Term loans and how they work

by | Jul 11, 2017 | Advisor Tips, Investment Tips, Small Business Tips & Advice

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Whether you’re offering bonds to secure capital, or thinking of investing in bonds, you’ll need an understanding of how term loans work.

Term loans can be anything between one to years in duration

A term loan, whether from a bank or an alternative finance marketplace such as CODE, is a loan for a specific amount with an agreed repayment schedule. The rate of the loan can be either fixed or variable. Term loans can enable SMEs to buy fixed assets, for example equipment, inventory or machinery. The can also be used to purchase real estate or to provide working capital, anything that can generate the cash flow needed to repay the loan.

Term loans can be from one to 25 years in duration, but in general (and in terms of the loans on CODE’s marketplace) they tend to be between one to five years term. The rate on a term loan can be fixed or variable with an annual, six-monthly, quarterly or monthly interest payment schedule and have a set maturity date. The maturity date is when the remaining principle amount loaned is due to be paid back to the investor. This is also the date that any interest payments on the loan finish.

Term loan types

Short term loans

A short or intermediate term loan is the type that you’re most likely to find on the CODE Investing platform. The term of the loan can be as low as one year but is more likely to be two to five years. There are other variables that are possible with a short-term loan such as having a fixed or variable rate, the loan could also be secured or unsecured.  The principal can be repaid over the course of the loan or in a single payment at the end of the term. The bonds being offered on the loan can also be convertible or non-convertible.

Long term loans

This type of loan can be anything from five to 25 years in duration and are usually collateralised using the company’s assets, with regular payments of interest and principal coming from cash flow or profits. This type of loan can sometimes limit the company from making any additional financial commitments though, such as other debts or dividends.

Term loans through CODE

Investors

As a CODE investor looking to diversify your portfolio, investing in short term loans in the form of bonds can be an attractive option, as long as the risks are taken into account.

  • It can offer you regular interest payments over a pre-determined term
  • Once the term has ended you should get back the initial capital you invested*.
  • If convertible, there may be the opportunity at the end of the term to convert the bonds into equity and become a shareholder.
  • Investing in debt through some P2P lending platforms may allow you to access tax-free interest via an Innovative Finance ISA (IFISA)

SMEs

As a business applying for a term loan with CODE, we’ll discuss with you they type of investment offer you decide to make for our investors.

  • Decide the term you wish to place on your loan (usually between three to five years)
  • Decide on an interest rate that is affordable to your business but also appealing to investors
  • Decide whether to repay at the end or during the term of the loan
  • Determine whether the loan can be secured against existing assets
  • Choose to offer convertible or non-convertible bonds

You can learn more about loan types, and how debt financing works from our blog, or sign up as a CODE Investor and be the first to find out about our latest offers.

*Capital will be paid back to investors provided that the company invested in is still able to repay it. Investing in mini bonds on Code Investing involves risks. Investments are illiquid (they can’t be realised or sold before they mature), and non-transferable. Investments will lock up your assets for the term of the bond. You may lose some or all of your capital, if the borrower is unable to repay or if the assets against which the bonds are secured are not sufficient to pay you back in full. Your money is not protected from loss by the Financial Services Compensation Scheme.

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