analysis
they plan their loan portfolio.

 Information checklist based on requirement

Whenever a client wants to take loan from IDLC they provide them an
information checklist based on their requirement. If the information
provided by the client is considerable then they go for further processing
otherwise they reject the loan proposal.

 D ocument submission

If a prospective client passed through the information checklist process

then the client is asked to submit some documents which are required for
further assessment. These documents vary in case to case.

 Appraisal report
After the submission of all documents the sales executive who bring the
client to IDLC prepares
an appraisal report in which he/she gives his/her expert opinion about
the loan proposal.
 CIB report

For assessing a loan proposal IDLC has to verify the proposer¶s credit
report provided by the Credit Information Bureau (CIB). CIB provides
necessary about the credit condition of the proposer. This CIB report is
very much important for assessing a loan proposal. If the report is
favorable for the proposer only then IDLC go for further assessment.
Otherwise they reject the proposal immediately.

 Justification through credit policy

After getting positive report from CIB IDLC justify the loan proposal
through its own credit policy. If the proposal complies with the credit
policy of IDLC then they approve the loan otherwise the proposal is
rejected.

 Sanction of loan
After justifying the loan proposal the loan is sanctioned to the proposer.
 D ocument preparation
After sanctioning the loan officials prepare the documents for the loan
signing.
 S ig n
After preparing the documents required both the parties sign the
document and the loan is
provided to the client.

 Internal control(credit administrationnternal Control & Compliance

Committee addresses operational risk and frames and implements
policies to encounter such risks. The Committee assesses operational
risk across the Company, as a whole, and ensures that an appropriate
framework exists to identify, assess and manage operational risk.

Term loan is one of the main operations in Finance Ltd. Basically term
loan is given to prospective and profitable customers. Finding out
prospective customers by undertaking appropriate marketing and
advertisement is one of the potentials of this company. Even after that,
IDLC has to maintain some rules and regulations and some defensive
measures to justify a loan application. One significant aspect is that, for
lease financing IDLC has the full control over the customer, i.e. IDLC
can monitor client¶s operations regarding lease financing. But, in case of
term loan financing, IDLC can not entirely monitor the activities of the
borrower. So that, before approving a term loan they have to become
meticulous about all possible phenomena and they have to be well-aware
of borrowers¶ historical performances and capabilities.

Certain factors are investigated before approving a loan to a borrower. A

different dimension is
applicable here. The 7 Cs of credit is an important aspect for perceiving
a borrower.
7Cs of Credit
 Character: IDLC must be comfortable with the borrower's integrity
and confidence in his

willingness to repay the loan. Certain questions are important here, Has
IDLC met the customer? What is his reputation in the community? Is he
an upstanding guy or is he a dead beat? IDLC may consider checking
references with other business-owners with which the customer does
business. Basically character means the repayment character of the
borrower. If borrowers¶ history in repaying debt is fair, then IDLC takes
the borrower into consideration.

 Credit History: Credit history of borrower is another important

element to consider before
approving a loan. IDLC would never loan money to an applicant without
first checking his or

her credit history. As a potential creditor, IDLC also has the legal right
to obtain the borrower's credit report and examine it in determining
whether or not the institution can risk extending the credit. IDLC will be
checking borrowers credit report and gets written permission before
actually doing so.

 Career History: IDLC asks about the borrower's business. Is it a

successful business
venture? Has he been in it for a while? Has he had failed business
ventures in the past? His
past successes or failures may be determinative of his future business
success.
 Capacity: Regarding this aspect of giving loan, IDLC must ask
certain questions. In what

capacity is the credit going to be used in his business? Is it part of

borrowers¶ inventory? Will the use of goods enable him to generate
sufficient funds to repay IDLC and any other creditors? IDLC may
consider going over his inventory records with him. The faster he moves
his inventory, the more likely his business is a success.

 Capital: Certain questions are material here, what is the borrower's

financial net worth? A
customer with a positive net worth can survive low cash flow times in
his business and still
pay creditors invoices.
 Collateral: IDLC may consider extending only "secured credit."
This usually means having

the customer pledge real estate or his inventory in exchange for

providing the credit. If he defaults on the loan, IDLC gets the pledged
property. IDLC makes sure the property hasn't been pledged before.

IDLC does not intend to sell the property, rather the value of the
collateral is important here, suppose the borrower has a land that
resembles the memory of his parents. In such case, borrower is unlikely
to fail repaying the loan because he would think, ³if I fail to repay, my
parents¶ remembrance will be taken away by the creditor´. A
psychological stunt is practiced by IDLC in valuation of the collateral.

 Conditions: IDLC always makes sure the conditions of the sale are
clear and in writing,

signed by the borrower. This includes payment dates and amounts. If he

defaults on any of the conditions, IDLC¶s collection efforts will go much
more smoothly if the conditions of the credit are clear.