Incremental term loans: Overview, definition, and example
What are incremental term loans?
Incremental term loans refer to a type of loan that allows a borrower to borrow additional amounts over time, up to a pre-set limit, under the same loan agreement. These loans are typically structured as part of a larger financing package, such as a credit facility, and are drawn down in increments based on the borrower’s needs. Incremental term loans are often used by businesses to secure flexible funding as their financial requirements evolve, enabling them to access additional capital without the need to negotiate a new loan agreement each time they need more funds.
For example, a company may agree to a $10 million credit facility with incremental term loans, which allows the company to borrow up to that amount over a few years, drawing on it as needed for capital expenditures, expansion, or other business purposes.
Why are incremental term loans important?
Incremental term loans are important because they provide borrowers with flexible access to capital over time, without the need to renegotiate loan terms or secure separate loans for each borrowing instance. This flexibility is especially valuable for companies that face fluctuating funding needs, as it helps them manage cash flow and plan for future investments without overcommitting to debt upfront.
For lenders, incremental term loans are attractive because they typically come with clear terms, such as interest rates and repayment schedules, and the additional funding can be tied to the company’s ongoing financial performance or specific milestones.
Understanding incremental term loans through an example
Imagine a company planning an expansion project over three years. Instead of borrowing a lump sum amount, the company secures a credit facility with incremental term loans. Initially, they borrow $2 million to start the project. Later, as the expansion progresses and more capital is needed, they draw additional funds from the loan facility, say $3 million and then $2 million more in the second and third years. This gradual borrowing helps the company manage its finances effectively while maintaining flexibility to borrow more as the project develops.
In another example, a startup may secure an incremental term loan to finance its growth. They might initially borrow $500,000 to purchase equipment, and as their operations expand, they have the option to borrow up to $1.5 million more over the next two years as part of the same loan agreement, avoiding the need to seek new financing each time additional funds are required.
An example of an incremental term loan clause
Here’s how an incremental term loan clause might appear in a loan agreement:
“The Borrower is entitled to request incremental term loans, in an aggregate amount not to exceed $10,000,000, in one or more installments, subject to the terms and conditions of this Agreement, and any additional requirements set by the Lender at the time of each borrowing.”
Conclusion
Incremental term loans offer businesses flexible access to capital over time, allowing them to borrow additional funds in stages as their needs grow. This type of financing is beneficial for companies that require ongoing funding for projects or expansions without the administrative burden of negotiating new loan agreements for each loan draw. For businesses, it ensures a smooth, adaptable approach to borrowing, while for lenders, it provides a way to structure funding that meets both parties' needs.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.