The sums of money available varies according to the size and creditworthiness of the business.
Interest is charged on a daily basis on the amount borrowed, depending on the credit rating of the business.
Security is often not required but the bank can demand repayment at any time.
9. What are the main sources of medium-term business finance?
Term loan Term loans are medium-term loans from a bank to be repaid in monthly instalments over a number of years. The conditions of the loan are customised to meet the needs of the business, including duration, interest charged, timing of interest payments and security provided.
Amount Cost Large amounts of finance can be borrowed.
Interest paid is usually lower than for overdrafts. Businesses with good credit ratings are charged lower interest. Since repayment amounts are clearly set out in the beginning, they can be budgeted for in advance.
Risk
Banks may look for some asset to be used as security (collateral) in the event of non-repayment. Failure to repay a loan on time can damage a firm’s credit rating and reputation.
Hire purchase Hire purchase means paying for an asset in instalments. The business gets the use of the asset before it is paid for. However, ownership doesn’t pass to the borrower until the final payment is made. In the past, Frank has used hire purchase to buy a delivery van for Outdoor World.
See Chapter 8: Borrowing Wisely for more information on hire purchase.
