Loans from Financial Institutions and Public Deposits

Besides debentures, two other borrowed sources feature regularly in AP Intermediate Commerce examination papers on this chapter: term loans from banks and financial institutions, and public deposits.

A term loan is a specified sum of money lent by a commercial bank or a specialised financial institution to a business for a fixed period, usually to finance the purchase of fixed assets such as land, building or machinery, or to fund a larger expansion project; it therefore serves mainly as a medium-term or long-term source. The borrowing company has to repay the loan in instalments over the agreed period and pay interest on the outstanding balance, and the lender frequently insists on security in the form of a mortgage or charge over the company's assets, together with certain conditions on how the business is run until the loan is repaid. Term loans are attractive because they can be tailored to the borrower's specific repayment capacity and are usually cheaper than raising an equivalent amount through debentures or a public deposit, since the lending institution does not incur the heavy issue expenses a public issue would involve; the borrower, however, has to satisfy the lender's appraisal of its project and accept restrictive conditions (called loan covenants) on matters such as further borrowing or the level of dividend it may declare. …