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Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan

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16.1 TERM LOANS

16.1.1 Basic Characteristics

Although term loans and debentures, both represent debt, yet they vary in their characteristics. In particular, term loans have five basic characteristics that distinguish them from debentures. These characteristics are as follows:

  1. Fixed maturity
  2. Direct negotiation with the lender
  3. Tie up with collateral
  4. Restrictive covenants
  5. Fixed repayment schedule

First, they have a fixed maturity within which the entire loan must be repaid along with the interest. It is their maturity that distinguishes long-term loans from intermediate and short-term loans. The first few months or the first few years represent a grace period during which repayment of the principal does not commence.

Second, term loans require ...

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