Credit and Loan Essay

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Harvard Business School

Rev. October 29, 1993

Note on Bank Loans
Bank loans are a versatile source of funding for businesses. For example, these loans can be structured either as short- or long-term, fixed or floating rate, demand or with a fixed maturity, and secured or unsecured. While each potential borrower's business is unique, reasons to borrow generally include the purchase of assets including new fixed assets or entire businesses, repayment of obligations, raising of temporary or permanent capital, and the meeting of unexpected needs. Loan repayment generally comes from one of four sources: operations, turnover or liquidation of assets, refinancing, or capital infusion. This note describes traditional bank lending
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Identifying alternatives to routine asset conversion as a source of repayment will further protect the bank.
Long-Term Loans

Introduced in the 1930s, long-term loans ("term loans") are relatively new in banking practice. Providing advantages in its flexibility to adapt to a borrower's special requirements, a term loan has the following characteristics: · · Original maturity of longer than one year; Repayment provided from future earnings or cash flow rather than the short-term liquidation of assets; and Provisions of the loan arrangement detailed in and governed by a signed agreement between the borrower and the lender(s), referred to herein as a Loan Agreement.


Term loans are most often used for specific purposes like the purchase of fixed assets, acquisition of another company, or refinancing existing long-term debt. The term loan may also be used in place of equity or a revolving credit facility to finance permanent working capital needs. The loan's amount and structure will closely match the transaction being financed. A term loan is typically fully funded at its inception, and principal and interest are repaid over a period of years from operating cash flows generated by the borrower. The tenor, or maturity, of term loans ranges from one to ten years with the average ranging from two to five years. Though the lender does not look to liquidation of the acquired asset(s) as the primary source of funds for repayment, a
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