| Passage 2 Term loans are designed to fund long-and-medium-term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period longer than one year. Usually the borrowing firm applies for a lump-sum loan based on the budgeted cost of its proposed project and then pledges to meet the scheduled repayment in a series of installments (often payments are made every quarter or even monthly). Thus, term loans look to the flow of future earnings of the business firm to amortize and retire the credit. The schedule of installment payments is usually structured with the borrower's normal cycle of cash inflows and outflows firmly in mind. For example, there may be 'blind spots' built into the repayment schedule, so there will be no installment payments due at those times of the year when the customer is short of cash. However, these payment must be made up later, when cash is more abundant. Some term loan agreements do not call for repayment of loan principal until the end of the loan period, for example, in a 'bullet loan' , only interest is paid periodically, with the full principal due when the loan matures. Term loans normally are secured by fixed assets (e. g. premises, equipment, furniture and fixtures) owned by the borrower and may carry either a fixed or floating interest rate. That rate normally is higher than on short-term business loans, due to the greater risk exposure to the bank from such loans. Certainly the probability of default or other adverse changes in the borrower's position is greater over the course of a long-term loan. |