Term loan facility: Overview, definition, and example
What is a term loan facility?
A term loan facility is a type of loan provided by a lender (such as a bank or financial institution) that is typically repaid over a fixed period of time, known as the term. This loan is used for specific purposes, such as financing a business acquisition, purchasing assets, or funding a capital expenditure. The key feature of a term loan facility is that it involves a lump-sum amount of money that the borrower agrees to repay in installments, typically with interest, over a set period of time.
There are two main types of term loans:
- Short-term loans: Typically have a repayment period of one to three years.
- Long-term loans: Usually have repayment periods ranging from three to ten years or more.
A term loan facility is often structured with fixed or variable interest rates, and the repayment schedule is established upfront, often including principal and interest payments on a monthly, quarterly, or annual basis.
Why is a term loan facility important?
A term loan facility is important because it provides businesses and individuals with the capital they need to finance significant investments or projects, while offering a clear repayment structure. This type of financing allows borrowers to access large sums of money, with the flexibility of repaying over an extended period, which can help manage cash flow and align repayment with the income generated by the investment.
For businesses, term loans are a common method of financing, as they can be used for expanding operations, purchasing equipment, or refinancing existing debt. It also provides lenders with a predictable return, as the borrower is obligated to make fixed repayments.
Understanding a term loan facility through an example
Imagine a company needs $500,000 to purchase new machinery to expand its manufacturing capabilities. The company approaches a bank for a term loan facility. The bank agrees to provide the loan with the following terms:
- Loan Amount: $500,000
- Interest Rate: 5% fixed
- Repayment Period: 5 years
- Monthly Payment: $9,434 (covering both principal and interest)
Over the course of five years, the company will make regular monthly payments of $9,434 until the full loan is repaid. The loan is secured by the company’s machinery, meaning that if the company defaults on the loan, the bank can seize the machinery as collateral.
In another example, a business owner takes out a term loan to finance the acquisition of a competitor. The loan may be structured as a long-term term loan facility, with a repayment period of 10 years, allowing the business owner to repay the loan over a longer period and match the income from the acquisition to the repayment schedule.
Example of a term loan facility clause
Here’s how a term loan facility clause might appear in a loan agreement:
“The Lender agrees to provide the Borrower with a term loan facility in the amount of [Insert Amount], which the Borrower agrees to repay over a term of [Insert Number] years. The interest rate shall be fixed at [Insert Rate]% per annum, with monthly payments of principal and interest, commencing on [Insert Date] and continuing until the loan is fully repaid. The Borrower shall make payments in accordance with the repayment schedule attached to this Agreement.”
Conclusion
A term loan facility is a vital financial tool for businesses and individuals looking to secure funding for significant investments or projects. It provides borrowers with the capital they need, while offering a predictable repayment schedule over a set term. Term loans are commonly used for a wide range of purposes, including business expansion, asset acquisition, and debt refinancing. By understanding the structure of a term loan facility, borrowers can make informed decisions about financing options and repayment strategies, while lenders benefit from a clear, structured loan arrangement.
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.