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What are term loans?

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A term loan is a fixed- or variable-rate secured or unsecured loan made available with a fixed maturity in excess of one year and up to a specified amount in order to acquire long-term assets, for refinancing, and for financial and corporate restructuring.  A term loan is either secured or unsecured and may be unsubordinated or subordinated to the ranking of the borrower’s other outstanding debt.

Term loans are used for various reasons and are structured is a great variety of ways.  They are used for such purposes as investing in fixed operating assets (property, plant and equipment), the expansion of business, project development, investing in real estate, corporate acquisition and debt refinancing or consolidation.

Typically, the borrower is allowed a short period after executing the loan agreement to draw loans up to the specified maximum facility limit.  However, draw loans common in leveraged finance often have an extended availability period of two to three years and longer, during which they can be drawn down, generally for capital expenditures, project financing or acquisitionsBanks charge a commitment fee on the undrawn amount during the availability period to reflect the need of banks to set aside capital to meet capital adequacy requirements and often a drawdown fee when utilized.

Until fairly recently, utilisation fees in the investment grade market became payable only once the facility was at least one‑third drawn, stepping up to a higher rate once the facility was two‑thirds drawn.

Unlike revolving credit facilities, borrowers are not at risk of lender refusal or inability to advance further funds once term loans are fully drawn down.  Draw loan, which have lengthy drawdown periods, are the exception.

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