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Medium Term Finance (Loan) Is Usually Provided From
Medium Term Finance (Loan) Is Usually Provided From
Financing
Medium term finance [loan] is usually provided from
three to ten years; Such finance is
Obtained for meeting the cost of maintenance, repair,
improvement and betterment of plant i.e., expansion and
modernization of the existing plant; and
Used for purchase of assets, costly raw material, and to
repay the short term loans.
Medium term finance is specially useful for small capital
projects or the developing new projects.
Sources of medium-term or
intermediate term financing
Medium term loans: banks, insurance
companies, development banks, finance
agencies, equipment manufacturers, leasing
companies, public fixed deposit, pension and
provident funds.
Forms: revolving credit, deferred credit, lease
financing, working capital term loans,
conditional sales contract and mortgage
including financing by mortgaging equipment,
chattel mortgage trust receipt loan,
warehouse receipt loan
Commercial banks
Provide medium term finance to traders and manufacturers
against security and applying fixed interest rate (the same rate
of interest for the whole period of loan) or variable interest rate
(interest rate changed within the loan period based on
changes in the bank rate of prime rate i.e. the current market
rate following any major change in he money and capital
market).
Commercial banks provide term loans as well as revolving credit.
Commercial banks raise funds by collecting deposits from
businesses and consumers via checkable deposits, savings
deposits, and time (or term) deposits and make loans to
businesses (for establishment of new businesses, expansion
of product line, plant modernization, working capital financing)
and consumers. They also buy corporate bonds and
government bonds.
Deposits are the primary liabilities of commercial banks and
loans and bonds are their primary assets. Commercial banks
provide loans of two types: secured loan unsecured loan.
Revolving credit
Type of credit extended under agreement between lending organization
(usually, a commercial bank) and the borrower on extending credit in
amounts within a pre-aproved limit and the amount (within the limit)
may be repeatedly used with availability of fund which may increase
or decrease (within the limit) as funds are borrowed and repaid.
There is no fixed number of payments as it is the case in installment
credit.
Examples of revolving credits used by consumers include credit cards.
Corporate revolving credit facilities are typically used to provide
liquidity for a company's day-to-day operations.
In a revolving credit arrangement
The borrower makes payments based only on the amount they've
actually used or withdrawn, plus interest.
The borrower may repay over time (subject to any minimum payment
requirement), or in full at any time.
In some cases, the borrower is required to pay a fee to the lender for
any money that is undrawn on the revolver; this is especially true of
corporate bank loan revolving credit facilities.
Mortgage
Transfer of an interest in property to a lender as a
security for a debt on the condition that this interest
will be returned to the owner when the terms of the
mortgage have been satisfied or performed.
Mortgage loans however, are now more institutional
and belong to secured loans as it is used as a very
common type of debt instrument in purchase of
real estate. Use the property as security in the
form of lien on the title to the property until the
mortgage is paid off in full. If the borrower defaults
on the loan, the bank would have the legal right to
repossess the property and sell it, to recover sums
owing to it.
Insurance companies
Provide loan to manufacturers against the security of assets but
usually, for longer period and at interest rates higher than the
commercial banks.
Insurance companies accumulate funds received as premium
from policy holders and the idle deposits, as well as the
surplus are given as loans, usually for longer periods (10 or
more years) to established and relatively large companies
where the risks are not high.
They charge relatively lower interest rates and prefer giving
loans in amounts much larger than the commercial banks
usually offer.
Besides longer loan period, one of the other reasons for higher
interest rate is the fact that insurance companies do not require
maintaining a compensating balance that the commercial
banks do (commercial banks keep a certain amount, say 4% of
the loan sanctioned as compensating balance, which the
borrower cannot withdraw; this makes the effective rate of
interest of bank loans higher than the nominal rates).
Lease Financing
Emerged in the recent years as one of the most important
sources of medium (and also long-) term financing.
Lease is a written agreement between a company (the
lessor) that buys machines or even plants and then
leases them out to the lessee industries and thereby
provide an important financing support.
Under the leasing agreements, the lessee company
acquires the right to use the asset i.e., the lessor
permits the lessee to economically use the asset for a
specified period of time (in exchange of making
periodic rental payments) but the title of the asset is
retains by the lessor. At the end of the lease contract
Advantages of Leasing
Risks of ownership: lessee can avoid the risks attached with the
ownership of the equipments, say risk of obsolescence in the area of
over changing technologies.
Saving of capital outlay: Lessee can make full use of the asset without
making immediate payments of the purchase price which otherwise
would be payable by him.
Tax advantages: the payment of lease rents is the tax deductible
expenditure.
Structuring of lease rents: Lessor may structure the payments of lease
rents in such a way that it matches the revenue expectations of the
lessee from the equipments,
No effect on borrowing power: As the obligations accepted by the
lessee under the lease deed appear nowhere on the balance sheet as
debt, the borrowing power of the lessee still remains unaffected.
The lessee may still resort to debt capital provided equity base of
the company permits further borrowing.
Convenience: Leasing is the quickest method of financing the
requirements of long term capital and lessee is relieved from the
rigid and time consuming procedures and terms and conditions
involved in other forms of term borrowings say term loans.
Deferred Credit
Money received in advance of it being earned i.e., income items
received by a business, but not yet reported as income. An
example is a consulting fee received in advance before being
earned or, say, a magazine publisher might defer a 3-year
subscription to match revenue against later publication
expenses. A deferred credit is a deferred revenue, unearned
revenue, or customer advances. A deferred credit could also
result from complicated transactions where a credit amount
arises, but the amount is not revenue.
Deferred credit is also called deferred annuity and deferred
income tax charge. The term also applies to revenue normally
includable in income but deferred until earned and matched
with expenses. The deferred credit is classified under noncurrent liabilities. However, it can be a current liability or a
non-current depending on the specifics.