Understanding a Term Loan

What is a term loan? Well, are you a business owner stuck on implementing a new business idea because of lack of sufficient capital? You have dreamt; the potential that results from implementing the idea is not a question because of its viability yet something seems to be holding you back—capital.

The market value for your product seems very high, and your potential prospects are everywhere, but you just can’t implement your ideas because of a lack of funds. Rest assured, we have a proposed solution for you today; it is called a term loan.

The essence of capital in any business or investment can never be overstated. In fact, it is even essential to living a decent life as a person, yes. That is the power of funds. For businesses, there might be a need to purchase inventory, expand their horizons, invest in a new course, diversify, etc.

There might even be a need to traverse uncharted business territory so as to bring to life a kind of product that has yet to be seen. Without capital, none of these goals can be achieved. Capital is the lifeblood of any business endeavour; there is no denying that.

So, if, as a business owner, you find yourself at this stage of dreaming and planning but no implementation, a term loan might be the way to go. And if you are a business owner who resides in Nigeria, we have valuable information for you.

In this piece, we will examine what a term loan means. Moreover, we will examine other concepts, such as term loan in Nigeria, term loan requirements, and other valuable related information. So, stay with us; maybe you will find the key to moving forward in your business in this piece.

What Is a Term Loan?

A term loan is a kind of loan that provides a one-time lump sum of a short-term or long-term loan that is meant to be repaid over a set period of time or term. Hence, the term “term loan.” So, now, you get the idea of how the terminology was born. In simpler terms, term loan is a one-time large sum of money that is received as loan, and will be repaid over a specified time.

Like we stated earlier, capital is the lifeblood of any business-related endeavour. Without capital, there is only so much that can be done. Businesses need capital to finance their operations, and this manifests in various ways. It could be to purchase inventory, acquire a new asset, enact a new branch, invest in new opportunities, etc.

However, it will be unrealistic to think that cash will always be available. In fact, in other circumstances, the availability of money is not even an issue because businesses always generate revenue.

The challenge is taking a large sum of money from an existing business and investing it in a new course; such a move could negatively impact the operation of the existing business. That is why, in many cases, businesses would rather resort to taking out a loan.

In cases such as this, a term loan could be the way to go. It provides businesses with the lump sum of money needed to finance their business initiatives. This lump sum of money is repaid over a specified period of time during the loan term. In the next section, we will examine the types of term loans.

Types of Term Loans

There are various kinds of term loans which businesses can explore. Selection is based on the business capacity, the amount of funding required by the business, liquidity the business commands, etc. The kind of term loan we will explore in this section will be based on the loan tenure, and it includes:

Short-term Loan

As the name implies, it is a short-term loan, and it typically offers a short repayment term between 1 and 2 years. This kind of loan is taken to finance the day-to-day expenses of businesses or to meet their working capital needs. They can be obtained from commercial banks, trade credit, discounting bills of exchange, etc.

However, it is important to know that, of the three kinds of term loans, the short-term loan offers the highest interest rate. Its tenure is relatively short, and its repayment installment could even be on a weekly basis.

Medium-term Loan

This exhibits a mix of characteristics of both short and long term loans. It’s repayment period is between 2 and 5 years. Businesses take this loan to renovate or repair a fixed asset.

Also, it has a higher interest rate when compared to long-term loans. However, its documentation requirements during application is more lenient than those of long-term loans

Long-term Loan

This kind of loan has the lowest interest rate. Also, it has a tenure spanning over 5 years. It could be up to 20 or 30 years. Because of the high risk involved, this loan is secured, and it requires stringent paperwork and collateral.

Examples include: home loan, car loan, a loan against property, etc. Due to this security, the loan usually offer a a low interest rate. However, in cases where the loan is not secured, the interest rate will be high.

Benefits of Term Loans

In this section, we will discuss the benefits attached to taking a term loan. When you take a term loan, you stand to enjoy these benefits:

• Lower cost of debt
• Tax reduction
• Personalized loan options
• Financial and operational scaling
• Predictable repayment pattern.

