Q.1 Define intermediate term/mid-term financing and discuss its characteristics/features?

Intermediate Sources of Capital

A. Business Finance Functions
1. Short — term Financing:
• Early-stage capital (intermediate capital) is funds to be paid back within a
period of five years.
2. Intermediate — term Financing: Intermediate term financing or Intermediate
Source of Capital. Refers to borrowings with repayment schedule of more than one
year but less than ten years.
• Need arises as need for working capital increases.
3. Long —term Financing:
• Used for small expansion activities.
• This includes leasing and medium-term loans.
B. Features of intermediate-term financing
1. Maturity: The maturity of intermediate-term financing is one year to five years.
Sometimes the finance period can be exceeding up to seven or ten years.
2. Size of loan: The size of loan is generally small. Because the main sources of
intermediate-term financing are commercial bank and insurance company.
Normally commercial bank does not finance to the company for expanding their
business.
3. Users of term financing: Generally small, middle and large businesses use this
loan. Specifically, commercial hank does not finance which business can’t excess
the capital market.
4. Objective of credit: The objective of this loan is to expand capital, machinery or
replace capital machinery.
5. Repayment method: Repayment of loan is made instalment basis that may me in
balloon payment method or capital recovery method.
6. Security provision: Though loan is used to purchase assets, security is required to
get this type of loan. Especially small or middle business must require security to
collect this loan. Generally, buildings, machineries, plant etc. are used as security.
Now-a- days share, debenture, etc. also used as security
7. Cost of financing: Cost of this financing is relatively more than short-term finance
and less than long-term finance.
8. Flexibility: The amount of loan or repayment of loan is flexible. Suppose you have
got five years period loan from a bank against a plant asset. Your assets life time is
20 or 25 years; here you can enhance your loan or repayment period.
9. Renewable: Intermediate-term financing agreement is renewable. Commercial
bank normally offers renewable option to business at the end of loan period.
Q.2: Discuss the advantages and disadvantages of intermediate term financing.
Advantage of Intermediate Term Financing
1. Flexibility: the borrower can get loan as his/her need.
2. Low cost: cost is less than long-term financing.
3. Convenience in repayment: the borrower can repay the loan as instalment or at a time.
4. Renewable: if the borrower fails to repay instalment, the loan repayment period can
be expanded.
5. Maintaining secrecy
6. Goodwill for the borrower
7. Rapid financing: collecting loan from capital market by selling share or debenture is
time consuming. So, business collect intermediate-term credit in a short time.
8. Control
9. Only source for small business
10. Get ownership of asset without capital
11. Tax advantage
Disadvantage of Intermediate Term Financing
1. It is comparatively high cost than short-term financing.
2. Inconvenience of instalment payment if inflow of cash is decreasing.
3. If borrower fails to repay instalment, the lender collect money by selling borrower's
collateral security
4. It is not easy to get loan for financially weak, small and new business. Because
banks, financial institutions give more afford to borrower's financially solvency
when considering loan.
5. Sometimes lenders impose some restrictions over the borrower which limits the
borrower s power.
6. The borrower is required to keep a portion of loan as compensating balance.

Q3. Discuss the different sources of intermediate term financing.

Sources of INTERMEDIATE—TERM FINANCING
Private Financial Institution:
• Private Commercial Banks
• Insurance Companies
• Finance Companies
• Factors
• Pre — Need Companies
The Government
Conduit Private Banks
• LDP
• Private Thrift Banks
• DBP
• Private Development Banks
• Rural Banks
• Private Savings and Mortgage Banks
• Private Savings and Loans Associations
Private Financial Institution
1. Private Commercial Banks: An establishment that focuses on dealing with financial
transactions, such as investments, loans and deposits.
2. Insurance Company: Insurance companies are important sources of term loans. The
premiums generated constitute advances to the insurance companies for periods varying
from six months to five years.
3. Finance Companies: Finance companies has developed special instalment financing plans
for firms acquiring machinery and equipment.
4. Term Loans by the Government
The government offers loan programs through different departments that support
individuals, communities and businesses according to their varied and unique needs. These
loans provide capital for enterprises deemed worthy by the government that might not
qualify for a loan on the open market.
Individuals and small businesses with little or no seed capital or collateral may find the
conditions for a market rate loan unaffordable. Low cost government loans attempt to
bridge this capital gap for deserving individuals and parties, thus enabling long term
benefits for the recipients and the nation.
Other sources of financing:
 Development Bank
 Leasing company
 Grameen Bank
 Pension and provident fund
Q.4: What are the different types of intermediate term?
Forms of Intermediate Term Debt Financing
1. Bank term loans: Term Loan Defined. A term loan is a bank advance for specific period
(normally one to ten years) repaid, with interest, usually by regular periodic payments. The
interest rate of this loan determined by two ways:
➢ Fixed rate of interest
➢ Variable rate of interest
2. Insurance company term loans:
➢ Insurance companies & similar other institutional lenders also extend term loans.
➢ Their protective covenants are similar to banks except for maturity period & interest
rate.
➢ Life insurance companies provide loans for more than 10 years.
➢ Interest rate is higher because they do not have opportunity to do business with the
client, & demand compensating balance requirement.
➢ To the insurance companies, loans represent investment & must yield greater than
cost.
➢ Prepayment penalty.
➢ Sometimes banks & insurance companies participate in the same loan: bank taking
early maturities & insurance companies taking late maturities. Serves both, mid-
term & long-term loans.
3. Revolving credit agreement: Revolving Credit Facility is one of the forms of business
finance in which flexibility is provided to the companies to borrow and use the funds of
the financial institution according to their cash flow needs by paying a commitment fee as
agreed in the agreement with the financial institution.
4. Equipment financing: Borrower takes loan by give some security as equipment which is
easily marketable.
▪ The maturity of this loan more than one year.
▪ This loan is also called secured term financing.
▪ There are some factors are given below:
➢ Marketability
➢ Margin
➢ Repayment schedule
There are Two types of equipment financing which are:
• Chattel mortgage:
Definition: Chattel mortgage is a loan extended to an individual or a company on a
movable property. Here, the ‘chattel’ or the movable personal property which could be a
car or a mobile home can be used as a security to extend the loan.
Description: Chattel mortgages are secured loans attached to a personal movable property
which is used to extend the loan to an individual or a business owner. In the traditional
 setup, a loan is given to a person based on the security he/she provides which is usually in
the form of land, house, etc.
• Conditional sales contract: A conditional sales agreement is a financing arrangement
where a buyer takes possession of an asset, but its title and right of repossession remain
with the seller until the purchase price is paid in full. ... If the business defaults on its
payments, the seller will repossess the item.

