{"id":5298,"date":"2021-10-25T00:07:07","date_gmt":"2021-10-24T23:07:07","guid":{"rendered":"https:\/\/www.simtrade.fr\/blog_simtrade\/?p=5298"},"modified":"2021-10-25T00:07:07","modified_gmt":"2021-10-24T23:07:07","slug":"long-term-loans","status":"publish","type":"post","link":"https:\/\/www.simtrade.fr\/blog_simtrade\/long-term-loans\/","title":{"rendered":"Long-Term Loans"},"content":{"rendered":"

Long-Term Loans<\/h1>\n

\"Shruti<\/a><\/p>\n

In this article,\u00a0Shruti Chand<\/a>\u00a0(ESSEC Business School, Master in Management, 2020-2022) elaborates on long-term loans.<\/p>\n

This read will help you get started with understanding\u00a0long-term loans and how it is\u00a0used in today’s world.<\/p>\n

Introduction<\/h2>\n

A term loan or long-term loan refers to a loan from a bank for a specific amount of
\nfunds with a fixed interest rate or a floating interest rate payable over a specified
\nschedule. A company uses term loans to fund the purchase of fixed assets, for
\ninstance, manufacturing equipment, property, etc.<\/p>\n

The term loans are issued by banks for short-term as well as long-term periods of
\ntime. Depending on the needs of the business, the banks usually have different
\ntypes of term loan offerings. These loans differ from each other in their repayment
\nschedule as well as the type of interest rates.<\/p>\n

Main aspects behind facilitating a term loan<\/h2>\n

1. Collateral:
\nNature of term loans are usually very risky for the lender, hence the banks
\nusually require collateral and a rigorous approval process to grant term loans
\nto businesses.<\/p>\n

2. Repayment schedule:
\nThe repayment schedule is fixed by the bank at the beginning of the term loan
\ngrant process. This is based on various factors that the bank considers about
\nthe risk profile behind the loan. Generally, term loans do not carry any
\npenalties if they are paid off ahead of schedule. If the company does not pay
\nthe obligations in time based on a pre-decided repayment schedule, the
\nbanks charge a penalty which can be hefty. These repayment schedules can
\nbe monthly, quarterly, or yearly.<\/p>\n

3. Interest rates: The term loan bears an interest rate charged by the bank which is pre-decided. This interest rate can be either fixed throughout the tenure of the
\nterm loan period or be a floating rate that fluctuates throughout the period of
\nthe term loan. Let\u2019s understand the types of interest rates to get better
\nunderstanding:<\/p>\n

\u25cf Fixed interest rate:
\nThis is straightforward as it is fixed based on the nature of the loan and
\nthe time period. If the loan is relatively risky, the interest rate fixed will be
\nhigher than that for a loan with low levels of risk.<\/p>\n

\u25cf Variable interest rates:
\nThe interest rates that differ along the period of the term loan are
\nreferred to as variable interest rate. They are usually attached to the
\nvalue of a benchmark rate such as LIBOR (London Interbank Offered
\nRate).<\/p>\n

This interest can be represented in the following way: LIBOR + 0.5%
\nHence, as the value of LIBOR changes, the interest rate also increases
\nor decreases along with it.<\/p>\n

 <\/p>\n

Various types of term loans:<\/h2>\n

1. Short-term loans: These loans are usually taken by companies for a period of
\nless than 1 year.<\/p>\n

2. Intermediate-term loans: These loans are usually for a period of more than 1
\nyear but less than 3 years. The company usually pays for these loans monthly
\nthrough the cash flow it generates through its operations.<\/p>\n

3. Long-term loans: Any term loan for a period of more than 3 years can be
\ndefined as a long-term loan. These loans require collateral to be granted by
\nthe bank. The repayment schedule can be monthly, quarterly based on the
\nagreed terms in the beginning.<\/p>\n

Long-term loans are present on the non-current liabilities of the balance of every
\nfirm. Long-term loans cannot be avoided by a company especially when it is starting
\nout as it is a primary source of funding<\/p>\n

You can read more about other forms of liabilities on a firm\u2019s balance sheet.<\/p>\n

Relevance to the SimTrade certificate<\/h2>\n

This post deals with\u00a0Long-Term loans, which are taken up by companies and indicate their financial health.<\/p>\n

About theory<\/h3>\n