Lower Cost of Debt: A term loan typically provides a lower cost of debt when compared to its counterparts in business financing, like: revolving lines of credit and cash advance. When you need to sort out a business financial need, a term loan might be an option to explore.

Tax Reduction: The interest amount of loans like this falls under tax-deductible expenditure. Therefore, the tax advantage is accessible to such interest.

Personalized Loan Options: This is a very important benefit that a term loan offers. With some term loans, You can be given the privilege to personalize your loan experience. With this,you can define your loan rates, loan amounts and repayment schedule. This tailored flexibility is especially a crucial advantage for businesses, as they get to choose for themselves.

Financial and Operational Scaling: As the amount a term loan offers ranges from a few million Naira to billions of Naira, it has the ability to significantly improve your business operations through the working capital that it provides.

It’s totally up to you, as a business owner, to decide how you want to scale your business with the provided lump sum. At any rate, it can improve your business’s performance.

Predictable Repayment Pattern: Depending on the loan term, the repayment structure can be a weekly or monthly installment. This creates a spending pattern for the business, a pattern that could be easily adopted as a regular business expense.

Disadvantages of Term Loans

There is a conventional consensus that, for everything that has an advantage, there is always a disadvantage to it. It is safe to say term loans didn’t defy this opinion. Here are a few disadvantages of term loans:

1. Commitment: Borrowers are mandated to turn in yearly installments, and reimbursement of the principal interest. There will be consequences if the borrowers fail to adhere to these stipulated terms.
2. Risk: You may lose your collateral if you are unable to adhere to the loan terms and agreement.
3. High Interest Rate: Unsecured term loans may have a high interest rate.

How Does Term Loan Works?

In theory, term loans can provide any amount of funding. You could obtain millions or billions of Naira from this loan option. The repayment structure is based on the repayment structure of the loan you opted for.

For instance, sometime in 2021, the Central Bank of Nigeria took on the initiative to avail a few investments of a term loan. Check out the excerpt from The Cable Nigeria newsroom about the report.

Excerpt from The Cable Nigeria Newsroom

The Central Bank of Nigeria (CBN) has fixed N5 billion as the maximum loan an obligor can access in its new financial instrument tagged, ‘The 100 for 100 PPP — Policy on Production and Productivity.’ 

The apex bank disclosed this in its guidelines for the implementation of the policy, recently issued by Yila Yusuf, CBN’s director, development finance.

Under the new policy, Godwin Emefiele, CBN governor, had said the apex bank would advertise, screen, scrutinise and financially support 100 targeted private sector companies in 100 days, beginning November 1, 2021.

Last week, the apex bank unveiled selection criteria for companies to participate in the initiative.

The CBN said the broad objective of the initiative is to reverse the nation’s over-reliance on imports by creating an ecosystem that targets and supports the right projects with the potential to transform and catalyse the productive base of the economy.

“Loan amount shall be a maximum of N5bn per obligor. Any amount above N5bn shall require the special approval of CBN’s management,” the document reads.

The CBN said the interest rate under the intervention would be at not more than five per cent per annum (all inclusive) up to February 28, 2022, adding that interest on the facility would revert to nine per cent p.a. (all inclusive) effective from March 1, 2022.

On the facility’s tenor and moratorium, it said that the term loans would have a maximum tenor of 10 years depending on the complexity of the project, not exceeding December 31, 2031.

“The initiative shall select 100 private sector companies with projects that have potential to significantly increase domestic production and productivity, reduce imports, increase non-oil exports, and overall improvements in the foreign exchange generating capacity of the Nigerian economy,” the document adds.

Example of How Term Loan Works

In the previous section, we gave a real-life example of how term loan works. In this section, we will give a more relatable analogy using this loan calculator.

For the purpose of this analogy, we will assume you took a loan of ₦50,000,000 that has a fixed interest rate of 15% for a 2-year term. Check out the results below:

To borrow ₦50,000,000 over a 2-year term, your monthly payment will be ₦2,424,332.40 at an interest rate of 15%.

