Credit and Loan Essay

7023 Words Sep 16th, 2012 29 Pages
Harvard Business School

9-291-026
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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Revolving Loans

The revolving credit loan, a variation on the line of credit, has a commitment period often extending beyond one year, up to three or four years, and allows a business to borrow from a bank up to a maximum commitment level at any time over the life of a credit. The borrower's use of proceeds under a revolving loan tends to be not for an isolated transaction but to fund day to day operations, meet seasonal needs, or otherwise provide the borrower with a discretionary range of when and how much to borrow and when to repay the loan. Unlike a line of credit, a revolving loan is often used to finance permanent working capital needs when equity and trade credit are inadequate to support a company's sales volume.

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Note on Bank Loans

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Over the term of a revolving credit facility, the borrower has the right to prepay a loan and later reborrow those funds. But this right to reborrow is effective only when the borrower is in compliance with the loan agreement's terms and conditions. The amount of commitment is based upon the value of the assets being funded as well as the borrower's creditworthiness. The borrower pays a commitment fee, based on the total amount of the revolving facility, to secure a formal commitment from the bank. Many revolving loans are structured to convert to term loans or to automatically renew at maturity. The latter structure, called an "evergreen" facility, automatically renews a revolving

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