5. Lease financing: Lease financing is a contractual agreement between the owner of the
assets (lessor) and user of the assets (lessee), whereby the owner permits the user to
economically use the asset on the payment of periodical amount which is in the form
of lease rent for a specific period of time.
Q2: Who are the users of intermediate term financing?
The users of intermediate term financing are given below:
 Manufacturer
 Service Industries
 Small and Cottage industries
 Medium and large-scale trading concern
 Farmers project
Q.3: Discuss the methods of repayment of term loan.
I. Balloon Method: Balloon payment is the lump sum payment which is attached to a loan,
mortgage, or a commercial loan. This payment is usually made towards the end of the loan
period. Balloon payment is higher than what you might be paying towards the loan on a
monthly basis.
II. Capital Recovery Method: Capital recovery refers primarily to recovering initial funds
put into an investment through returns from that investment, making it a break-even
measure. It can also refer to a recouping invested funds through the disposition of assets.
The term can also refer to corporate debt collection.

THE END
 Mathematical Problem
Problem 1:
Rahima Food Ltd needs Tk. 6 lakh to finance its intermediate term capital requirement for remodeling of
food processing equipment. Agrani bank agreed to meet the requirement at 14 percent interest. The loan
should be repaid in next 8 years. You are required to show the repayment schedule under: A) Balloon
payment method B) Capital Recovery Method.

Solution: - A) Loan Repayment Under Balloon Method:

600000
Principal payment = =Tk. 75000
8
Loan Repayment Schedule under Balloon Method:

1 2 3 4 5 = (3+4) 6= (2-3)
Year Loan in the Principal Interest Total Loan due at
beginning Repayment 2x .14 payment/Installment the end
amount
1 600000 75000 84000 159000 525000
2 525000 75000 73500 148500 450000
3 450000 75000 63000 138000 375000
4 375000 75000 52500 127500 300000
5 300000 75000 42000 117000 225000
6 225000 75000 31500 106500 150000
7 150000 75000 21000 96000 75000
8 75000 75000 10500 85500 0

B) Capital Recovery Method

P.R 600000x.14
𝐴= = =Tk.129350
1−((1+𝑅)−𝑛 ) 1−((1+.14)−8 )

Loan Repayment Schedule under Capital Recovery Method:

1 2 3 4 5 = (3-4) 6 = (2-3)
Year Loan in the Total Interest Principal Loan due at
beginning payment/Installment 2x .14 Repayment the end
amount
1 600000 129350 84000 45350 554650
2 554650 129350 77651 51699 502951
3 502451 129350 70413 58937 444014
4 444014 129350 62162 67188 376826
5 376826 129350 52756 76594 300232
6 300232 129350 42032 87318 212914
7 212914 129350 29808 99542 113372
8 113372 129350 15978 113372 0
Problem-2: A company needs tk. 40000 to finance a capital expenditure. The company came into a
revolving credit agreement with a bank for two years with a condition that the agreement may be converted
into a further 2 term loan. The bank will charge an interest rate of 3 percent over the prime rate for revolving
credit and 2 percent over the prime rate for term loan. The commitment fee for both the agreement is 2.5
percent on the unused part of the loan amount. The company plans to borrow tk.25000 at the beginning and
tk. 10000 at the very end of the first year. At the expiration of the revolving credit agreement the company
plans to take down the full amount. At the end of the third year and fourth year it plans to make principal
payment of tk. 20000 each. The prime rate of interest is 10 percent.

Required: A) Calculate the total cost of revolving credit and effective interest rate for 1st year and 2nd year.
B) Calculate the total cost of bank term loan and effective interest rate for 3rd year and 4th year.

Solution:

Calculation of total cost and effective interest rate of Revolving credit agreement and Term loan
agreement.
particulars Revolving credit agreement Term loan agreement
1st year 2nd year 3rd year 4th year
A) Loan utilized 25000 35000 40000 20000
B) Unutilized loan 15000 5000 0 20000
C) Interest on utilized 3250 4550 4800 2400
loan@ (10+3) = 13%
D) Commitment fee on 375 125 0 500
unused loan @2.5%
E) Total cost of loan (C+D) 3625 4675 4800 2900

Effective interest rate= (3625 ÷ 25000) (4675÷ 35000) (4800÷ 40000) ×100 (2900 ÷ 20000) × 100
(Total cost of loan÷ Loan ×100 ×100 =12% =14.5%
utilized) × 100 =14.5% =13.36%