MONTHLY PAYMENT

$2,424,332.40

AVERAGE MONTHLY INTEREST

$340,999.07

TOTAL INTEREST

$8,183,977.66

NUMBER OF YEARS

2

TOTAL BORROWING COST

$58,183,977.66

How to Get Term Loans in Nigeria

There are several banks in Nigeria that offer term loans to businesses. However, when applying for a term loan in Nigeria, especially from a traditional bank, one needs to be ready for all of the stringent requirements and paperwork.

Also, you might not find a commercial bank in Nigeria that offers a long-term loan. Okonkwo, the former Managing Director of Fidelity Bank Plc, gave the reason for this in a report released by the Vanguard newsroom in 2016.

Excerpt from the The Vanguard Newsroom Report

The inability of commercial banks to give long-term credit facilities is due to the non-availability of long-term-deposits by Nigerians, a financial expert, Mr Nnamdi Okonkwo has said.

He made the remark at a conference themed ’Nigeria beyond Oil, Financing Options for Non-Oil Exports’’ which was organised by the Finance Correspondents Association of Nigeria (FICAN) in Lagos.

He said most depositors who had huge amounts to save, did it on short-term basis because of uncertainties of the economic policies.

Okonkwo wondered why banks were always condemned at every occasion for not lending long-term facilities to businessmen and farmers.

The managing director insisted “that commercial banks do not have the kind of huge amount of money to lend out to those in businesses for long-term period’’.

The financial expert also listed lack of the right framework as being responsible for local banks not lending long-term to Small and Medium enterprises (SMEs).

He said lack of infrastructure, such as power, among others had made the bank to generate private electricity for its operations.

According to him, banks paid full interest on all deposits, while 25 per cent was taken as Cash Reserve Ratio (CRR), leaving banks with only 75 per cent of the amount to trade with.

He said, “If as a bank, I know a secret place where I can get long-term funds to trade with, I will be the number one bank in Nigeria today because I can lend long-term.

“Bring me a depositor that will place N100 million today with me at 10 per cent.

“I will then give a loan at 15 per cent and pay the depositor’s interest on N100 million but I have to trade with N75 million because the Cash Reserve Ratio is deducted from the N100 million. Read the full report here.

Institutions that Offer Term Loans in Nigeria

In this section, we will highlight two types of institutions that offer term loan in Nigeria. They are:

• Banks
• Fintech companies and online lenders

Banks

Several commercial banks in Nigeria offer term loans to businesses across the nation. However, this comes with a lot of formalities and stringent requirements. Also, when some of these requirements are tendered, the verification may require some time to be vetted.

Furthermore, they may not offer loans below a specified threshold amount. So, do your research before choosing your creditor. Nevertheless, regardless of the bank you opt for, what matters is your satisfaction with their services. Some banks to check out include:

• Access Bank Plc
• Fidelity Bank Plc
• Guaranty Trust Bank
• First City Monument Bank
• Stanbic IBTC Bank
• Zenith Bank
• Heritage Bank Plc
• Premium Trust Bank

There are also other banks in Nigeria that offer this loan service; the ones listed above are just a few of them.

Fintech Companies and Online Lenders

The advancement in technology has ushered in an era of several banking solutions and platforms. One of such platforms the fintech. There has been a surge in the rate at which these organizations are proliferated across the country in the last few years. So, what’s with these organizations? They make banking services easy for users.

They bridge the gap between the arduous formalities of traditional banking and the needs and wants of users. As a result, there has been a high rise in their userbase in the last few of years. Also, just like traditional banks, they offer loans to users. However, loan terms varies from company to company.

Also, you could check out Top 10 Online Banking Apps in Nigeria 2024 and Best Loan Apps with Low Interest Rate in Nigeria, to aid in your choice. Also, check out 8 Illegal Digital Loan Companies in Nigeria You Should Avoid 2024.

Term Loan Requirements

Term loan requirements can strictly be determined by your creditor and the kind of loan you opt for. So, to find out your term loan requirements, you need to check in with your creditor. In fact, term loan requirements are usually not hidden, or the kind of information that can be missed. Term loan requirements are usually transparent, so both parties can have an understanding. Find out about the requirements of your intended creditor on their official channels.

That brings us to the end of this piece. If you find the information useful, follow us for more on X or Twitter, @SiliconAfriTech.